Defining Ideas

The Economic Trap Of “Medicare For All”

Monday, August 5, 2019
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When an untested program looks too good to be true, it is almost certainly far worse than anyone could imagine. Case in point: the Medicare for All program set out in Senate Bill 1129, introduced this past April by Senator Bernie Sanders (VT) and cosponsored by three fellow presidential candidates, Senators Cory Booker (NJ), Kamala Harris (CA), and Elizabeth Warren (MA). The legislation proposes a government takeover of the nation’s entire health care system—the same government that is notoriously unable to address the endless waste in its very own Veterans Administration health care program. The obvious explanation for the government’s abysmal performance in health care is its lack of ownership stake and the associated lack of accountability for costs and performance. This difficulty is inherent in all government-run enterprises, which explains why the United States Post Office is far less efficient than Federal Express and UPS.

A self-described democratic-socialist like Sanders finds these pesky details of business management and incentives irritating irrelevancies that can eventually be solved by clever government officials. After all, if you don’t believe that markets solve problems, why would you think that the market can untie the nation’s health care gridlock? Warren, who has described herself as “capitalist to my bones,” should know better than to trust the federal government to bring order to the national health care system. But the truth is, she deeply disdains markets. Just consider her outlandish proposal to make corporations stack corporate boards with outside stakeholders ultimately accountable to her.

Sadly, the Medicare for All program will collapse under its own weight. First, the bill contains no price constraints whatsoever on universal access to a rich set of benefits, which will be available not only to all American citizens, but also to all resident legal aliens. No one will have to make any monthly contributions to enroll in the program:  There are no monthly fees as there are with Medicare, and no copayments or deductibles.

Statists like Marcia Angell, the former editor of the New England Journal of Medicine, trumpet the virtues of the bill for limiting the “huge out-of-pocket costs to American families.” In so doing, she repeats the classic error of assuming that a massive change in payment systems with huge distributive effects will have few, if any, effects on the overall levels of utilization. Accordingly, she predicts that total health care costs will go down, even though every independent study from across the political spectrum reaches the opposite conclusion, predicting that overall the price tag for this new set of benefits will range between $25 and $40 trillion in the program’s initial decade. For comparison, the 2010 projections of the costs of Obamacare were consciously limited to under a trillion dollars for the same period of time. Remember this program does more than add people to an already costly Medicare and Medicaid programs.  It expands the size of those subsidies as well, apparently on the utopian view that there is never a point where the additional social subsidies cost more than they are worth.  Apparently, the money that is left over from funding the Green New Deal and universal student loan forgiveness will cover this modest expense.

People like Angell, Sanders, and Warren fail to appreciate that the central function of any price system is to allocate scarce goods to the people who need and desire them most. This is why all private insurance plans work hard to set the fine line between excessive and ineffective deductibles and copayments. Without financial discipline in the system, hospitals and physicians’ offices will be flooded with well-intentioned patients seeking unnecessary medical care. In this regime, the only way to ration services is to force people to wait in queues. But it is highly unlikely that the people most in need of urgent medical care will be treated first.

The situation is made even worse by two obvious complications: managing health care providers and financing arrangements. Medicare for All would establish an unresponsive state monopoly for providing all essential health services. The bill takes the dramatic step of prohibiting the private provision of “duplicative” services: Since the benefit packages under the legislation are so expansive, there is little place for additional, private care. Don’t ask who sets the fees of physicians and other health care providers because that answer is all too clear—the government. In the absence of reliable information, government will compress salaries so that the best doctors—with their precious human capital—will seek work elsewhere or retire early.

Centralized government control will be insensitive to relevant local variations in niche markets, where a mix of smaller firms have flourished under the Affordable Care Act system. Walk-in clinics like City MD and OneMedical, which are popular in urban areas and offer urgent and primary care services, are a useful example. Moreover, some niche insurers, such as faith-based plans, could not be easily incorporated into a single national health coverage system given the ongoing debate over issues such as contraception and abortion. Do these companies just disappear, or will they be granted exemptions? The answer is not clear, so we should fear the worst.

The foundation of our current health care system lies with large private health care plans that cover about 156 million people, or close to half the population, most of whom give these plans high ratings. It is rash and irresponsible for the elitist defenders of Medicare for All to ignore the stubborn fact that people are happy with their private plans—because they are worth more to them than they cost—and instead force such people into a government program. Yet, Senators Sanders, Booker, Harris, and Warren are so confident that they know more about the needs of ordinary individuals that they are prepared to force their fellow citizens out of their current health care plans into some untested regulatory regime whose design flaws have been systematically overlooked.

Moreover, the decision to ban all private health care insurance without a dime of compensation will wreak havoc on the economy, as trillions of dollars will be drained from the stock market, and thus from private pension plans, institutional endowments, and the savings of ordinary citizens. Shareholders cannot count on any form of compensation to cushion the blow because the government could never raise enough money to pay off such enormous losses.

How will this new government monstrosity be financed? Senate Bill 1129 would require that all revenues paid into Medicare and Medicaid be transferred into the new program, with such revenues constituting only a small down-payment on the total bill. The remaining funds will come through new taxes. But the people who don’t have to make direct contributions to their own plans will be hit hard in other ways.  Sanders’ program calls for a 4 percent tax on all incomes over $29,000, and higher income and estate tax rates for higher brackets based on the naïve assumption that output levels will remain constant even as transfer taxes surge.

Harris—who hopes to ease into a Medicare for All system more slowly—wants to reduce the burden of direct taxation through her alternative proposal to “tax Wall Street stock trades at 0.2%, bond trades at 0.1%, and derivative transactions at 0.002%.” Those special taxes will likely drive trading activity from New York to foreign financial centers to minimize the costs. Regardless of whether the activity goes elsewhere, Harris’ proposal will undercut the efficiency of capital markets, as fewer transactions will mean less efficient pricing and therefore lower capital yields, fewer capital investments, lower salaries, and ultimately lower tax revenues.

These criticisms of the different variations of the Medicare for All program should not be construed as an implicit endorsement of the current health care regime. There are massive inefficiencies in the American health care system, many of which stem from the huge regulatory burdens placed by federal and state governments on productive activity. The large expansion of Medicare and Medicaid may please their beneficiaries, but the inevitable overconsumption in medical services such expansion creates will continue unless increased deregulation drives health care reform.

Consider one example: current government mandates on the terms and conditions for health care plans force many people in the private market to get coverage for medical services they don’t want in order to get coverage for the services they do want. But when these mandates are too burdensome, some employer plans will shut down, increasing the number of uninsureds. For instance, proposals to ease up on community rating systems or to offer full coverage for pre-existing conditions face enormous political pushback, leaving the status quo in place. Deregulation would lower administrative costs, subject health care markets to competition, and provide consumers with more agency in their health care decisions.


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