National Feature

How big of a check would I have to write for you to pay $5,130 more in taxes? A healthcare picture book (kind of)

The economically rational answer to the question: “How big of a check would I have to write for you to be willing to pay $5,130 more in taxes?” should be simple–$5,130.

The fact that huge numbers of Americans wouldn’t answer that way gets at the heart of the biggest obstacle to cutting healthcare costs in the United States, and broadly speaking, the biggest roadblock to taking on 21st challenges.

Where does the number $5,130 come from?  It’s the average total annual employer and worker premium contribution for an individual HMO health insurance policy in the United States.*

Let’s say JoJo is a single, employed adult.    For the sake of argument, JoJo is the simplest type of economically rational agent–all JoJo cares about is how good her own healthcare is, and how much money she has, and she couldn’t care less about whether anyone else has healthcare. How big of a check would I have to write to get JoJo to pay $5,130 more in taxes?  Just a check for $5,130.

Her health insurance costs her and her employer $5,130 each year (not including the copays she’ll pay if she goes to a doctor’s office, hospital or fills a prescription)–we’ll call these her Type I healthcare costs.  But that’s not all JoJo spends on health care.  In addition, because she pays federal and state income taxes, she’s also sharing the costs of healthcare for the elderly (Medicare), the least wealthy (Medicaid), veterans and Native Americans–we’ll call these her Type II healthcare costs.  How much she’s paying in Type II healthcare costs depends on how much she’s paying in taxes, but if we split the $1.083 trillion the United States government spends on healthcare** amongst the 139 million Americans in the workforce,***  then we see that she pays about $7,791 on Type II healthcare costs.  That means JoJo has $12,291 in healthcare costs each year.

So if there was some way for her to have the same quality of healthcare, while spending less than $12,921 per year, that would make JoJo happy, because remember, all JoJo cares about is saving money.

Now we’re going to introduce Marcus:


Marcus really hates taxes.  He thinks they’re awful.  They make him incredibly angry.   He is also skeptical of foreigners.  USA!  USA!  USA!  Like JoJo, Marcus is employed and he’s spending about $12,921 on his healthcare and other people’s healthcare each year.

A  genie comes up to Marcus and JoJo, and makes an interesting offer ….

The genie says to JoJo and Marcus–How would you like to switch to Spain’s healthcare system?

Marcus is automatically skeptical because Marcus thinks the USA is the best at everything.  JoJo asks the genie, “Will my healthcare costs go up or down?  Will I have better or worse healthcare?”

The genie says, “Don’t you also want to know whether your other fellow citizens, 23 million of whom even under ‘Obamacare’ still won’t have health insurance, will be better or worse off?”****

JoJo replies, “Not really, all I care about is myself.”

“Fair enough,” replied the genie.

The genie continued, “let’s stat out with costs.  Spain’s healthcare system costs $2,099 per person, per year, and it’s all paid for by taxes.”

Marcus, blerghing

“BLEERRRGGH,” interrupts Marcus (this is his reaction every time he hears the word “taxes”)–but the genie continues.

“Since employed people pay most of the taxes, JoJo and Marcus, you’d each have to pay $4,636 in this system”*****

JoJo says, “well that seems quite reasonable–in fact, that’s only about a quarter of what I’m paying now in healthcare costs! But will my quality of healthcare be as good?  I hear sometimes that other countries have waiting lists to get healthcare, and sometimes there are treatments that American health insurance will pay for that other healthcare systems don’t pay for, like some of the more expensive types of cancer medication, or certain surgeries.”

The genie says, “Spain does have a national healthcare program that everyone is automatically a part of–when any Spanish resident goes to the doctor’s office or hospital it is free; the only copays are for prescription drugs.  Overall, Spain’s healthcare system is ranked very highly–7th in the world by the World Health Organization, compared to 37th for the United States    Not everything that American insurers cover is provided by the public Spanish healthcare system though, and you might end up waiting for elective treatments longer than you would in the United States. ”

JoJo starts to frown–she was only going to go for the Spanish system if it were cheaper and if it were going to give just as good of healthcare as she had before.  It is not clear to JoJo that if she uses the public healthcare system, if she’ll get the same standard of healthcare that she’s used to in the United States.

The genie continues “health care in Spain is sort of like K-12 education in the United States though.  If you’re happy with the public system, you can use it for free–it is completely paid for by taxpayers.  If you want premium service though (in healthcare–shorter wait times, and coverage for all treatments) you can still “go private,” (in this case, buying private health insurance).  Some countries like the UK and Canada don’t let their citizens do this, because they think its unfair.  In the private system, you can get all of the amenities you might be used to in the United States. About 1 in 10 Spanish citizens decide to get private insurance–if you don’t have private insurance in Spain, you can still go to private hospitals or doctors, but you’ll pay out-of-pocket.”

JoJo asks, “How much would private insurance cost?”

Genie: “About $2,686 per year to get the top-of-the-line service you’re used to.”******

JoJo: Just to be clear, let’s sum this up.

The genie then made a graph appear in the sky, summarizing all of the important information.

JoJo decided to take the genie’s offer–after all, she could have pretty darn good healthcare for $4,636, or the same quality of healthcare that she was used to before for $7,832, which is almost half as much as she’s paying now ($12,921).  Marcus stopped listening a long time ago. [The next post on this blog will explain why the Spanish healthcare system is so much cheaper than ours, and it will give allowances to the fact that it is cheaper to provide healthcare to healthier people, like the Spaniards.  The shortest possible explanation though is that there are ways in which having a healthcare system financed by the public sector (like in Spain or the UK) or through non-profit insurance companies (like in Germany or Japan) ends up resulting in lots of cost savings, and greater efficiency].

Marcus explains a big part of the reason why health care reform is so hard in the United States.  Technically speaking, Marcus’ taxes would go down in the Spanish plan, but we can imagine a counterfactual situation in which Marcus could pay all $7,832 to the government in taxes to get American style healthcare in a National Insurance Plan (think a Canadian style system).  This would be a slight increase in his taxes, but he would be spending less on healthcare overall because he wouldn’t be buying insurance.  This unwillingness to pay more to the government in taxes, even if it means having more money in his pocket overall, is a friction that economists need to pay more attention to.  Marcus doesn’t like that more doctors would be government employees (like doctors in our VA system), and he doesn’t like that more of the healthcare system would be publicly financed.  This peculiarly American religion of “small government” is a major stumbling block to the type of economic analysis we’re used to.

Sources:

* Kaiser Family Foundation report, 2010.  I’ m saying that JoJo bears both the costs of her contribution and her employer’s contribution, because if the employer didn’t offer health insurance, they could pay her the cost of the employer contribution and be equally well off.

** Summary of a Centers for Medicaid and Medicare services report, 2011

***Associate Press, June 2011  — The assumption here is that Americans in the workforce is close to 1:1 with people who pay federal and state income tax

**** The Healing of America: A Global Quest for Better Cheaper and Fairer Healthcare by T.R. Reid — a great book that I would recommend to anyone (pages 245)

***** The population of the United States is 307,006,550.  At $2,099 per capita, that means the Spanish healthcare system in the United States would cost around $644,406,748,450.  When we divide that amongst the 139 million employed Americans, we get $4,636

******To check this stat, you’re probably going to have to speak Spanish.  I went to sanitas.es —  Sanitas is one of the major Spanish insurers, and looked up the costs for a 40 year old woman in the premium plan, living in the Madrid postal code 28080, got a monthly rate in euros, multiplied it by 12, and then converted it to dollars using today’s exchange rate.  You can check out what’s covered in that plan on their website

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