Belmont Club

The singer, not the song

The WSJ describes how smaller firms are having to drop health care coverage as the economy worsens, as an alternative to laying off workers. In another article, economist Greg Mankiw explains how shifting responsibility for health care to the government just moves things around in the aggregate. So what happens to health care consumption in a recession? Apparently it declines. The cake gets smaller and slicing doesn’t change the fact that there’s less cake.

As the Obama administration wrestles with broader questions of health-care overhaul, tough economic times are forcing more businesses to grapple with stressful questions about discontinuing coverage. Health-insurance premiums for single workers rose 74% for small businesses from 2001 to 2008, the latest year data are available, according to nonprofit research group Kaiser Family Foundation.

About 10% of small businesses are considering eliminating coverage over the next year, up from 3% in 2005, according to a recent survey by National Small Business Association.

That follows earlier declines in coverage, with just 38% of small businesses providing health insurance last year compared to 61% in 1993, according to the trade group. In 2007, 41% offered coverage. A Hewitt Associates survey found that 19% of all companies plan to stop providing health-care benefits in the next three to five years.

Havard professor Greg Mankiw, quoting Paul Krugman and a recent CBO study, among other data, says that from the point of view of total economic competitiveness, shows there is no lasting advantage to moving the responsibility from one payer to another. The CBO study said:

The equilibrium level of overall compensation in the economy is determined by the supply of and the demand for labor. Fringe benefits (such as health insurance) are just part of that compensation. Consequently, the costs of fringe benefits are borne by workers largely in the form of lower cash wages than they would receive if no such benefits were provided by their employer.

Which is a way of saying that the money for health care has to come from somewhere. Health care can be paid for from fringe benefits, self-insurance or state benefits in exchange for higher taxes. And these can be shifted around on the same payslip, but there is essentially no free lunch. Yet the debate doesn’t end there; within that inescapable constraint, there remains a dispute over efficiencies and distribution. Proponents of universal, single payer system argue that such a system would be cheaper and better. In other words “health care reform” would allow people to get more value for money.


President Obama made the argument in a recent CSPAN interview that he needs trillions more dollars to keep the United States from running out of money. Essentially he argues that people need to spend a large lump sum to re-architecture to health care system in order to get a cheaper system. Glenn Reynolds called it the “I’ve bankrupted the nation, so now your only hope is to pass my healthcare plan” argument. But does Obama have a point?

OBAMA: Well, we are out of money now. We are operating in deep deficits, not caused by any decisions we’ve made on health care so far. This is a consequence of the crisis that we’ve seen and in fact our failure to make some good decisions on health care over the last several decades …

Along that trajectory, we will see health care cost as an overall share of our federal spending grow and grow and grow and grow until essentially it consumes everything. That’s the wrong option. I think the right option is to say, where are the game changers, the investments that we can make now that are going to
reduce costs, even if they don’t reduce them this year or next year, but 10 years from now or 20 years from now, we are going to see substantially lower costs.

Maybe theoretically, but theory isn’t everything. The abstract argument centers around the question of whether health care will become cheaper or better with “health care reform”. Obama’s plan would create a “National Health Insurance Exchange that would include both private insurance plans and a Medicare-like government run option. Coverage would be guaranteed regardless of health status, and premiums would not vary based on health status either. It would require parents to cover their children, but does not require adults to buy insurance.” The academic debate has points on the side of both those for or against. A single system would probably make basic health care more available, but in a rationed way. More people could use it, but it would be less innovative and probably less capable at the higher levels of care. It would be different from the current system, for good or ill. On that level the choices are hard but amenable to a rational consensus.

Yet sitting like an elephant in the living room is a noneconomic consideration. Though it is has little to do with the architectures of health care systems themselves, one of the unstated objections to “reform” is probably a deep seated reluctance to entrust government or a single entity with any further control over yet another aspect of life. Experience with public institutions and bureaucratic red tape have stamped the image of failure all over the state-provided brand. To advance the provision of medical services under this label is likely to be a tough sell. This is probably why any debate over “health care reform” is likely to go beyond any mere comparison of features based on statistics and economics. It was no accident that CSPAN’s Steve Scully immediately followed up Obama’s exposition on the savings on health care with the question of whether Obama could reform Detroit.  “You mentioned the auto industry. What will GM look like a year from now?” The implication was clearly that if you were willing to believe that Obama could rebuild the auto industry, then you would be willing to grant him the benefit of the doubt in health care area.  The question of whether the car industry could be rejuvenated was distinct from the proposition of whether Obama could rejuvenate the car industry.

And therein lay the rub. Just as it was theoretically possible that government assistance could help Detroit pull itself out a hole, it is theoretically possible for “health care reform” to be attractive at some level which a rational person might accept. But theoretically and actually are two different things; and the difference between the two often isn’t systems or concepts but implementation and execution. Maybe it isn’t that people disbelieve in the proposition that health care can be reformed. They simply may not believe that government can do it.


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