HCS 235 Week 4 Health Care Financing Example

Following the Health Care Dollar: Where $4.9 Trillion Came From and Where It Went in 2023, Traced Through One Knee Replacement

[Student Name]

University of Phoenix

HCS/235: Health Care Delivery in the U.S.

Week 4 Assignment

[Instructor Name]

[Date]

The patient and the knee replacement example are composites written for a model paper; national figures come from the sources listed.

The national bill for health care in 2023 came to about $4.9 trillion, up 7.5% on the year before and equal to 17.6% of the gross domestic product (Martin et al., 2025). That is roughly $14,500 for every person in the country. A number that large is hard to picture, so this paper breaks it into two questions, where the money came from and where it went, and then follows a single knee replacement through the payment system to show how the money moves.

Where the Money Comes From

Private health insurance was the largest single source of spending in 2023, most of it employer-sponsored coverage. Medicare, the federal program for people 65 and older and some younger people with disabilities, was second, and Medicaid, the joint federal and state program for people with low incomes, was third. Together those three sources paid for roughly two thirds of national health spending. Out-of-pocket payments by patients, including deductibles, copayments and services not covered by insurance, accounted for about a tenth. The rest came from other public programs, such as the Veterans Health Administration, the Children's Health Insurance Program and public health activity, and from other private sources (Centers for Medicare and Medicaid Services, 2024).

The names of payers can hide who really funds care. Employers pay most of the premiums for employer-sponsored insurance, but economists generally agree that workers bear much of that cost through lower wages. Medicare is funded by payroll taxes, general tax revenue and beneficiary premiums. Medicaid is funded by federal and state tax revenue. In the end, all health spending is paid by households, through premiums, taxes, lower wages or direct payments, even when a business or government writes the check.

Where the Money Goes

Hospital care was the largest category of spending in 2023, accounting for nearly a third of the total. Physician and clinical services were second, followed by prescription drugs bought at retail. Other categories include nursing care facilities, home health, dental care, medical equipment, administration and the net cost of insurance, public health activity and investment in research and buildings (Martin et al., 2025).

One Knee Replacement

Consider a 67-year-old retired teacher with severe osteoarthritis of the knee. She has traditional Medicare and a supplemental Medigap plan. Her orthopedic surgeon recommends a total knee replacement.

Medicare Part A covers hospital care, and Part B covers physician and outpatient services (Shi & Singh, 2022). If she is admitted as an inpatient, the hospital receives a single prospective payment under Medicare's inpatient system based on the diagnosis-related group for major joint replacement, regardless of whether she stays one day or three. If her surgeon judges her suitable for outpatient surgery, the hospital is paid under Medicare's outpatient system, or an ambulatory surgery center under its own payment rates, which are generally lower. The surgeon is paid separately under the Medicare physician fee schedule, which sets a global payment covering the operation and routine follow-up visits for 90 days.

Her hospital also participates in a Medicare bundled payment model for joint replacement, which holds the hospital accountable for total Medicare spending from the surgery through 90 days afterward, including rehabilitation. If spending for its patients comes in below a target, the hospital can share in the savings; if above, it may owe money back. That arrangement gives the hospital a reason to plan her discharge carefully and to send her home with outpatient therapy rather than to a skilled nursing facility if she is able.

Her own costs depend on her coverage. Traditional Medicare has a Part A deductible for the hospital stay and a Part B deductible and 20% coinsurance for physician services, but her Medigap plan covers most of those. She pays a monthly Part B premium and a Medigap premium, which financed much of her care in advance.

Why Prices Differ by Payer

The same knee replacement can be paid at very different amounts depending on who pays. Medicare sets its rates administratively, through the prospective payment systems and the physician fee schedule, and every participating hospital must accept them. Each state decides its own Medicaid rates, which tend to sit below Medicare's. Commercial insurers negotiate their rates with each hospital and physician group, and those rates are usually well above Medicare's, especially where a hospital system dominates its market. Hospitals often argue that higher commercial payments make up for public programs that pay less than cost, a practice known as cost shifting, though economists disagree about how much it happens. For a manager, the result is that the payer mix of a service line, not only its volume, decides whether it makes money.

Payment Methods and Their Incentives

The example shows several payment methods at once. Fee-for-service pays for each service and rewards volume. Prospective payment, such as the diagnosis-related group, pays a fixed amount per case and rewards efficiency within the case. Bundled payment extends a fixed budget across an episode of care and rewards coordination after discharge. Capitation, common in Medicare Advantage and some Medicaid managed care, pays a set monthly sum for each enrolled person and rewards keeping people healthy and out of expensive settings.

What Financing Means for Administrators

For a health administrator, payment method shapes daily decisions: how long a patient stays, whether a case moves to an outpatient setting, which rehabilitation partners the hospital chooses and how closely it tracks what happens after discharge. A manager who understands where the dollar comes from and how it is paid can see why an organization makes choices that look puzzling from the outside.

Conclusion

In 2023, U.S. health care cost $4.9 trillion, funded ultimately by households and flowing through private insurance, Medicare, Medicaid and patients' own pockets to hospitals, clinicians and drug makers. One knee replacement shows how several payment methods operate at once, each rewarding different behavior, and why financing is never far from any decision in health administration.

References

Centers for Medicare and Medicaid Services. (2024). National health expenditure data: Historical. https://www.cms.gov/data-research/statistics-trends-and-reports/national-health-expenditure-data/historical

Martin, A. B., Hartman, M., Washington, B., Catlin, A., & The National Health Expenditure Accounts Team. (2025). National health expenditures in 2023: Faster growth as insurance coverage and utilization increased. Health Affairs, 44(1), 12-22. https://doi.org/10.1377/hlthaff.2024.01375

Shi, L., & Singh, D. A. (2022). Delivering health care in America: A systems approach (8th ed.). Jones & Bartlett Learning.