The Costs of Universal Coverage

National Health Insurance programs that guarantee universal coverage certainly cost a great deal of money, but it is important to distinguish which costs are incremental. In other words, what are the additional costs to society from the imposition of NHI? From society’s point of view, the incremental cost of NHI in the United States is the extra total expenditure on health care incurred if we switched to national health insurance. Inasmuch as most people already have insurance for almost all hospital care and most physician care, the extra cost of NHI would be much smaller than many expect. The truly incremental costs stem from several sources. First, the major reason for switching to a NHI plan is to extend coverage to the 50 million uninsured. It should be understood that the uninsured already consume health care. Zero insurance does not necessarily mean zero care. Using data from the 2002–2004 Medical Expenditure Panel Surveys (MEPS), a nationally representative survey of the civilian, non-institutionalized population, Hadley and colleagues

(2008), in what remains the most comprehensive study to date, estimated that uninsured Americans consumed $86 billion worth of health care in 2008. This total consisted of $30 billion in out-ofpocket costs and $56 billion in uncompensated care. Governments picked up about $43 billion of the latter. The authors then projected that the incremental cost of providing full-year coverage for all uninsured would amount to $123 billion, so that total spending of those currently uninsured would rise from $86 to $209 billion. This incremental cost represented 5.1 percent of total health care spending in the United States and slightly less than 1 percent of its GDP. The authors base their estimates on the utilization patterns of lower-income and lower-middle income individuals. More or less generous plans as well as higher or lower payment rates to providers would raise or lower estimated costs accordingly. Second, the insured population will cost more to the extent that an NHI plan provides greater typical coverage than people already choose to buy or have provided to them by other sources. Third, any tax-supported system of financing care potentially entails a deadweight loss to society, as taxpayers respond to the changed incentives. The deadweight losses that accompany tax increases mean that some efficiency loss will result, caused by the disincentives to work and invest. This is true even if the program is of the employer-mandated type, because a law forcing employers to incur expense is really a tax. The incremental costs constitute real costs to society, because, as noted in Figure 23-1, society must divert resources from elsewhere to pay them. In contrast, differences in financing methods (determining who pays) mean less in economic terms. It may be politically more palatable to choose a plan that does not greatly expand the government budget, and employment-mandated plans may be attractive politically for this reason. Nonetheless, society incurs the cost irrespective of whether it finances it through the government or through mandates to individuals or employers by law.

ENSURING ACCESS TO CARE
In this section, we group reforms by their two main motivations: the desire to see that sick people get health care, and the desire to control the rising cost of health care

Employer versus Individual Mandates
The country that wishes to provide universal coverage for health care must choose one scheme or another to extract resources from its households. Schemes for employers or government to pay the bills are only mechanisms by which households ultimately pay. The U.S. debate features and contrasts two mechanisms: employer versus individual mandates. Employer mandates form the backbone of the health systems in Europe, Latin America, and Asia (Krueger and Reinhardt, 1994). Under employer mandates, employers must procure health insurance for their employees and their dependents. Although the employer writes the check, the firm undoubtedly will pass on as much of this cost as it can to customers in the form of higher prices or to employees in the form of lower wages. The individual mandate, in contrast, obligates all residents to purchase health insurance for themselves and their families, either from private insurance (individually purchased) or through a group, such as a work group, professional organization, or religious group. The government subsidizes the poor in their purchases through taxation of those who have more money. In Chapter 11, we showed that a lower market money wage rate leads an employer to hire more workers. Assuming at the outset that there are no benefits and that the market wage is $20 per hour, employers will hire workers as long as the marginal revenue from the goods those workers produce exceeds the $20 per hour wage. To begin, assume that the employer hires 1,000 workers. Suppose that an NHI mandates the provision of a health benefit for all workers that costs $1 per hour of work. If the mandated benefit is worth at least $1 per hour to the workers, and costs exactly $1 per hour for the employer to provide, employers who were previously willing to pay $20 will now pay $20 less the $1 cost to provide the mandated benefit. Other points on the demand schedule will also change by the $1 cost of the benefit. Workers previously willing to accept a wage of $20 will now be willing to supply their labor for $1 less since they value the mandated benefit at $1. The net wage (money wage + the value of the benefit) remains unchanged at $20, but the equilibrium money wage falls to $19, or by exactly the amount of the benefit. Workers accept lower money wages, and the same 1,000 workers are employed at the same net wage, $19 in money wages plus the $1 benefit. The workers are no worse off at a wage of $19 with the mandated benefit than at $20 without the mandated benefit because the benefit is worth the $1 that it cost in reduced wages. Business leaders often complain that employer mandates either will reduce profits or force firms out of business. Such responses implicitly assume that their firm is the only one affected by the mandate. If all firms faced the same labor costs, it is doubtful that closings would result. In the short run, firms would pay workers less, take less in profits, and/or raise prices to consumers. “Economists are convinced, however, that in the longer run more and more of the cost of the employer mandate would likely be shifted backward to employees . . . through smaller real (inflation-adjusted) increases in wages than would have been warranted by long-run productivity gain” (Krueger and Reinhardt, 1994, p. 44). If the labor supply is very unresponsive to the wage rate, the employer’s lower wage expenditures will offset extra health benefit costs regardless of whether the laborers value the benefit highly or not at all. Most economists would agree that the aggregate labor supply, at least in the long run, is nearly vertical (totally inelastic) for men, and also highly inelastic for women. In this scenario, the mandate has little effect on producers, their competitive position, or their customers. Whether the program helps or harms the well-being of society under conventional economic analysis depends largely on whether workers value their health insurance as much as or more than they did their foregone wages. The individual mandate provides the same result with a clearer pathway, because its costs fall on the beneficiary who pays them directly. Pauly (1994b, 1997) describes an individual mandate, enforced by employers and subsidized for the poor, requiring all individuals to purchase a minimum health plan or better. He argues that this approach is desirable so that people can relate their taxes to what they are paying to obtain benefits. In this scheme, individuals are required to purchase health insurance. They may in fact acquire it through their workplaces, or they may buy it explicitly in a market setting. During the U.S. debate of 1993–1994, disputes arose frequently over the fraction that the employer pays as opposed to the fraction paid by the individual. The presumption in these arguments is that the chosen fraction reflects the burden. Economists, however, tend to agree that the fraction chosen does not matter. The discussion presented above (regarding the $20 per hour wage) says nothing about fractions. The economic logic suggests that those who are least able to avoid a tax will bear its burden, irrespective of who writes the check. Some argue that it is a political necessity to overlook the economics, but others insist that an open public discussion of the genuine issues would improve the quality of national debate.