Why Healthcare Reform is Good

I’m certainly not qualified to discuss many of the ramifications of the healthcare reform the Democrats passed today; nor its intellectual heritage.

But let’s take a look at some of the economic ramifications of healthcare. Even though poor people, and those with debilitating pre-existing conditions, are better off than they were before at the expense of the rich, the economic consequences could by positive – a net benefit for everyone.

Here’s how:

Health insurance is about more than making sure sick people are treated well: it is more than giving people a fundamental right to health to go alongside “life, liberty, and the pursuit of happiness.”

It’s about improving the efficiency of the labor market.

Sure, single-payer systems are better than the reform we have now. They’re undeniably cheaper and more efficient. They provide at worst a comparable level of care, and under some metrics outperform the US handily whilst spending half as much.

But the reform passed last night ensures that every person in America will have health insurance, and will not have to worry about medical bills. In other words, they can worry less about what insurance their employer will provide them.

Prior to the passing of this bill, health insurance was a large part of compensation. It’ll still be a large part, but (i) it’ll be broken out separately on your W2, and (ii) if you switch jobs or become unemployed you’re guaranteed health insurance.

It’s obvious what I’m getting at: health insurance used to increase the transaction cost of switching jobs, and with the reform that transaction cost will go down. As per Coase, the efficiency of the market will increase.

Another invisible benefit is that health insurance should limit the growth of medical expenses as a percentage of GDP. Money that would have gone to health – treating expensive diseases and battling against old age – will go to other sectors of the economy (such as energy). Healthcare is essential – if people aren’t healthy, they can’t work – but it is not productive in and of itself.

Furthermore, the bill incentivizes preventative care; which could increase the overall health of the nation, thereby boosting productivity.

Really, the most astonishing part of the healthcare debate was the lack of focus – as a core issue – on healthcare spending as a percentage of GDP and how inefficient that was. If healthcare costs grow faster than GDP – faster than wages – then it’s reasonable to assume that resources are being misallocated to healthcare. Particularly since life expectancy has not increased substantially. It’s added the most jobs in the past decade – by a considerable margin.

Healthcare was broken. It was threatening to choke our economy by allocating increasing amounts of GDP to health – with no end in site. Healthcare reform goes a long way to fixing the problem. It’s not perfect, of course, but sadly our political system is almost as dysfunctional as our healthcare system was.