Does Universal Healthcare Make Economic Sense? It Depends

Healthcare may be a human right, but the burden of funding it falls differently on governments, businesses, health systems and taxpayers.

By Andrew Feld

Former President Barack Obama signed the Affordable Care Act (ACA) into law in 2010. While the legislation aimed to reduce the number of uninsured Americans, which at the time measured 48.6 million, not everyone was happy with what it did to the health system. Republicans branded it as socialized medicine while some Democrats complained it did not take health reform far enough. These criticisms ignited debates over what the ideal health system looked like, and for many, that meant achieving Universal Health Care (UHC). 

The World Health Organization defines UHC as a system where “all people have access to the full range of quality health services they need, when and where they need them, without financial hardship” (WHO). 

Despite the ACA, 27.5 million Americans currently remain uninsured. 

Most arguments in favor of UHC center on ethical principles. Supporters’ claims often boil down to the belief that health is a fundamental right of every human being. But, no matter how righteous it may be to provide healthcare to all citizens, no policy will ever get passed without first understanding its economic impacts.

Modifying the current health system will certainly create winners and losers. And determining who those winners and losers are depend on how UHC is achieved.

What could a UHC system look like?

Most Western countries have a UHC system. The United Kingdom, Spain, Canada, Germany and Switzerland all guarantee health coverage to citizens, however the way in which they do so differs. Canada employs a single-payer model: the government pays for each citizen’s healthcare needs, however the private sector delivers it. The UK has socialized medicine: the government finances and delivers healthcare through the National Health Service. And Switzerland implements a system similar to the original ACA: all citizens are required to buy private health insurance, but those insurance providers are not-for-profit, which makes the plans cheap. 

The U.S. is different. Aside from Medicare and Medicaid, most people get health insurance through their employer who provides them a set of insurance plans they can choose from. There is cost sharing, but employers pay for the bulk of it: 78% for single coverage plans and 66% for family plans. What’s interesting is that these expenses are tax deductible. 

“I think this is the biggest problem in our healthcare system,” says Evan Saltzman, professor of economics at Emory University. “If you get health insurance through your employer, any money that you or your employer contributes to your health insurance is not taxed. Now the problem is that it effectively works like a tax deduction. And tax deductions favor the rich.”

Take two companies, for example — both of whom spend $1 million on health insurance. The first is a wealthy company, taxed at 30%. The tax break saves them $30,000. The second is relatively poorer and taxed at 10%. It only saves $10,000.

These tax breaks are the government’s way of financing the healthcare system, however they are inefficient because the wealthy receive larger tax breaks than the poor.

“No economist is going to say that this tax exclusion is an effective way of providing health insurance,” said Saltzman. “If we wanted to move towards a universal health care system, I think we would have to think about making some very significant change.”

One major change would be abandoning the current employer-sponsored system. Doing so would impact four main groups: taxpayers, employees, providers and businesses. 

Taxpayers

Moving to a UHC system would carry both advantages and disadvantages for taxpayers. 

The obvious downside are the higher taxes needed to finance such a system. For example, Bernie Sanders’ “Medicare for All” plan was projected to raise payroll and income taxes from a combined 8.6% to 20% (JPC). 

Someone expecting to need a lot of medical care in the future may be fine with tax increases, but a healthy/wealthy individual may dislike paying for services they do not plan on using. Also, higher taxes means people have less money to spend on goods and services, which can slow economic growth. 

UHC is not all bad for taxpayers though, especially considering 20-30 million more people would have health insurance. This is an advantage in itself. 

“One benefit [of UHC] that sometimes people overlook is that health insurance is insurance,” said Dr. Mark Meiselbach, assistant professor of health economics at Johns Hopkins University. “It’s protection against financial harm when you know someone has unexpected losses due to health. So diminishing medical debt — which is a major contributor to bankruptcy — is positive.” 

Reducing medical debt obviously benefits the uninsured individual. But it also helps taxpayers. 

The cost of uncompensated care — health services that the patient could not pay for — totaled $42.4 billion per year between 2015-17. Somebody must pay for this. And often, it is the government that steps in to cover some, not all, of the bill using taxpayer dollars. 

Employees

The impact on employees depends on which industry the person works in. 

Employees in a non-health insurance industry should be better off under a UHC system than under our current employee-sponsored one. 

One benefit is higher salaries. If companies no longer have to pay for their employees’ health insurance, they would presumably pass along some of those savings to employees. 

“Our salaries are lower because employers are paying for health insurance,” said Saltzman. “Ultimately, employers only care about the total compensation, right? Salary is one part of it, but they care about your salary plus all your fringe benefits.”

Another benefit could be workers no longer feeling stuck at their job — a phenomenon known as “job lock.” 

“The fact that you get health insurance from your employer could have distortions to the labor market,” said Meiselbach. “It could make you less likely to leave a job than you otherwise would, because you don’t want to lose access to your primary care provider or your prescriptions or whatever.”

