When the 2016 election gave the GOP control of all three branches of government, it seemed a foregone conclusion that Obamacare would be repealed. The House of Representatives had previously voted to abolish all or parts of the law multiple times, and repeal was a central plank in Donald Trump’s presidential campaign. Trump even floated the idea of convening a special session of Congress on his inauguration day to eradicate his predecessor’s signature domestic accomplishment.
It now seems that Obamacare will remain in place longer than the Republicans led everyone to believe. Although the House passed the American Health Care Act (AHCA) on the second try, the Senate, which is more closely divided, has so far shown itself to be incapable of passing even a minor overhaul of the law apart from the repeal of the individual mandate in 2017. This surprising turn of events has many causes, two of which seem especially potent.
The first is opposition among voters, who like certain benefits of Obamacare (if they don’t have to pay for them, that is), especially the provisions that guarantee coverage for people with pre-existing conditions, lower insurance premiums for the near-elderly, and make coverage available for children on their parents’ policies until the age of 26. People concerned about the loss of these benefits converted town hall meetings with their Republican representatives into shouting matches that ranged from angry to almost violent. Patient advocacy groups, including the American Association of Retired Persons, the American Heart Association, the March of Dimes, the Cystic Fibrosis Foundation, the National Multiple Sclerosis Society, and a host of others also heaped scorn on the AHCA, claiming that it would throw the poor, the near-elderly, and the sick to the wolves for no better reason than to reduce the tax burden on the rich.
The second major cause is the opposition of the medical establishment, which has hundreds of billions of dollars in revenues at stake and is using all of its political muscle to protect the flow of cash. Every trade association whose members benefit financially from Obamacare opposed the AHCA, including the American Medical Association, the American Hospital Association, the American Academy of Pediatrics, the Federation of American Hospitals, the American College of Cardiology, the American Academy of Family Physicians, and the American Nurses Association, to name but a few. They opposed the bills that were placed on the Senate’s agenda too.1
Opposition from entrenched interests is hard for politicians to overcome. It may be the most important reason that Obamacare did not attempt to tackle any of the problems we identified in Part 1. A serious effort to rationalize the payment system would threaten health care providers, pharma companies, and the rest of the medical establishment with the loss of hundreds of billions of dollars in revenues a year. Given that one-third of all medical spending is wasted, the stakes for providers could conceivably be $1 trillion. A threat of that magnitude would unleash a maelstrom that few politicians have the courage to confront. Realistically, one cannot expect Republicans or Democrats to take the steps that are needed to make American health care better and cheaper.
That would be true even if American voters were open minded. They are not. Millions are palpably fearful that they will have to pay far more for insurance or will lose their coverage entirely if Obamacare is repealed. The GOP’s members in Congress should have expected this and attempted to put voters at ease. Instead of rushing to abolish Obamacare, they should have developed a plan for protecting vulnerable individuals and embarked on a year-long effort to educate the public. Obamacare wasn’t built in a day, and the GOP should not have tried to build its replacement that quickly either. But it threw caution and common sense to the wind. The House raced to enact the AHCA in the shortest possible time and attached no importance to educating the public or learning from it. Many Republican representatives were so reluctant to discuss health care policy with their constituents that they refused to attend public gatherings arranged for the purpose. The Senate rushed the process too, at times moving so quickly that even its members did not know what proposals would be put before them.
Good ideas were casualties of the process. The chief problem with Obamacare was that it was more of the same. It mostly just increased the role of third-party payment in the health care system by expanding Medicaid and making it easier (as well as compulsory) for people to obtain private insurance in the individual market. To combat the pathologies of the health care system, the AHCA needed to be very different. It wasn’t. Instead, it was “Obamacare-lite.” Being hell-bent on scoring a legislative victory as quickly as possible, the GOP cobbled together a bill that would pass—and the bill that emerged preserved many of Obamacare’s core features. Whether the AHCA would make American health care better and cheaper didn’t matter nearly as much to House Republicans, so thoroughgoing reform of the payment system wasn’t even attempted.
The AHCA would have kept several key provisions of Obamacare. It would have preserved the provisions allowing adults to keep children on their parents’ policies until the age of 26. It would have preserved the provisions that forbid carriers from denying coverage to persons with pre-existing conditions and from charging sick people more. It would have preserved provisions requiring consumers to purchase coverage with unlimited annual and lifetime benefits.
The AHCA would also have tinkered with but not abandoned other Obamacare provisions. It would have converted Obamacare’s income-based subsidies to smaller age-based subsidies. It would also have retained Obamacare’s community rating of premiums by age while increasing the maximum ratio between the charges for the oldest and youngest enrollees from 3:1 to 5:1.
