Why ‘Medicare For All’ Is The Wrong Approach

A rallying call for many in the progressive left, Medicare For All was effectively introduced and championed by Senators Bernie Sanders in the 2016 and 2020 Democratic Party Presidential Primaries. Advocates, of which there are many, claim that Medicare For All would bring the United States in line with the rest of the world, promising cheaper, better quality care which extends to all of the nation’s citizens, not just those who can afford insurance.

As a proponent of universal access to health coverage, Medicare For All has at times been on my mind, considered and contrasted with competing plans for achieving universal coverage. I’ve down a great amount of research over the last two years on both Senator Sanders and Vice President Biden’s health plans, as well the existing hybrid public-private insurance system.

I think to get started on whether or not reform proposals are worthwhile, we have to have an idea of the system that’s been put in place, as well as the issues prompting calls for reform. The United States has a hybrid healthcare system where the majority of hospitals and other providers are privately owned and operated, but where nearly half the population is enrolled in some sort of public insurance plan. These plans include Medicaid, Medicare, the Indian Health Service, Children’s Health Insurance Program, and the Veterans Health Administration.

Medicare and Medicaid were introduced by the Social Security Amendments of 1965, with Medicare, a Federal insurer providing subsidized insurance to the elderly, and Medicaid, a collection of Federally-funded state insurers providing zero cost insurance to the indigent. The Veterans Health Administration and Indian Health Service both slowly evolved into being through the 19th and 20th centuries to provide insurance to veterans and American Indians respectively. The Children’s Health Insurance Program began in the late 90’s, and similar to Medicaid, provides cost free coverage to children of low income families.

In 2010 the Patient Protection and Affordable Care Act was signed in law, the most comprehensive and consequential healthcare regulatory overhaul in the history of the United States. Among some of the most striking changes were the implementation of the following regulations:

  • Mandatory out-of-pocket maximum, capping out-of-pocket expenses each year, not to exceed a level determined annually by the Dept. of HHS based on average per enrollee premiums (e.g. $6,350 in 2014, $8,150 in 2020)
  • Prohibition against denying coverage on the basis of pre-existing conditions
  • Permitting premiums to vary only by enrollee age and location
  • Minimum coverage of ‘essential health benefits’
  • Prohibition against annual and lifetime benefit limits

In addition to these new regulations, the ACA created a pair of new subsidies, a temporary reinsurance program for insurers, and allowed states to expand coverage of Medicaid. The subsidies include the Premium Tax Credit, which directly subsidies premiums for lower and middle income households not eligible for other coverage, and the cost-sharing reduction, which reimburses insurers for mandatory cost-sharing reductions (reductions in deductibles and copays) for low-income ACA enrollees.

Graphic source: A. Roy / FREOPP

Altogether, in the present system, few Americans lack coverage or the ability to afford their healthcare. However, progressives like myself believe that not a single person should be without comprehensive coverage. There are still nearly 30 million Americans without coverage, and tens of millions for whom adequate insurance is hardly affordable.

According to a poll conducted by the Kaiser Family Foundation in February 2019, one in four taking prescription drugs find it difficult to afford their medicines, meanwhile Gallup found that tens of millions of Americans knew someone who lost their life unable to afford necessary treatment, including nearly a fifth of Americans with annual household incomes below $40,000.

In addition, it’s often claimed that American healthcare is excessively costly, especially when considering American patient’s often times worse outcomes and shorter life spans. I’m not going to get too into that here but there’s a great blogpost on the site Random Critical Analysis I suggest taking a look at which addresses the question of cost (the basic gist is healthcare is a superior good and the US is rich so it spends more). As for quality of care, I think the United States has genuinely fallen behind top tier countries, but still performs reasonably well all things considered.

Advocates of Medicare For All claim a single-payer system would reduce administrative costs, drive down prices, slow cost growth, and improve outcomes. But is Medicare For All the best option? Is it even feasible? The immediate issue that comes to mind for me is the fiscal effects of implementing the Medicare For All system, which I view as downright impossible to reconcile. Let me explain.

Graphic source: Wikipedia

The United States spends approximately 18 percent of its gross domestic product on health care nowadays, which in 2018 came out to $3.65 trillion, or 17.7 percent of GDP. The same year, public spending on healthcare amounted to $1.61 trillion, meaning nonpublic spending was in the area of $2.04 trillion, or 9.9 percent of GDP. If the Federal government were to have assumed this entire expense, subtracting the more or less 2 percent of GDP in profits and excess administrative costs, the Federal government would’ve had to come up with 8 percent of GDP in new revenues, on top of the existing Federal deficit, which amounted to 3.8 percent of GDP in 2018.

Let’s say we ignore the deficit. We have 8 percent of GDP to come up with in new revenue. In 2018, 8 percent of GDP was equal to $1.65 trillion, what the income tax raised that year, or twice what the Social Security payroll tax raised.

Sure, you could raise some of the revenue from taxes on wealth and corporate income. Hell, you could even create a value added tax. Here’s the catch: heavy taxes on corporate revenue and income could at most raise half of the necessary revenue, and then we’d be taxing profit for many if not most firms at an effective rate exceeding 100 percent. Taxing and spending accumulated capital could reduce the capital stock and long-term growth, but most importantly would mostly be absorbed by inflation.

