I've worked in (or near) manufacturing for more than twenty years and something has always puzzled me: why would a business want to pay for the healthcare of its employees?
Year after year, I've sat in company-wide meetings which seem to have the same script. It goes: “We did well last year. We met and exceeded our targets. Sadly, our healthcare costs have gone up faster than we expected, so we were not as profitable a business as we'd planned. As a result, we all need to sacrifice.” What follows this is some unilateral cut – a higher deductible, a higher co-pay, a higher monthly premium contribution.
It's generally an easy sell; they can show that healthcare costs have increased. We know that a business can't afford to have uncontrolled costs and remain viable. We can see that healthcare costs are the one cost which a business can't predict. They can lock in raw material costs with long-term blanket purchase orders. They can lock in labor costs with annual salaries. Their fixed costs (the cost of the plant and the machines) are fixed. But healthcare costs are out of their control and skyrocketing year after year.
So, when someone proposes 'Medicare for All' – a single payer system where healthcare costs are paid by the government and not the employer; why is this something which businesses are against? Doesn't it solve their biggest problem? Doesn't it remove a whole major cost? Doesn't it immediately make them more profitable and more competitive? Of course, the answer is 'yes, it would'. It would remove their biggest uncontrolled cost. It would make them more profitable.
Yet, the group that is most hostile to the idea of single-payer healthcare is the Chamber of Commerce – the group that speaks for businesses. Why is this? What explains this fundamental paradox? I think the explanation lies in imperfect markets.
We are all taught, and being taught believe, that free markets are good things. With a perfect market, the value of an object is the same as the price that is set by the market as driven by supply and demand. Scarce things cost more; common things cost less. Competition among suppliers drives down prices. Resources are allocated to the most efficient producers. Unquestionably, these are all good things with benefits for the whole society.
However, not all markets are perfect. Consider the case of a monopoly. Here, the monopolistic supplier can hold a price artificially high since there is no competition to drive his price lower. The monopoly has more power than the consumer and it benefits disproportionally. This is always the case with imperfect markets; resources flow not to the most efficient economic agent, but to the economic agent with the greatest power. The owner of the monopoly has more power than the consumer, so these robber-barons grow disproportionally wealthy.
The market for healthcare is greatly imperfect. When it comes to saving your life or the life of a loved-one, the fundamental law of diminishing returns does not apply. The first ice-cream cone is nice. The second is not as important. The seventeenth is hardly desired at all. This is the foundation of the demand curve. Yet, if seventeen pills are required to save your life; you will pay full price for them all. There is no diminishing return.
Similarly, the supply curve in healthcare is not standard. In general, if you double the resources of a producer making widgets, that producer can buy more raw materials and machines, hire more workers, and quickly double his output. But, if you double the pay of even the best heart surgeon, she will not be able to operate on twice the number of patients.
The overall result of this imperfect healthcare market is that resources are diverted to the healthcare providers since they are more powerful than the healthcare consumers. Healthcare costs go up and up.
So, what happens when you link an imperfect market with another market? In this case, the second market becomes less perfect. For example, let's say you own a really rare car of which only a thousand were made. It is possible that the market for this car will have been imperfect and that the price of the car will have been high. Now, if that car had a special size tire, then the market for the car and the market for the tire are linked. In this case, the price of the tire will be greater than the amount of rubber in the tire would suggest. So, not only is the price of the car disproportionally high, but the price of replacement tires is disproportionally high as well. This would not be the case if car used standard tires; in that case the market for the car and the market for the tires are not linked. It is the linking of the two markets which drives up the price of the special car's tires.
We are led to believe that the labor market is relatively perfect. People with rare and valuable skills, experience and traits are scarce and thus paid more that other people with commonplace skills, experience and traits. The market forces employers to pay more for such people or risk losing them to competition from other employers. When jobs are scarce, the risk is less and employers can pay less.
Yet, in a system where employers are expected to pay the for the healthcare of their employees, the labor market and the healthcare market are linked. If it means that you lose your healthcare, you will be less likely to leave a lower paying job for a higher paying one. Every year, your employer can lower your overall compensation by changing your healthcare benefits to shift the cost to you; your only recourse is to quit on the spot. The linking of the markets greatly increases the imperfection of the labor market. It means that instead of allocating resources to the most efficient producers in a fair and equitable way, the system shifts resources toward the side with the greater economic power – the employer.
Thus, the linking of the healthcare and labor markets explains some of why wages have stagnated despite significant annual productivity gains. It explains why wealth has been so rapidly concentrated among the business owners. Note, it is not the healthcare providers (doctors and nurses) who have benefited disproportionally; it is the business owners – the chamber of commerce members – who have made such large gains. And this explains their hatred of the idea of single-payer healthcare. It explains why they oppose a system which would remove uncontrolled healthcare costs from their cost structure and business model. The linking of the two markets gives them greater economic power and they can pass the ever-increasing healthcare costs on to us through 'shared' sacrifice, all the while pocketing the productivity gains we have achieved year after year after year.