The Economic Cost of National Health Insurance

First Published: 2004-02-08

As the Bahamian government goes forward with its plans to create a national public health insurance scheme, it is important to keep in mind some of the important changes and problems that will occur as a result of such a program. Beyond those that currently plague national public health care systems around the world, problems such as high levels of public expenditure or long waiting times (or both in the case of Canada), come problems that will arise from the implementation of a new scheme.

One important issue is the effect of the new or increased taxes or fees required to fund such a scheme.

Funding Alternatives. There are three ways to finance a national health insurance program ("NHI"):

1. Increased import duties, fees and taxes (general tax revenues) to cover the Government's increased healthcare expenditures. This is a form of financing that is not likely to occur due to the current Government's commitment to not increase taxes.

2. New income related payments for health insurance where high-income earners would pay more for health service coverage than low income earners.

3. Payments for health insurance where each individual is assessed a flat premium based on the cost of insurance for the average individual and the number of people insured under his policy. Under this alternative there would be no adjustment for income or employment status.

The most likely option for the implementation of a new national health insurance scheme in the Bahamas is mandatory income related payments for health insurance.

In the Bahamas, most low-income individuals have no insurance, which means that a new individual premium assessed on them will have approximately the same effect as a new tax on earnings, whether or not it is related to income. In addition, NHI premiums will likely have to be positively related to income, since the goal of NHI is to provide insurance coverage for health services to the low income portion of the population through income redistribution and risk pooling, which means that social insurance premiums will appear as a tax increase to wealthier Bahamians. The Blue Ribbon Commission on National Health Insurance seems to have accepted this inevitability, and according to press reports it has stated that the new NHI premiums will be positively related to income. 1 2

Increasing government revenues to finance a health insurance scheme has the notable effect of constraining economic growth. Increases in taxes affect the incentives for investment, risk-taking, entrepreneurial activities, and working by reducing the value of any gains that might accrue from these activities. Estimates of the cost of tax increases in the United States show that it costs anywhere between $1.26 and $2.02 to raise an additional dollar of taxes, depending on the form of taxation used. Most important to this discussion is the fact that a $1.00 increase in income taxes costs $1.60 – in other words there is a net loss to the economy of $0.60 before counting the bill to taxpayers. 3

Since economic growth and development are related to lower levels of unemployment and higher levels of employment growth, these costs to the economy will ultimately lead to larger costs for workers unable to find work or finding themselves without work as the government takes a larger share of the economy to finance the NHI program.

(This estimate is based on the work of Dale W. Jorgensen and Kun-Young Yun cited in the endnotes; but unfortunately the authors do not calculate the cost of a dollar of revenue raised through a payroll tax assessed on employers. Estimates by the Federal Ministry of Finance in Canada suggest that the cost is lower than that of a personal income tax, $1.27 versus $1.56, but still a positive cost for the economy as a whole.) 4

Gruber/Hanratty Study. As a response to this concern, the Blue Ribbon Commission on National Health Insurance Health Insurance has widely distributed a study by Jonathan Gruber and Maria Hanratty titled "The Labor Market Effects of Introducing National Health Insurance: Evidence from Canada", dated 1993 and printed by the National Bureau of Economic Research.

The Canadian provinces implemented NHI programs on a staggered basis between 1962 and 1971 and Gruber and Hanratty found that employment rose between 2 and 2.6 percent after implementation.

These findings, though interesting in the Canadian context, rely on two historical facts that are not the current experience in the Bahamas.

_ First is the fact that private health expenditures are exceptionally high today relative to the period when implementation of Canadian NHI began. In Canada, the cost of private health insurance, which only covered physician and drug expenses because hospital expenses were publicly insured, was estimated to be between 3 and 4 percent of the average wage in the early 1960s.5 By comparison, the authors estimate that the cost of a typical family health insurance plan in the US in 1993 was approximately 16.6 percent of the average wage, while a more recent estimate for 2001 is roughly 12.3 percent of wages to cover health care benefits for the average employee. 5,6,7

This means that the change studied in Canada was for a tax increase that would be approximately 3 to 4 percent of the average wage, while the implementation of a new NHI scheme today would require covering at least 12 percent of the average wage. A larger tax scheme would have notably larger negative effects on both incomes and employment as a result of the economic costs. Gruber and Hanratty also note that the effect of implementing an NHI scheme today may be different from that found in their paper because of the higher costs of services. 5

_ Second, the proposed finance regime for the NHI program in the Bahamas will be a form of tax financing, which will mean a reduction in economic growth and employment. In the case of Canada the provinces that implemented NHI and experienced a growth in employment were those that levied flat individual premiums for health. Not only were these premiums not related to income or hours worked, but they were also subsidized for low-income Canadians both before and after the introduction of NHI, meaning that their incentives for both work and leisure were unchanged by the introduction of NHI. 5

Canadian provinces that financed the new NHI scheme through general tax revenues instead of individual premiums suffered employment declines of 4-5%. 5

Likely Impact of NHI. Though the findings of Gruber and Hanratty are interesting, there is nothing in the paper to support a claim that employment will not fall if a new tax financed program is implemented. It is important to remember three conditions that existed at the time of NHI implementation in Canada that do not exist today in the Bahamas:

1. A relatively low cost of health services,

2. Flat individual premiums that did not vary according to income or hours worked, and

3. Existing subsidies for individual insurance premiums for low-income individuals. 5

Without these conditions, the findings of Gruber and Hanratty are inapplicable to the present day debate in the Bahamas. Further, the findings of Gruber and Hanratty support the opposite if health services are financed, as they are proposed to be, through a progressive tax scheme.

While the goal of a universal access health care system is laudable, it is incumbent on individuals to carefully and objectively assess both the costs and benefits of such a program. The implementation of an NHI scheme in the Bahamas is likely to mean a slowing of the economy and a reduction in employment, though a more careful analysis is required to determine precisely to what extent this will occur.

Despite the costs, Bahamians may ultimately decide to implement the NHI program, but the costs must be known up front so that a well-informed decision can be made. END

Nadeem Esmail

December 5, 2003.

Nadeem Esmail is a Senior Health Policy Analyst and Manager of Health Data Systems at the Fraser Institute, and has a BA (Honours) in Economics from the University of Calgary and a MA in Economics from the University of British Columbia. His publications include "How Good is Canadian Health Care?", Fraser Forum, August 2002 and "Waiting Your Turn: Hospital Waiting Lists in Canada", 13th Edition, both coauthored with Michael Walker.

Endnotes

1 Smith, Larry, "The national health question", The Nassau Guardian Online Edition, August 11, 2003, available on the Internet at www.nassauguardian.net.

2 Matthews, Martella, "Gomez presses case for National Health plan", The Nassau Guardian Online Edition, September 26, 2003, available on the Internet at www.nassauguardian.net.

3 Jorgensen, Dale W., and Kun-Young Yun, "The Excess Burden of Taxation in the United States", Journal of Accounting and Finance 6, 1991, pages 487-508.

4 "OECD Economic Surveys: Canada", Organization for Economic Cooperation and Development, 1997, Paris.

5 Gruber, Jonathan, and Maria Hanratty, "The Labor Market Effects of Introducing National Health Insurance: Evidence from Canada", NBER Working Paper Series, No. 4589, 1993, National Bureau of Economic Research, Cambridge, MA.

6 Employment Trends January 2003, "Employee Share of Health Insurance Costs is Not Rising", Employment Policy Foundation, Washington, DC.

7 U.S. Department of Labor, Bureau of Labour Statistics, "2001 National Employment and Wage Estimates", 2002, available on the Internet at www.bls.gov/oes/2001/oes_00al.htm.

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