Take for instance the value added tax, which is a tax on gross profits, or in other words the corporate income tax but without deductions for operating expenses aside from the direct cost of good sold. The cost would fall either on consumers or capital. If capital is hit, then again, you have an effective profits tax rate well over 100 percent, which means the entire economy stops immediately as no capitalist is interested in burning their money on unprofitable enterprise. If the cost falls on consumers, then you achieved the same thing as any typical regressive payroll tax.

As an example, here’s how a 20 percent VAT and 50 percent corporate income tax would impact Walmart: in 2019, Walmart logged an $129 billion gross profit. A 20 percent VAT would have cost the company $26 billion, which is actually more than twice what the company reported in net income for the year. Their new net income would be -$14.3 billion. If they made any money at all, half of it would become an income tax liability, and then the company’s shareholders would be taxed on their capital gains and dividends at an exceedingly high marginal rate. The net asset tax would then proceed to strip away Walmart stockholder equity (albeit not too significantly).

Ultimately, the issue with taxing capital and profit at the level required and then spending is it all would yield increased consumer price inflation and reduced economic growth. What really is happening when you tax capital and profit to finance consumption is you’re crowding out actual investment. To some extent, the economy can ramp up and avoid this by utilizing more of its real resources, but resources are limited. Unless we seek inflation in the 4 to 5 percent range, we won’t be able to

Don’t get me wrong, I actually support both a high corporate income tax and the Warren wealth tax (to reduce the national debt). What I don’t support is drastically raising taxes on most Americans, in addition to establishing a business-crushing value added tax, all for universal affordable coverage that could be achieved for an order of magnitude less cost, and with relatively minute tax hikes.

Graphic source: C. Holbrook, based on data from usgovernmentrevenue.com

This is the part where the reader asks themselves, how can this ‘corporate shill’ (me) explain the success of foreign countries in establishing single-payer healthcare systems. Simple. Other countries do exactly what I just described. They tax their people to death.

CASE 1: The United Kingdom has a 20 percent VAT, a 40 percent marginal rate of income tax on individual income over ~$65,000 (our marginal rate for that income is 22 percent), a combined 25.8 percent payroll tax (called National Insurance Contribution, similar to FICA) on middle incomes, a 0.5 percent tax on financial transactions called the Stamp Tax, as well as a whole host of other lesser taxes. In total they raise about 34% of GDP in taxes.

CASE 2: France has a 20 percent VAT, a 30 percent marginal rate of income tax on income over ~$35,000 and 41 percent for income over ~$93,000 (the U.S. rates for such income are 10 and 22 percent respectively). Stack that on top of the (and I’m not kidding) 48 to 54 percent combined payroll tax (there’s a ceiling for some of the payroll taxes but the total is never less than 48 percent). In addition to these taxes, the French maintain a wealth tax on net assets exceeding roughly $940,000. The French raise 48% of GDP in taxes.

CASE 3: The Swedish rock a 25 percent VAT, an average 32 percent marginal rate on income less than ~$50,000, an average of 52 percent on income exceeding that level, and a 31 percent payroll tax. Finally the Swedes levy an additional 7 percent in payroll tax on top for pensions. Altogether the Swedes raise 50% of GDP in taxes.

I think you get the gist. Europeans are paying incredible taxes, and it’s not chiefly on the super wealthy, it’s on lower and middle income folks. To what avail? All Europeans have comprehensive health insurance, but so do 90 percent of Americans. Considering the burden of tax, perhaps they are rightly referred to as ‘democratic socialist’ countries.

But what they do in Europe does not have to be what we do in America, and I have a feeling most Americans would be appalled at how they do things over there. Fortunately, there are ways to achieve universal coverage without draconian European-style tax laws.

Take for instance, in order to ensure affordable coverage for all Americans, we would simply need to extend the subsidies put in place by the Affordable Care Act and establish a public option that automatically enrolls the uninsured. That’s what Joe Biden’s plan entails, and according to the people at Wharton, it would cost a mere $352 billion over ten years, literally two orders of magnitude less than Sander’s Medicare For All.

Establishing universal access to quality healthcare does not require multitrillion dollar redistribution schemes. It simply requires we fill the gaps in coverage. Given real alternatives, Medicare For All is not realistic. The lowest estimates from credible researchers such as the ones presented in the New York Times article Would ‘Medicare for All’ Save Billions or Cost Billions are still well in excess of what’s plausibly affordable by the United States Federal government, except for when we allow the enormous tax increases such as those I mentioned prior.

Really, I think the best solution to the cost of healthcare is focusing on market-based solutions that actually engage patients and providers. Ultimately progress in the efficacy and efficiency of healthcare will come from private sector innovators and care providers. The aim of our government, however, should be to regulate insurance and promote universal coverage, with whatever subsidies ensure those lacking the means can still afford needed care.

Medicare For All is too costly, disruptive, and unnecessarily radical. There are simpler, more cost-effective ways to establish universal coverage. As Switzerland and Holland teach us, a universal private insurance system can succeed, and can curb costs. We do not need to resort to overly-redistributive policies, healthcare rationing, and monumental government overreach in order to create a system that works for all Americans.

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