National Health Care and Firm Competitiveness

In the comments to this post, commenter Tano made the following claim regarding national health care.

But they is plenty of room for compromise here. To take just one issue: I think it would be great if we had a national health insurance. That would relieve WalMart, and other companies, of their responsibilites toward their worker’s health, and thus make them more competitive. But so long as we dont have that, so long as we look to businesses to be providers of health insurance, then WalMart should do their part.

This is a notion I’ve seen tossed out casually in favor of nationalizing health care in some form. The problem is I think it is a bogus argument.

Employers pay both wages (salary) and benefits which the employer sees as total compensation. It is this latter number that firms look at when making decisions about the amount of labor to hire. Now, the idea that Tano seems to be espousing is that firms would become more competitive because they would lower their costs. That is, with benefits going to zero, compensation would go down and hence profits would go up. This would in turn lead to a decline in prices as competitors entered the market in response to these higher profits.

However, there is a problem here. Why should wages be assumed fixed? If the labor market is also competitive, which most are, then wages would rise. As such, the idea that firms would get a cost savings is only likely true in the short-run, if at all.

Second, there is the issue of how to pay for this nationalize health care. Suppose there is a tax levied on employers. Then all that we have done is simply exchange one cost for another, and a tax also comes with the added burden of a deadweight loss. Even if we recognize that the workers wages will rise, and instead tax them to pay for the national health care plan it will still likely reduce the workers income by more than enough to make workers worse off and possibly lower their conesumption of all goods. Consider a simple example. We have a worker who earns $900/year in wages and $100/year in benefits (lets also assume current taxes are 10%). Now, in this case the worker consumes $910 worth of goods and services. If we put in place national health care (and outlaw private health insurance, which we will probably have to due to avoid the problem of seperating equilibria due to adverse selection) and the competitive market in labor pushes up the wage to $1000, and we have to raise taxes just 1% point, now the worker enjoys only $890 of income for consumption. Basic consumer theory tells us that this consumer will be made strictly worse off. Further, it is possible that if this effect is large enough that firms also experience a decline.

So, this idea that by switching to a nationalized health care, firms will become more competitive strikes me as dubious at best. Another argument that is made in conjunction with the above is that a nationalized health care system will lower administrative costs. I find this somewhat of a dubious claim since governments and private businesses often have different standards for keeping track of various costs. That is, merely looking at what the government calls administrative costs, and what private industry calls administrative costs may not be the same thing.

FILED UNDER: Economics and Business, , , ,
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:

    If the labor market is also competitive, which most are, then wages would rise

    And yet, obviously, labor isn’t terribly competitive, given wage stagnation.

    Regardless, I think the better argument is that the employer-based system has other costs–the problems with switching jobs, for ex.

  2. M. Murcek says:

    Collectivism. It doesn’t scale past ants and bees to roaches even, but the true believers will never be convinced. When you meet someone at a cocktail party who says “True communism has never been tried…” you are meeting an idiot.

  3. Tano says:

    In your simple example, the worker in the first case takes home $810, and has health insurance which cost his employer $100, which causes you to arrive at the figure of $910 in goods and services he consumes. Is this right?

    In the second example, he takes home $890 dollars, and has health insurance which is funded out of the $110 he pays in taxes.

    In both cases he has health insurance. In one case he takes home $810 (for use in WalMart), in the other he takes home $890 for such use. And you claim that the latter case will depress consumption.

    Please help this poor biologist to understand your point.

  4. Tano says:

    As to competitiveness, my remarks were aimed at the position American companies would have in the global marketplace, where they must now compete with companies that have much lighter responsibilities with regard to their workers health care costs.

  5. RJN says:

    The best way to reduce health care costs and, at the same time, make more health care available is to restrict employer – particularly government – health plans to major medical only.

    As a start, I would propose a $1000 deductible policy as the most any employer could offer. This would make sharper, and less wasteful, medical care customers.

  6. Ray says:

    If we nationalise heath care in America and adopt a single payer system, what effect would that have on the current health insurance industry? Wouldn’t that decimate the industry and force thousands of people out of a job? Wouldn’t that effect the stock market and it’s investors that trade in insurance stock? Wouldn’t that force investors to sell their now worthless stocks? Wouldn’t that cause a massive decline in capitol investments? Wouldn’t that have a negative effect on the economy?

    How about the people that work for insurance companies? What would happen to them, their retirements and their investments? Perhaps they will get jobs with the now massive federal health insurance program? Would that mean that these new employees will receive union wages and benefits? Wouldn’t that mean that the labor costs will rise dramatically? Wouldn’t that increase the costs directly? Wouldn’t that mean a dramatic rise in taxes? You bet it wold! Suddenly, it seems that the cost of national health insurance doesn’t seem so small does it?

  7. Tano says:

    No Ray, none of that need happen. You could outsource all the administration to the existing private insurance infrastructure. Pool the risk, guarantee a policy to all, but let the private sector compete to provide the service.

  8. Ray says:

    No Ray, none of that need happen. You could outsource all the administration to the existing private insurance infrastructure. Pool the risk, guarantee a policy to all, but let the private sector compete to provide the service.

    In that case, why nationalize health care at all? If you use existing private infrastructure to provide a service, what justification can there be for government involvement? You want to guarantee a policy to all, but how do we decide which policy would be considered correct out of the various policies that are offered and how would you fund them? The best approach would be to use federal dollars to purchase private insurance policies for those who can’t afford it (the outsourcing you describe), but then we run into the problem of possible corruption in the selection of companies and policies provided. I can imagine the political infighting that would occur under that scenario!

    Can’t you hear the campaign commercials already? “Senator X has a daughter that’s married to a clerk that works for the health insurance company that issued the policy for her cousins son at tax payers expense! That’s proof of the corruption that permeates the office of Senator X! Vote for me and I’ll make sure that this type of corruption does not occur!”

    Also, how do you overcome the resistance of federal employees to allow outsourcing jobs that the the employees and their unions would want to keep with in the government? Do you really believe that the federal employees would allow outsourcing? I doubt that!

  9. Tano says:


    You seem to be stuck on a notion that no one is proposing. Its not national health CARE that is under discussion. It is national health INSURANCE. Blame goes to Verdon for misrepresenting my statement in his original post.

    As for outsourcing, well, that is an issue that is so yesterday. Do you have any idea how many government servies are out-sourced today? (personal aside – I work for a private firm that contracts with the NIH. 20 years ago I would have been employed directly by the NIH to do my job).

    Besides, we are not talking here about moving governemnt jobs out to the private sector – rather simply NOT moving private jobs into the federal system.

    Corruption is a constant in life, and is not in any way less prevelant in the private sector than the public. And politicians will say anything in a campaign, so I dont think you concerns in that regard count for much.