Posted by: Paul Chiariello | January 27, 2011

A Brief Intro to the Macro Economics of Public Health Care

In the conversations I’ve had with people over the past few months about the Health Care debate in the US, I’ve found that people on both sides don’t really understand all of the issues at stake.  They pick one thing to talk about and then simply repeat it as if all that is needed in an argument is a single good point.  Make your point and if they can prove it wrong, you win!  Unfortunately this is a complicated subject and many different points both for and against need to be weighed.

In adding to the debate, I’d like to go through some of the background to Universal health care in the US and internationally and then give a list of 8 reasons why Universal Public Health care is necessary, especially in a global market economy.


First, some background.

The US is the only developed country, besides Mexico and Turkey, that still does not have Universal Health Care.

It also has the highest costs per capita, as can be seen in this graph, and with all of that money buys one of the worst systems in terms of overall quality and efficiency (another graph here), i.e. not how good is the care available for the wealthiest, but for the whole country.

However, what I want to discuss is not graphs and figures but a few simple macro-economic arguments for why Public Health Care is necessary in a globalizing world, regardless of whether it is cheaper (which it is!).

I will try to be brief and not make this too long.  If there are a lot of comments on one or another point I will try to do a follow up post later.


1) Safety net in economic downturns.

As many of you might have noticed, the economy goes through ups and downs (we’re kind of in one of the downs right now).   The technical term for continual growth and decline is called a ‘business cycle.’  These happen and can pretty much be guaranteed to continue to happen.

Knowing business cycles will reoccur, there are certain things that can be done to cushion how far the economy falls.  One shock absorber is providing health care publicly.  When an economic crisis hits, lots of people lose jobs.  In a private system, where health insurance policies are provided by your job, that means you lose your health care.  As many people will probably agree, if you get sick you won’t be as productive, be able to look for a job or be able to maintain rent, bills, utilities, etc as you build a nice collection of expensive medical bills.

In a private system, when you lose your job you lose your health care.  When that happens it’s harder to get another job and to stay healthy, and it’s much easier to cycle downward into poverty; when this becomes a nationwide issue, it makes the trough of a business cycle far more severe, and harder to rebound from.  A public system ensures that in an economic downturn people stay healthy and productive and have less bills to worry about so they can get back on their feet.

2) US corporations more competitive internationally.

Very simply, health care adds to the costs of US corporations.  Every other developed country in the entire world (save Mexico and Turkey) doesn’t have to worry about this extra cost to business.  They can produce the same product with the same procedure for cheaper because they don’t have to use some of their profits to buy health insurance for their employees.  When US products go into the international market they may be a bit better and produced a bit cheaper, but still not bought because the final price on the shelves is higher than what other companies can afford to price it at.

Further, these high costs of providing employee health insurance is an incentive for US businesses to outsource jobs.  “Even if that European guy or gal isn’t any more productive or will produce the same thing for the same cost, at least I save a lot of money on health insurance.”

This is one reason among a few others that public health care will lead to job growth.  It lowers the cost of doing business in the US.

This also adds onto point #1, in fact it is the exact same kind of reasoning.  Businesses are less likely to go under if they don’t have the added burdens of health insurance costs.

3) Decreased prices for consumer goods/services and producer inputs.

I already mentioned that US companies produce more expensive goods, all other things considered.  Some of you may already have figured out that that means consumers in the US are paying more for goods and services than they otherwise would on a public health care system.  Health care has to be paid for somehow.  In a public health care system, its paid for through taxes.  In a private system, insurance companies bill corporations who then pass on the costs to their consumers.

So to the consumer/tax payer the cost is merely shifted (jump to the next point to see how this deeply affects certain people).  To businesses this is a boon because products that they use for inputs are cheaper which decreases their cost.  Another weight off the shoulders for businesses during economic crises.

4) Justice and fairness in who pays for health care.

Working off point #3, it is important to note that the poorer you are, the higher the percentage of your income that is spent on basic needs.  If everything costs less, you can either buy more and upgrade your life and/or put away needed savings.  A private system creates a much heavier proportional cost on the poor than a public system which allows them to save/spend a larger portion of their income.  I go into this point a lot more in my blog post here.

5) Human capital investment.