The AHCA and Obamacare differ in four major ways. First, the AHCA would have frozen and slowly wound back the Medicaid expansion. Starting in 2020, it would have limited funding for the program to a per capita amount times the size of the covered population (rather than having the federal government match whatever the state spends). Second, it would have eliminated Obamacare’s individual mandate (which penalizes individuals who don’t purchase a minimum level of coverage) and employer mandate (which requires businesses with a certain number of full-time workers to offer coverage as a benefit or pay a tax). Third, it would have allowed insurers to offer less comprehensive coverage packages in states that obtain waivers, rather than requiring them to sell policies that provide the minimum package of benefits that the federal government deems essential. Fourth, it would have raised the annual contribution limits for tax-exempt health savings accounts (HSAs) from $3,400 to $6,550 for individuals and from $6,750 to $13,100 for families. These changes were designed to keep the Obamacare insurance program going while enabling Republicans to say they repealed it.
These are not pathbreaking changes. Anyone who scours the AHCA in hope of finding a big idea with significant potential to pressure health care providers to offer better services at less cost will be disappointed. But only in a small, libertarian corner of the health care policy world was the AHCA criticized for being too much like Obamacare. In the mainstream, it was harshly condemned for cutting Medicaid and for changing the individual mandate and Obamacare’s subsidies in ways that would cause millions of Americans to drop their insurance. When the Congressional Budget Office predicted that 28 percent of the nonelderly population would be uninsured by 2026—roughly the same percentage as before Obamacare—centrist economists and policy analysts were mortified.2
Because our goal is to make American health care better and cheaper, we have little sympathy for the mainstream critique. It strikes us as a bad idea to give 325 million Americans the means with which to buy all the mediocre, unnecessary, harmful, and overpriced medical treatments they want, while also funneling hundreds of billions of dollars to providers and criminals who commit frauds.
Even so, we too think that the House’s version of the AHCA is deficient. Like Obamacare, the bill leaves the payment system mostly intact. It preserves the incentives and tax advantages that distort consumers’ spending habits by making medical services and insurance seem cheap relative to goods and services of other kinds. It changes Medicare not at all, and it reforms Medicaid in a way that is bound to disserve the poor. Once states start receiving fixed payments per Medicaid beneficiary, their incentive will be to maximize the number of beneficiaries while minimizing the services that each beneficiary receives.3 It would be far better to give the money to poor people directly and let them decide how to spend it.
We are also dismayed that the Republicans flubbed the opportunity to change the national conversation about health care by educating the public. Having grown up with Medicare, Medicaid, private insurance, the U.S. Veterans Health Administration (VHA), and other existing arrangements, millions of Americans hold two related beliefs. One is that medical services are too complicated and too expensive for consumers to buy directly. The other is that the more we rely on third-party payment arrangements, the better. Both beliefs are wrong, and the occasion of repealing Obamacare was the GOP’s opportunity to explain why. Simply stated, providers perform better and charge less when consumers buy medical treatments directly, and health care can and should be sold in competitive markets. The GOP should have carried this message to voters and left Obamacare in place while explaining it. The message would have played well too. According to a survey taken by the Kaiser Family Foundation in late 2016, the public’s top health care–related priorities were “lowering the amount individuals pay for health care [and] lowering the cost of prescription drugs.”4 Fully 67 percent of the respondents said that making health care cheaper should be a top priority for the next administration. Repealing Obamacare ranked much farther down on the list.
Unfortunately, the GOP spent no time educating voters. It rushed to repeal Obamacare without even formulating a program that would work better, let alone taking the time to explain why. That strategy left unchallenged the conventional beliefs that insurer- and governmental-control of health care purchasing are necessary and desirable. The GOP thus ceded the terms of the public conversation to mainstream thinkers, who took full advantage and pummeled the party severely.
Suppose you wanted to lose a few pounds. Which would you do: Go through your pantry and toss out the junk food and snacks, or go to the grocery and buy more? We hope you’d know better than to surround yourself with temptations.
When it comes to medical care, overconsumption is an enormous problem. In Chapter 6, we showed that pretty much everything the health care sector has to offer is overused. But, instead of doing what you’d do if you were on a diet, the government keeps tempting people to use more. It offers special inducements to buy health care by exempting the dollars that are used from taxation. This makes medical treatments seem cheap in comparison to other things, like cars, housing, energy, and transportation, so people spend more of their wealth on health care than they would if all types of purchases were taxed equally.
The tax breaks the federal government offers for medical consumption are huge. In 2015, all tax preferences related to health care collectively cost the federal government about $360 billion in revenues that would otherwise have been collected through income and Social Security taxes.5 The exemptions relating to dollars spent on health insurance account for the bulk of this amount, making them the largest targeted preferences in the federal tax code.
