In the US, there's a massive debate about universal healthcare. Republicans tend argue that it's too much of a budget cost or that citizens should be 'free to choose their own' healthcare. Democrats tend to argue that healthcare should be a basic right offered by the state. Lost somewhere in translation here is the economic case for universal coverage. Neither party seems to want to go into it, but it's important to understand how healthcare isn't a regular market, and why it gets so expensive when individuals have to shop for their own coverage.

Purchasing in an Economy of Scale

Purchasing massive amounts of healthcare offers the advantage of lowering the costs across the board. While it's true that many government programs tend to have a lot of waste (or 'pork', if you prefer), what that argument tends to miss is that often the overall cost can be lower because of the scale involved, and the purchasing leverage that such a large purchaser tends to have.

If a pharmaceutical company wants to sell a drug, they can either lower the cost to the point that the large provider (government) agrees to purchase it in bulk, in which case, the company gains access to a huge number of unit sales. Their other option is to keep the price artificially high in an attempt to sell very few units at a higher margin to smaller (wealthier) markets. Looking at private examples: when Blue Cross/Blue Shield agrees to cover a drug, they have the leverage of 106 million enrolled people to pressure lower costs. When a provider with fewer enrollees tries to negotiate with that same pharma company, they have less leverage, and therefore can't demand lower prices with the same authority.

This same thing applies to costs across the board - hospital stays, surgeries, rehab, etc.

Now imagine the purchasing power of a provider that covers 350 million of the wealthiest citizens in the world on a per-capita basis. That provider would have a huge amount of leverage to demand lower prices from pharmaceutical companies, hospitals and healthcare devices companies. This is why a lot of really smart people tend to believe that a single payer system would do a lot to combat the rapidly rising cost of US healthcare.

Entrepreneurial Economic Benefits

One of the top worries for new businesses and entrepreneurs is healthcare. There are two reasons for this:

Providing healthcare for a small business owner's own family.
Providing healthcare for employees when the business grows.

Both of these can be solved through either a marketplace solution (like the ACA provides), or through a single payer system, but are not (or at least, have not) been solved by a free market solution. Let's take a quick look at both of these.

Starting Your Own Business

Ok, let's say you've been working for a company for a while, but now you'd like to strike out on your own. One of the things you're going to immediately realize is that existing healthcare options for your situation are incredibly expensive. As anyone who has lost their job can tell you, COBRA coverage is prohibitively costly, even if you're gainfully employed. The reason for this is that if you have healthcare through an employer, the company subsidizes a large part of your health insurance. When you switch to COBRA as you start your business, now all of a sudden, you have to pay your normal healthcare premium plus the amount subsidized by your employer plus 2% on top of that (yay for charging you extra money for no reason at all). In the US, the average employee pays only 27% of their healthcare premium, while the employer pays the other 73%.

Statistic: The average US employee pays $4,710 of the $17,322 total cost of their yearly healthcare premium, while the employer shoulders the other $12,612.

Source: The Henry J. Kaiser Family Foundation

So now someone who wants to start their own business is either going to be paying 360% more for their healthcare than they were when they were employed, in addition to the costs of starting up their own business. Or they can go without healthcare (which a lot of people do), which is also dangerous, because healthcare is the number one cause of bankruptcy in the United States. So it makes a huge amount of sense to cover people through the state rather than through the employer, as this allows for more people to start small businesses without being crippled by healthcare insurance premiums or the possibility of bankruptcy from a medical emergency.

But hey, what if our entrepreneur manages to navigate his or her own family's healthcare needs while they start their business? Guess what's about to be in store for them...

The Cost of Employee Healthcare Premiums

Remember in that last section where I mentioned that the employer is on the hook for an average of 73% of healthcare costs in the US? Now our entrepreneur is going to be on the hook for that for all of their employees as well, provided that they want to be a competitive employer, of course.

This is an immediate depression on wages at a company. Every employee ends up costing another $12,612 (US average) in addition to their paycheck (and payroll taxes). This is a drag on job creation, and it's a drag on employee salaries.

But what if the state was the healthcare provider? Now the employer no longer has to worry about the cost of healthcare for their employees. This is what the ACA attempted to mitigate with the Small Business Health Options Program, which gives small businesses (fewer than 50 full time employees) a 50% discount on the cost of healthcare for their employees. This is arguably handled better in many European countries than it is in the US, because employers have nothing to do with the healthcare of their employees (unless they're providing private benefits above what the state provides). So in most European countries, an entrepreneur never has to worry about healthcare costs for themselves or their employees. That's a huge competitive advantage for small businesses, and it's one reason why the US really isn't the entrepreneurial capital of the world, despite having most of the world's venture capital wrapped up.

But what about from an employee's view?

Advantages for the Changing Labor Market

The US (and the rest of the world) is rapidly shifting to a job market where individuals frequently change jobs. Companies rapidly shift their sizes as they attempt to compete in a global market that quickly names winners and losers, and employees are more incentivized than ever to continually seek new opportunities. What is healthcare's role in this changing economy? Does the healthcare system work for or against citizens in this scenario?

When an employee changes jobs in the US, they also change healthcare plans. This means that when a head of household changes, their family can often be subject to healthcare gaps, or increased costs for a few months because of the transition to COBRA before being picked up by the new employer's plan(s). Prior to the ACA, it was extremely important to make sure never to have a coverage gap, because that would allow for pre-existing conditions to spike insurance premiums or even make a person ineligible for healthcare at all.

But what are the other healthcare casualties of changing jobs in the US?

"If you like the plan you have, you can keep it. If you like the doctor you have, you can keep your doctor, too."

President Obama, June 6th 2009

Frequently, keeping a plan (and the doctors to which that plan provides access) is difficult when changing jobs in the US. Each employer chooses which providers to go through, which means that when changing from Employer A to Employer B, an employee may have no choice but to switch from Kaiser to Blue Cross or from Blue Cross to Aetna. Which means...

You guessed it, it's often the case that when an employee changes jobs, they're unable to keep their family doctor. That's a huge problem for a lot of people, and it creates friction when considering taking a job with a different company.

In a state-run system... that doesn't happen. You keep your doctor. There's no plan to change. You simply keep your healthcare, no matter which job you go to or whether you get laid off and can't find work for a couple of months.

But isn't this more expensive?

Paying for Universal Healthcare

Healthcare costs are always contentious, because there are so many variables involved. Some of the variables when comparing healthcare:

Cost per-capita
Waiting times
Successful treatment
System waste

What we know is that the US pays the absolute most for healthcare per-capita, and it's not even close to the runner-up.

The Top Five

United States - $9,451 per person
Luxembourg - $7,765 per person
Switzerland - $6,935 per person
Norway - $6,567 per person
Netherlands - $5,343 per person

The Netherlands spends just 56% of the cost per person that the US does. And yet...

The US ranks #31 in the global healthcare rankings. It is atrociously bad. Canada sits one place above us at #30, but spends just 48% of what the US pays for healthcare. If you are wealthy in the US, the healthcare is fine. If you are not... then it's really, really awful.

Universal Healthcare Makes Economic Sense

Categorically, it's almost impossible to state just how much economic sense it makes to provide universal healthcare. The scale of government purchased healthcare provides leverage to lower costs for drugs and care. It allows small businesses to ignore the cost of providing healthcare to employees. It allows individuals to start businesses without worrying about lapsed healthcare. It reduces friction for employees thinking about taking better job offers. It reduces the cost per employee for businesses.

So let's make the case for universal healthcare because it is economical as well as the benefits it provides to covering the uninsured.