Controlling Health Care Cost or…

…shifting health care costs. There is this curious notion that comes up occassionally that by switching to universal health care (read government funded health care) corporations could control their health care costs. Frankly I think people who think this way have it wrong. Even if we assume that the government is going to do it for exactly the same cost as the private sector (a highly questionable assumption) this does not control costs, but merely shifts the cost from the corporations to the tax payers. Your salary might go up, but you’ll be paying more in taxes. Further, it is quite possible that after tax income goes down.

Here is how it could work out. Suppose health care costs are $1,000 for a worker (lets keep it simple and keep the cost the same per worker). Along comes government funded health care and your salary/wage rate goes up so that you now get $1,000 extra in your paycheck (this follows if the labor market you are working in is competitive, if you work in an industry where there is only one demander–a monopsonist–then your S.O.L.). But you now have to pay taxes on that $1,000. In keeping with the simple nature of this example lets suppose the tax rate is 10%. Now, you actually have only $900. On top of that your taxes will have to go up. Assuming the government is no better or worse than business your taxes will go up by $900 (this follows from the fact that the government now has to collect $1,000 per worker, which is precisely your raise; the government got $100 when your salary/wage increased, so it will tax away the rest of your raise…that $900). So where does that leave the worker? No better or worse.

Of course, this simple example assumes no increase in the deadweight loss due to the increase in tax rates. Thus, it could very likely come out as a loss for the worker. Add on that many of the people who don’t have insurance don’t have insurance because they have pre-existing conditions which will further increase the cost of government provided health care and things aren’t looking like much of deal. Of course, one possible source of improvement would be ending the current patchwork system that is very expensive and inefficient. Could this offset these other costs? I don’t know. The bottom line here is that rarely are (if ever) free lunches in economics. It could be possible that by simplifying the current health care delivery system quite a bit of savings could be realized. I just don’t expect the federal government to be the ones to provide such solutions.

FILED UNDER: Economics and Business, Health
Steve Verdon
About Steve Verdon
Steve has a B.A. in Economics from the University of California, Los Angeles and attended graduate school at The George Washington University, leaving school shortly before staring work on his dissertation when his first child was born. He works in the energy industry and prior to that worked at the Bureau of Labor Statistics in the Division of Price Index and Number Research. He joined the staff at OTB in November 2004.


  1. Anderson says:

    Of course, one possible source of improvement would be ending the current patchwork system that is very expensive and inefficient. Could this offset these other costs? I don’t know. The bottom line here is that rarely are (if ever) free lunches in economics.

    Steve, I think the “free lunch” is a straw man. And the inefficiency of the current system is a big argument in favor of a national system, though I have no more hard data than you do.

    But to a certain extent, cost isn’t the main issue. Suppose that national health care does indeed cost taxpayers a net increase. Unless that increase is gargantuan, So What?

    I’m being provocative, but surely money spent on health care promises to be a much better investment of gov’t resources (= tax money) than, say, tax breaks for the upper classes, or trumped-up wars of occupation, or some of the other things that appear to be worth billions of dollars these days.

    It’s just a little grotesque that the richest country the world has ever seen, has such inequities in health care. I’m sure you feel the same way at least some of the time. It’s great to have conservatives reminding us “yes, but look at the cost”—no one should want a boondoggle. But I wish the debate weren’t *whether* to make sure every American has health care, but *how* to ensure that.

  2. Ravi says:

    One potential place for improvement (of social welfare) is based on the more accurate “marginal cost of employment” that an employer sees. Right now when an employer makes a decision whether or not to employ someone, they look at the wage they would have to offer and the benefits they would have to pay in order to employ that person. Those benefit costs include the cost of providing health care to that employee. However, from a social perspective that cost is almost entirely illusory. If a person doesn’t get health care from their employer they are very likely to get it from somewhere *else* in our patchwork system (spousal coverage, Medicaid, Medicare, emergency rooms and so on). If employers no longer have to directly internalize the cost of providing health care, they might end up employing more workers (or employing workers more efficiently because their judgment is not distorted by the improperly internalized cost of providing health coverage).

    Another interesting possibility is the increased potential for entrepreneurship by eliminating one part of the downside risk of leaving a stable job – the gap in health coverage (which can snowball because of things like “creditable coverage” rules and the like).

  3. odograph says:

    I crashed my mountain bike and broke my wrist a couple years ago. I learned a lot from that. The most striking of course was that the first question from every doctor, facility, or hospital was “do you have insurance?”

    I learned that many people don’t have insurance, and basically get a compassionate doctor, but a second level of care: less visits, less x-rays, less rehab, and less than perfect recovery.

    The next thing I learned was that doctors and hospitals are very efficient at billing a lot, and major insurance company will pay it all. In the system of haves and have-nots, we haves do very well.

    Of course, even if you finish up all your treatment and rehab complete before your COBRA runs out, they won’t really want you as an individual policy holder. Instead, they’ll try referring you to your state’s “major health risk fund” … for a now-healed broken wrist?

    Yup, the game is to under-inform you about your options, try to shift you off the books, etc.

    Only if you are lucky will you learn about the nice lady at your state’s insurance watchdog org who will tell you “they can’t do that.” Etc.

    Pfft. I ended up bailing and going to a new provider, who is very nice, but again I had to deal with a default answer of “no coverage, declined” and prove my good health.

    I got in at the base rate, which I think proves my health, but I actually had to go through the refusal and written appeal process.

