Healthcare reform

To all the people who find themselves concerned with the health care reform proposals going on now, particularly those who are worried about socialized healthcare, I would like to explain why I don’t think you should be worried. I’m not going to try to debunk some of the hysterical claims about things like “death panels” because they’ve already been debunked in other places. Also, I’m not going to argue that creating a new socialized healthcare system will be better than our current capitalist free-market system. On the contrary, what I’d like to argue is that our current system is already a socialized system and not a free-market system, and therefore it’s nonsensical to worry about “socializing” it.

This might seem like a strange claim– we have private insurance systems, so how could that be socialist? First of all, the government already subsidizes the healthcare industry, including health insurance companies. The reason we commonly get our health insurance policies through our employers is that money spent on health insurance is classified as an expense for your employer, and therefore is not taxed. It’s also not counted as income for the employee, and so it’s not taxed there either.

Now a tax break like this is a funny thing, because in one sense tax breaks are simply the government taking less of your money. However, if you start from the supposition of a flat tax, then every targeted tax break could be viewed as a subsidy. Some people find this hard to understand, but imagine a store which is selling an item at full price, and then providing an immediate $20 refund at the cash register. If you’re paying with cash, you get cash back. If you’re paying with credit, $20 gets credited to your credit card. Now is that any different than the store simply selling the item for $20 less? Effectively, no. In the same way, there’s not a significant difference between viewing a tax structure with deductions as being the same as a flat-tax system with subsidies. Essentially, the government is subsidizing everything that they’re allowing tax deductions for.

Once you consider this, you realize that by not taxing health insurance, the government is essentially subsidizing your employer’s purchase of health insurance, and thereby subsidizing the health insurance providers themselves. And it makes sense, because who would buy health insurance if it were not subsidized? It’s the nature of insurance that the average cost to the policy holder must be more than what they receive back from the insurance company. If this weren’t the case, the insurance company could have no operating budget. Because of this, insofar as health insurance pays for regular care (checkups and medication), healthy people will generally pay more into the system then they receive back in terms of care by the amount of their share of the operating costs and profit of the insurance company.

So just making numbers up on the spot, imagine 10 million healthy people all buy insurance from the same company, each person spending $2,000/month. That means the health insurance company receives $240 billion per year. Now let’s say that it takes $100 million per year to run the insurance company, and they expect a $20 million annual profit. That means the customers can only get an average of $1,999 per year in coverage. Now that’s not too bad to only lose a dollar, but it’s not gaining you anything.

Now imagine half of those 10 million people get sick, and need an average of $3,000 in care one year. That means that healthy people are only able to get $999 worth of coverage for their $2,000 expense. It’s not a great value for the healthy people, but that’s how insurance works. So in another sense, health insurance itself is a socialist system already, even without the government subsidy. It is a method of socializing the costs of health treatment rather than expecting each person to pay for their own health care costs.

Of course the problem is that, in a free market, health insurance wouldn’t work. People who believe themselves to be healthy generally wouldn’t buy health insurance because it’s not a good value for them. In my made-up example, they have to pay $2,000 for $999 worth of services. However, if you look at what happens to my example when the healthy people leave the system, suddenly everyone is paying for $2,000 for average of $3,000 worth of coverage, which cannot possibly be profitable for the health insurance company. They’ll have to raise their rates. Now the healthier portion of the sick people are no longer getting a good value, since the same model prevails and the people with cheaper care are subsidizing those with more expensive care, so they might very well drop out of the system too. The likely outcome is that, if health insurance would exist at all, it would be only for catastrophic coverage and would be no more common than life insurance or maybe renter’s insurance. That is to say, some people might buy it, but many people wouldn’t.

And this is why the government subsidizes health insurance through tax breaks, so that people get health insurance because they think it’s very cheap, when in fact it’s only cheap because we’re subsidizing it with tax dollars. Because of all this, I think it’s fair to claim that our current healthcare system is socialist– after all, it’s funded by the government with the goal of distributing costs, to take money from everyone and use it to provide for those who are in need.

What’s more, even if you look at those who can’t afford health insurance, their health care is still paid for by the rest of us. In some cases, the services are provided more directly by the government through systems like Medicare, but even in other cases the costs are still distributed among the rest of us. If someone without health insurance gets very sick, they go to the emergency room and simply don’t pay for the services they receive. This increases the operating costs of the hospital, which makes it necessary for the hospital to charge health insurance more for services provided to those who have health insurance. These increase in charge to the health insurance company in turn is passed to their customers, which we all pay for. We pay for it through our premiums and copayments and through our tax dollars which are used to subsidize health insurance. None of this comes free.

I find it interesting when opponents to reform, claiming to be in favor of free markets, also claim that we already have the best healthcare system in the world. Given that our system is already socialized, wouldn’t that mean that the best healthcare system in the world is a socialist healthcare system?