Health Insurance: Benefit or Necessity?

What the United States can learn from the rest of the world

When I received my first job offer for a position in the United States, I did not understand what people meant when they were talking about “benefits” that a job comes with — complimentary gym membership? Food? Company outings? No, as I learned, the most important benefit that a U.S. employer provides is health insurance.

Photo from Unsplash.

Health coverage around the world

I grew up in Germany, a country with a universal health coverage system, which means that everyone has it — health coverage in my home country is not regarded as a benefit, but as a necessity. In Germany, the insurance companies (Krankenkassen) are government-regulated organizations, and the government regulates the premiums that they charge, which are shared between employer and employee, while the government pays for the unemployed. Most importantly, the insurers are non-profit organizations. This stands in stark contrast to the U.S. system, where insurance companies, seeking profits, have incentive to deny as many claims as possible. Similar systems to the one in Germany can be found today in Japan, Belgium, or Switzerland.

After leaving Germany, I was lucky enough to live for several years in Finland, which also has universal health coverage, but with a different system. In Finland (as well as in the other Nordic countries, the U.K., and some others), health care is provided and paid for by the government through taxes. This means that many doctors are full-time salaried employees of the government. The advantage of this system is that, because the government is providing for everyone, it can negotiate good deals to lower the costs.

The central railway station in Helsinki, Finland (Photo from Unsplash)

Poor countries, poor health

There are many countries in the world that are too poor to provide any health coverage system at all, places like Cambodia, Burkina Faso, or rural regions in India or China. In these places, people have to pay for health care out of their own pockets — which means that pretty much only the rich can afford medical care, while the poor stay sick or die. A cruel system.

The U.S. is really a patchwork of different health care systems. Most people are enrolled in an employer-sponsored health insurance plan (part of their employee benefits). The government provides Medicare and Medicaid for some of the rest. Alarmingly, around 9% of the U.S. population does not have any health insurance at all (2017 Census report) —for them, being in the U.S. is no different from being in Burkina Faso or Cambodia.

Cambodia (Photo from Unsplash)

Disadvantages for employer and employee

The U.S. system has disadvantages for the employer as well as for the employee: For the employer, especially for small businesses, it is a huge burden to pay for all of their workers’ health insurance. As a side note, when I was job-hunting in the U.S., recruiters advertised contractor jobs to me; given the lack of benefits (including health coverage), I did not consider contractor jobs as an attractive option. By hiring contractors, companies can avoid at least some of the health insurance costs.

Compare this to a start-up in Finland: An entrepreneur in Finland does not need to worry about his workers’ health care, because they are covered already by the universal government system.

The U.S. system places a huge burden on the employee, too: if I happen to lose my job, I would also lose my health insurance (and any dependents I might have on my plan would lose it as well), which could cause even more financial loss for me. Even worse, if I were to get seriously ill, so ill that I cannot work any more, then I would face the risk of losing my job, and with it the health insurance that I would need the most in that situation. It’s a scary thought, but the U.S. system makes it a possibility.

The lemon market problem

There is another problem with the US system, a problem that a universal system would solve, and this has to do with the lemon market I discussed here. The problem is that in a system where people can opt in or out of health insurance, the more unhealthy part of the population will have higher incentive to opt in, causing a distribution of the insured population that is skewed towards unhealthy.

If this happens, then the insurance company needs to raise their premiums in order to take into account the new distribution of their insured population, which will amplify this same effect even more. This feedback-loop, or death spiral, can continue until the insurance provider goes out of business. One way to prevent the death spiral is to insure everyone — and this is exactly the premise of the universal system.

Problems with government-provided health care

There are problems with government-provided health care, too. How should the government decide which treatments to use? In the British system, the National Institute for Clinical Excellence (NICE) evaluates different treatments and decides which one the government should pay for. But if you think about it, this is an incredibly difficult task, given that NICE has limited amount of money, but an unlimited number of treatment options that it could decide to pay for. As Tim Harford puts it in his book The Undercover Economist,

“How, then, would you compare a treatment that increases the chance of walking again after an accident, with a treatment that reduces the likelihood of going blind? Impossible! But if you were running NICE you would have to try.”
The skyline of Singapore (photo from Unsplash)

The Singapore model

Tim Harford argues that the best system for health care would be one where the patients pay for small costs such as checkups themselves, while the government covers extremely high bills, such as surgeries. Such a system would incentivize patients to reduce costs, while making sure at the same time that they are covered against extreme loss.

Such a system exists today in Singapore.

The system in Singapore works as follows: every worker has a compulsory savings account for medical expenses, and has to divert 7–9% of their income into this account. Routine medical tests and small expenses come out of this account. However, everyone is at the same time covered by catastrophe insurance, provided by the government, which kicks in if they have a very large medical expense. The system in Singapore has been successful for around two decades.

Conclusion — universal health care is the way forward

It is remarkable that the U.S. is the only developed country in the world without universal health coverage. At the same time, the U.S. also spends around twice as much on healthcare per capita compared to other wealthy countries. Other countries, such as Germany, Finland, the U.K., and Singapore, which I discussed here, show that a successful universal system is possible.

Countries in red do not have universal health coverage (source: Wikipedia)