    What on earth do people do when they have health problems, have financial problems, or don’t have the social/written skills to work the phone and letters?

    I think they drop through the net, and become the walking wounded (often literally) of our half-market, half-regulated, medical system.

    I think it’s f’d up enough that a clean slate approach is needed, perhaps some sort of base-level universal health care.

  4. odograph says:

    Oh, I should also mention that there was a strong assumption that every injury might have a lawyer associated with it. Lawyer’s name is an open slot in introductory forms for an orthopedist’s office.

    Two years after my bike crash my insurance carrier sent another letter asking to know my laywer’s name.

    There was none of course, it was a simple self-inflicted bike crash.

  5. Steve Verdon says:

    It’s just a little grotesque that the richest country the world has ever seen, has such inequities in health care. I’m sure you feel the same way at least some of the time. It’s great to have conservatives reminding us “yes, but look at the cost”—-no one should want a boondoggle. But I wish the debate weren’t whether to make sure every American has health care, but how to ensure that.

    Thanks Anderson for not saying I want people to be dying in the streets.

    Yes, in a perfect world I’d love for everybody to have decent health care, housing, food, and opportunity to pursue and education. Problem is we don’t live in that world. We live in one with trade offs. The idea of “faster, better, and cheaper” is in my view largely a myth for most things. Especially when that thing is medicine and last years procedure isn’t what everybody wants (i.e., they want the latest and greatest and understandably so since in many cases it is their life that is in the balance).

    So if we can’t have all three,


    Which one is going to give? My view is we might be able to have two…maybe. We can have one. And all three are right out. So to contain cost (i.e., have cheaper) we have to give up faster or better. Faster and better will cost even more. And so forth.

    The further problem is that if we allocate huge amounts of resources to health/medical care we might find that we can’t sustain it. That is, economic growth becomes and issue.

    Now doing nothing isn’t an option either since the growth rate in cost for health/medical care is excessive. The only thing I can think of is something like this. With a follow-up here, as well as another follow-follow-up here.

  6. Anderson says:

    Right, the voucher thing. Leaving aside my economic illiteracy, I don’t see how you avoid the problem of the sicker people being unable to afford coverage when private insurers can still pick & choose. The advantage of basic insurance through the feds would seem to be leveling out the risk pool. But I’m probably already sounding ignorant.

    I will run those posts of yours by my health-policy-wonk friend & see what he thinks.

  7. McGehee says:

    The bottom line is that health care does not grow on trees. It is provided. To provide it to everyone, you have to take from some and give it to others.

    The real problem is not that people aren’t receiving adequate health care — it’s that the word “adequate” has been redefined out of all reason.

  8. dutchmarbel says:

    Administrative costs make a big difference.

    And having health care for everybody is NOT the same as health care funded by the government. There are a lot of system where the funding is mixed.

  9. Victor says:

    I hope to post on this similar topic in the near future (yes, I know, I always say this).

    Question. Is there ANY profitable industry in America that would not experience estimated accounting efficiencies if taken over and standardized by a national government?

    Comments. 1. Let’s even take an unprofitable industry, like car manufacturing. If the gov’t were to take over Ford, Chrylster, GM, etc., imagine the efficiences that could result. First, we could have standard automobile parts decreasing the cost of those parts and increasing the speed with which mechanics could fix cars. Second, the entire costly network of dealers could be trimmed, and commission payments eliminated or reduced. GM would no longer compete against Ford, redundant car lines could be eliminated, administrative overhead would be reduced, R&D would apply to the entire fleet of US produced vehicles rather than a single auto manufacturer, etc.

    From an accounting perspective, how could you lose (well, aside from the fact that GM may no longer make products that Americans demand and therefore has huge accounting losses that you have to overcome)? From an economic perspective, of course, gov’t takeover of all industries would be a nightmare for reasons I hope I don’t have to articulate.

    My point here is a rather mundane one: there is nothing special to healthcare in these sorts of calculations. They are simply redefining profits and choices as administrative overhead. They compare systems where companies are encouraged/required to engage in realistic accounting practices to dollars reported from government agencies where budgetary accounts are virtually incomprehensible.

    This is just another fancy way of describing the decades-old objective of mystic efficiencies of uber-intelligent central planning.

    2. The story behind most of the administrative efficiencies relate to standardization. We have that in many industries without a government takeover, and there is no theoretical reason why that couldn’t happen in healthcare, either.

    3. Now, it so happens that the efficiencies from electronic records and so forth might just be much, much harder to realize that advertised explaining why things are the way they are. But maybe not. Either way, the gov’t COULD mandate those sorts of things making the bulk of the supposed efficiencies evaporate.

    4. And instead of relying on a comparison to Canada for a single-payer system, they could use Medicare. There, you do get per-claim admin efficiency, but you also have fraud and other accounting issues. Our national spending per capita in Medicare exceeds virtually any other industrialized nation’s expenditure on their ENTIRE healthcare system. This makes obvious what we should already know intuitively: the problem isn’t admin costs, it’s the cost and frequency of the services you receive.

    5. And, as always, the debate is not really about health care. The debate is about health care financing.

    6. I do have more thoughts, bu I need to save something for my own blog. 🙂

  10. odograph says:

    I’m trying to think of anything else we do in our society with the goal of “universal coverage” and through multiple providers.

    Local utilities are all about universal coverage, but of course were built on the monopoly provider model.

    What brings this to mind is the mention of GM above …