Erik Engheim
Feb 8 · 7 min read

I will assume you are asking how America will pay for universal health care, because it is a problem already solved by most industrial countries.

The very short answer is: You pay for universal health care through taxes.

Most people will not be happy with that answer and will demand more details, so let me elaborate.

You are not buying something new. Most American are already buying health care. Thus this question is not like asking: how can we afford to buy 30 new fighter jets? Rather this is about changing the payment method.

Instead of paying premiums or out of pocket, you will be paying in taxes. Paying $100 in taxes does not cost more than paying $100 in insurance premiums or out of pocket. It is the same money. It is ludicrious to have to point this out. But Americans in particular have a tendency to view taxes as special. Somehow things cost more, if it is payed through taxes than out of pocket in the American mental model of economics.

What Are the Benefits of Out of Pocket vs Taxes?

If America does absolutely nothing to reform its health care system apart from changing from paying premiums and out pocket to taxes, will there be any benefits?

Indeed. It is easily illustrated with insurance. Why do people buy insurance? For insurance to work, people must on average pay more into insurance than they get out. Less than 10% get more out than they paid into insurance. So on the surface it sounds like a shitty deal. Except it is not, because you are paying to spread risk. The larger the pool of insurance payers, the more you spread the risk. A single payer government health insurance would thus be a very large risk spreading.

But it gets better. A government system also happens to handle the risk of dramatic changes to your income. Many Americans today who get seriously sick, cannot work anymore, and thus don’t get an income to pay for health insurance. Taxes thus has the benefit that they adapt to your income level. When your income falls, you pay less for your insurance, when it rises, you pay more.

Fear of Socialism Hampered American Health Care

This benefit of risk spreading is obvious, but one of the reasons it has not been employed in the US unlike other industrialized nations is due to a deep seated American paranoia about socialism. Malcom Gladwell gets into this history in a piece called the Risk Pool in the New Yorker. Wired magazine talks about its relation to health care. Basically unions tried to spread risk between companies by having workers employed in many different companies pay into the same fund or pool for things like pensions and health care.

While the companies say this as smart, and economical, they rejected it on the grounds that it was too socialist in their view. Workers looking after each other was not something they wanted. They wanted a more paternalistic system, where each individual company looked after their workers. That became a problem when the business of one company shrank. We have seen this with American car makers and steel makers. Due to foreign competition markets have shrank while automation has caused the need for workers to fall. Thus companies are saddled with a huge number of dependents they have to pay health insurance and pensions to, which no longer work there. This made American car and steel industry uncompetitive. With a public sector scheme you spread the risk over all of society. That is the benefit of tax paid system: Risk spreading.

Economics of Scale, Bargainging Position and Profits

We have thus assumed government is not able to make any cost reduction, but of course they are able to do that. A large single payer insurance scheme run by the government gets enormous market power to push prices down.

We have a curious case of this in my native Norway. We have famously high taxes on alcohol, and anything but 5% beer is sold through a government run liquor monopoly. Ironically expensive French wines are cheaper in Norway than in France. French tourists will actually buy expensive French wines in Norway. Why? Because taxes are tied to alcohol content and not other qualities. Thus for more expensive wines the overal effect is diminished. However the bargaining power of the Norwegian government is huge, given that it buys all the wine consumed in Norway. That is why it gets low prices.

The second opportunity for cost savings is in profits. American health insurance companies run with 20% profit margins. Public sector systems tend to have just a few percent of overhead.

Bureaucracy Savings

American health care has an unusually large bureacracy. The many different hospitals and insurance companies means there is a wide variety of procedures and forms. The fight between the companies to avoid paying, or getting as much as possible from each other, leads to an escalation in paper production and rules. Thus no health care system in the world has as many paper pushers as the American one.

I can attest to this from my own experience. The number of forms and the complexities of bills is quite staggering in the US from my experience. In contrast it is very simple in my native Norway. Government standarize much more and simplify. E.g. there is one electronic system for exchanging prescriptions. Get a subscription at any doctors office and you can go to a pharmacy run by any company and get the prescription by just showing an ID. They can look it up on their computers.

How to Further Reduce Health Care Costs

So the question is not really about how to pay for it. You are already paying for it, you are just switching to paying for it through higher taxes. But usually what people want is a lower total cost. I have showed some ways of achieving that through a single payer system.

But there are far more issues in the American health care system which needs to be tackled to bring prices further down.

The capitalist nature of all of American society is a contributor to high prices. Reward usually follows risk. People only make risky investments if the rewards are higher. In the US unlike most other western countries becoming a medical professional carries a huge financial risk. It thus follows that companies must pay a higher premium for these professionals to make taking the risk worthwhile.

The effect of this is that medical professionals in the US are under heavy economic strain in the early years while they get excessively fat payout later in life. Moderating this effect can save a lot of money. That is why free college and free health care is actually tied together. With free college you reduce the financial risk of medical professionals which means they do not need to be paid equally high salaries to make their investment in the education worthwhile.

Medical professionals get something important in exchange for sacrificing higher salaries: that is increased economic safety. They will not be saddled with huge student loans they worry about defaulting on.

The second capitalist problem, is that in a market economy, the logical thing is to get customers to consume as much of your product as possible. This seems to be reflected in practice. Americans have more C-sections, appendix removals and a host of other procedures performed than people in other industrial countries without any health benefits. In fact it is deterimental to your health to do operations you don’t need.

We have experience the same in Norway. While hospitals and government owned, they are free to tinker with the incentive system. To speed up the number of procedures performed, the government started paying hospitals for every procedure performed. Surely it made hospitals do more work in shorter time. However it also inflated costs as they started doing more unessasary procedures. Eventually they settled on a mixed system of fixed budgets plus pay per service. It is hard to get this right, but just paying for work done, will create a too strong incentive towards excessive health care consumption.

That is why health care is not completely free in Norway. You pay a small fee to see the doctor, to avoid excessive visists. However there is no cost associated with large operations or treatments like cancer. Those are given free, because nobody would voluntarily commit themselves to cancer treatment if they did not really need it.

The Real Problem is Not Cost, But Politics

Paying for universal health care in the US, is not really a complicated problem. The actual complicated problem is politics. Because American health care has remained private for so long, there are huge vested interests. It is a huge industry making fat profits on the current arrangement and which has no interest in changing that. In a political system where politicians an be legally bought through excessive donations, most universal health care schemes will be quickly burried, or redered toothless with excessive red tape. Look at the insane complexity of the Obama health care legislation. That was simply a result of balancing act of satisfying all the vested interests.

Thus the US should not really be asking itself how to pay for universal health care, but rather how to get money out of politics. That ought to be first priority. Once money is out of politics it will be much easier to devise a sensible health care system.

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