A 2021 study found that one-third of insured workers would leave their job if health insurance played no role. (PolicyGenius). This lack of mobility hampers the economy because it prevents people from moving to jobs where they may be happier and more productive. Moving away from employer-sponsored insurance would eliminate these inefficiencies. 

Employees who work for private health insurance companies will certainly lose out in a UHC system. In a single-payer and socialized medicine, the entire industry would no longer exist and hundreds of thousands of employees would lose their jobs. And even in a system like Switzerland, there would be job loss as the government would prevent the private insurance companies from growing too large and powerful.

Some of these unemployed workers may simply transition to healthcare delivery, as demand for providers will increase, however, the new healthcare system would be more efficient than the prior one, so not every laid-off worker would find a job. These higher rates of unemployment would hurt the economy because it would prevent the U.S. from operating at its potential.  

Providers

Most healthcare providers are likely to suffer under a UHC system, but some may welcome the change.  

Currently, prices for different procedures are set through negotiations between a provider and an insurance company. For example, Aetna may negotiate a specific price for an appendectomy with Children’s Hospital— meaning that when a doctor completes that procedure, Aetna pays them the agreed-upon amount. The level of reimbursement a provider receives can vary between insurance companies, however, the rate ultimately comes down to who has the most bargaining power. 

“If you [individually] try to negotiate with a hospital about your hospital bill, good luck,” said Saltzman. “But when a health insurer with lots and lots of people starts saying you give me this rate, or else then the providers really have to listen. And if you create one large government payer that says ‘Look, you have to give me a certain rate’, then that’s even greater bargaining power. So yeah, providers stand to lose from this.”

Providers also already have a taste of what government reimbursement rates may look like through Medicare and Medicaid. According to the Kaiser Family Foundation, private insurers paid providers rates 199% greater than what Medicare paid for all hospital procedures. So with that knowledge, why would a doctor want UHC? 

Well, there is some evidence that physicians may make up for their lost revenue in the form of lower costs. For example, there are insanely high overhead costs of dealing with multiple insurance companies. Doctors must process patient information across thousands of different health plans. Reduce that complexity and its possible providers may earn not that much less than before while being able to navigate a much simpler system. 

“If you talk to hospital administrators and people on that side, they’re pretty fed up with the administrative burden of sorting through a lot of different payment systems,” said Meiselbach. So, if there’s some shrinking of the possible price options, I think there’s some administrative benefit to that.”

For providers financially, it ultimately comes down to if the savings from operating in simpler systems outweigh the decreases in reimbursement. 

Businesses

Like all other stakeholders, businesses would also face tradeoffs under a UHC system. Not buying employees health insurance would save companies money, but it would also mean paying more taxes, as now they would not be able to deduct those costs from their taxable revenue.

Calculating those savings is not that simple. Companies’ health insurance expenses include the amount spent on the health plans themselves AND the amount of money spent on finding, managing and dealing with those plans — these are the administrative costs. 

These administrative costs often occur in human resources — the department to which companies delegate administering health benefits. The problem is these departments must also provide financial benefits, deal with hiring and firing as well as employee training. HR teams have so much on their plate that it’s impossible for them to learn how to administer health benefits most efficiently. 

“Employers are not particularly adept at handling health insurance,” said Meiselbach. “It’s a really complex thing. And so, even the best employers, if they try to directly contract with hospitals or something, might struggle to do so.” 

Some companies try to do it anyway, but end up buying overpriced plans that do not align with employee needs. Other companies outsource this task to consultants and health benefits specialists. Either way, administrative costs are high and can be reduced in a UHC system. 

Smaller businesses may also thrive as they will not be forced to buy expensive health insurance to attract the talent needed to grow. Success of these small businesses is vital to the economy, as they provide two-thirds of new jobs and drive innovation (USBA). 

Ultimately, businesses will favor a UHC system if their savings from no longer paying for health insurance outweigh the increase in taxes. 

What should the US do?

It’s highly unlikely the U.S. deviates very far from its current system. There are over 500,000 employees in the private health insurance industry and it would be insane to completely eliminate the entire sector. Therefore, the most practical solutions towards UHC build upon existing frameworks. 

One possibility is providing people with government-subsidized plans, such as Medicaid or Medicare Advantage. The government could put these plans on a website and allow people to buy them, regardless of their age or income. 

“You’d still have private insurance firms,” said Saltzman. “But everyone would have the ability to access subsidies to go by private plan. You wouldn’t just have the one plan that your employer offers. You’d have a spectrum of subsidized plans you could get.” 

Such a system would increase the number of people insured. Taxes would likely increase, but by less than they would for a single-payer or socialized medicine system. Taxpayers may even benefit: less tax money spent on uncompensated care means more funds available for other programs that improve citizen welfare. It would not wipe an entire industry, and it would not tank provider’s reimbursement rates. It would also let consumers choose between more options, increasing the chances they find a plan better suited to their needs. This could reduce unnecessary costs.   

“I tend to think the current health insurance plans that employers offer are too comprehensive,” said Saltzman. “And it’s because of the incentives to offer more health benefits because of the tax exclusion. So I think people will be more cognizant of like, ‘do I really need all this coverage?’”