The US had in 2008 over 46 million uninsured citizens, or over 15% of its population.  Very simply this creates a poverty trap.  You can’t get a good education/job if you are constantly sick because you can’t afford treatment.  And you can’t pay for that education or make investments if you have the added burden of expensive medical bills.  But without a good education and job you can’t get good health care.  Also, many jobs do not provide medical insurance or only a cheap plan, so getting a job at all doesn’t guarantee you will be able to get access to health care.  Not providing health care to certain employees may be rational for the business after a cost-benefit analysis, but, similar to education or a lamp post, health is a public good.  Individuals are more productive if they are healthy, a fairly simple observation.  If I can do my job better I can add more to the economy which helps everyone.  So while an employer may not be able to provide health care for all of their workers, they would certainly benefit from healthier workers.

Also, health creates positive externalities, meaning I want X to be healthy not only because it is good for him, but because it is good for me.  In a society where a portion of the population does not have access to health care diseases basically have a safe zone where they can chill out and relax while they wait for an opportunity to spread more widely.  Basically, assuming you already have good healthcare, still, would you want to live in a house with a bunch of sick people or a bunch of healthy people?

6) Removes disincentives for entrepreneurs.

Entrepreneurs are one of the most important parts of the market system.  Without them it simply cannot function, as competition and innovation are the prime drivers of the system.

In a private system, where health care is provided by your employer, quitting to start up a business means you lose your health care.  In such uncertain circumstances as starting a new business, this is a huge disincentive.  Either it makes the investment more expensive or you must forgo health care until when and if you can afford it.

Even if you aren’t faced with the option ‘to quit or not to quit,’ for those right out of school or fresh from being fired, eventually finding a job to gain health care is a prime concern.  For those with medical conditions it may be not just important but literally a matter of life and death.  The risk of trying to start up your own business is just too costly.

Further, even if the individual entrepreneur does take the risk, it adds huge costs to fledgling businesses because they have the expensive burden of providing health care to employees, or must settle for employees who won’t mind going without or finding it elsewhere.

This factor is one of the biggest reasons why making health care public will actually promote job creation.

7) Facilitates job mobility.

As jobs become increasing mobile, human capital (i.e. you and me) will have to becoming increasingly mobile to move with it.  Job security is increasingly a thing of the past.  The fact that health care is provided by employers, who will change with ever increasing speed,  is inefficient for the entire Market system (and that’s Market capital ‘M’).  As globalization progresses, people will be spending more time unemployed as they shift jobs more frequently.  If this means people will be spending more time without health care then you will necessarily have a less healthy nation, which means a less productive nation.

Furthermore, this creates a disincentive for people to quit jobs to look for new ones because they risk being without health care.  Whether the job is unsatisfying, there is a newborn child, a career shift is planned, moving to a new area or any number of reasons, quitting/changing jobs becomes a very costly decision.  Resulting in people staying in less fulfilling and less productive jobs.

8 ) Government savings on cost compared to Insurance Companies.

We could argue that government or the market could more efficiently handle the health care system, but that would take numbers I do not want to look up right now (because I know I could find tons of articles on both sides of the argument).  But for the sake of argument let us assume that the market can handle it more efficiently, i.e. greater output for less cost.  This does not mean that it will be cheaper overall.  Insurance companies have added costs which must be accounted for before one can make the jump from merely efficient to cheaper provision.  Namely these are advertisement costs, screening costs and profit margins.  The latter is of less concern, but advertising is a multi-million dollar expenditure for many individual insurance companies and one a government program would not need to spend on.

It may take the government 2 million dollars more to produce the same health care provision, but since it does not have to pay either for advertising or overhead from screening individual consumers it may in the end be able to provide the same for cheaper.  Krugman in the article above argues that this is one huge factor for why a public system would be cheaper.


In conclusion, I’d like to say that a private health care system is great for providing absolutely amazing health care for the rich.  As Glen Beck loves to point out, Prime Ministers and Presidents come from all over the world to get US health care.  I’m sure Glen Beck wouldn’t want to go anywhere else for the health care policy he can afford to buy here.  The market incentives it gives to produce top notch care for a price that reflects it are powerful.  However, if you are not part of that top ten, twenty or so percent, its a different story.

Far from an efficient health care system overall, the US also has some of the least healthy people in the developed world (graphs and such at the top).  We have a super healthy and wealthy class, but the average person is much worse off than elsewhere. Millions have no health care and the average person can only get sub-par policies.  Furthermore, the private system is simply bad for a healthy and efficient Market system.  To be competitive in the international arena we need to make our businesses more competitive, remove disincentives for entrepreneurs, create a healthier more productive society and so on and so on.

The proof of the pudding is in the tasting.  The entire world has tasted universal health care and has decided it’s delicious and nutritious.

I know the US likes to do things its own way, but there is a point where you have to second guess your approach when everyone is doing something different and are better off after it than you.

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