People age 65 and older receive a large tax break too, because the federal government doesn’t tax Medicare benefits as income. Although many seniors think they paid for Medicare in full, Medicare actually doles out far more in benefits than the average senior kicked in during his or her working years. A typical one-earner couple can expect to receive Medicare benefits worth $427,000 after paying in only $70,000. A two-earner couple fares slightly worse. They get $427,000 in benefits at the price of $102,000 in Medicare taxes. But that’s still a bonus of $325,000.6
Medicare Part B, which covers doctors’ services, is an excellent value for seniors too. Congress initially set the premiums to cover 50 percent of the program’s expected cost. But Congress effectively reduced that share, so Part B premiums now cover only 25 percent of spending on physician services. The balance—75 percent of Part B spending—is an untaxed gift to the program’s beneficiaries, paid for out of general tax revenues.
If Medicare were an ordinary investment, these outsized returns would be taxed at the beneficiaries’ marginal rates. But they aren’t, so health care consumption gets yet another tax preference. The “total tax benefit to Medicare beneficiaries [was] $67 billion in 2013” and has grown by billions of dollars since.7
Everywhere one looks, the tax system encourages health care spending. Why? Two reasons. One is the belief that health care is special and that dollars spent on it should be privileged in a way that dollars spent on goods and services of other types are not. This belief is unwarranted. Health may be special, but money used to purchase insurance and medical treatments is not. Americans preserve and improve their health and their children’s health by spending money on food, water, shelter, clothing, electricity, education, sanitation, gym memberships, and many other things. For most of us most of the time, these other expenditures affect our health far more than dollars spent on insurance or health care.
Investments in public health also often impact our health more than medical treatments. Many of the increases in life expectancy and quality that Americans have enjoyed over the years are due to investments in sanitation, personal hygiene, anti-smoking campaigns, housing, policing, and regulations like mandatory seat belt laws—things not ordinarily thought of as health care.
Markets deserve an extraordinary amount of the credit for improvements in Americans’ health too. By offering employment opportunities that raise people out of poverty and by delivering pure foods and other high-quality items at affordable prices, markets have contributed greatly to Americans’ well-being.
In short, health may be special, but medical treatments and insurance are not. Expenditures on them should be taxed like everything else.
The second reason for the preferential treatment of expenditures on health care insurance is that elected officials use the tax system to buy support. Politicians who want votes and contributions from homeowners, realtors, builders, and bankers can get both by letting people use tax-free dollars to pay the interest on home mortgages. Likewise, those who want support from health care businesses, senior citizens, and workers can gain by throwing tax breaks at them.
Of course, tax breaks cannot reduce the aggregate tax burden. The money that the government spends has to come from somewhere. Tax breaks just move the burden around. And by doing that, they also distort purchasing decisions by making medical services seem cheap.
Consider the exemptions from the federal income tax that apply to dollars that are withheld from workers’ wages and put into HSAs or that are combined with employers’ contributions and used to pay workers’ insurance premiums. Although they seem to make health care cheaper, they really just encourage spending. When a worker funds an HSA or buys insurance through her employer, she saves the amount that she would have paid in taxes on the earnings involved. This makes medical services cheaper for her, so she puts more money in the HSA or buys more comprehensive insurance coverage than she otherwise would. (Our progressive tax system compounds the problem, by making the subsidy worth more to people who make more, but leave that problem aside.) But the Treasury loses the same amount the worker saves. To cover the same amount of government spending, the tax burden on other workers has to go up. And those workers return the favor when they use their pre-tax earnings to fund their HSAs or to pay their insurance premiums. Then the first worker’s taxes rise, and she bears part of their costs. The shell game of tax preferences moves money around, but it doesn’t save any money.
To the contrary, tax preferences actually increase medical spending because health care prices rise in response to the increase in demand they induce. This is why the real winners in this rigged game are the providers and insurers who take workers’ money. Start with insurance. Because wages used to pay premiums are tax favored, more workers buy coverage than otherwise would and the coverage they buy is more comprehensive. Everyone also wants insurance to pay for more and more things so that the value of their tax preference will increase. This is a clear win for insurers, who can charge more when demand and use increase.
Health care providers gain too. Tax exemptions encourage workers to purchase more insurance, and better-insured workers use more and more expensive medical treatments. The aggregate effect of tax exemptions on medical spending is enormous, as economists Martin Feldstein and Bernard Friedman figured out decades ago: “because the growth of insurance has been the primary cause of the exceptional rise in health care prices, it can with justice be said that the tax [preference] has been responsible for much of the health care crisis of the past decade.”8 The problem has since been compounded by the rise of health reimbursement arrangements, flexible spending accounts, and HSAs. When politicians try to make health care less expensive, they instead make it more expensive.
To summarize, tax preferences exert a powerful upward pressure on prices and spending. We could save hundreds of billions of dollars just by treating insurance and health care like ordinary purchases. We should eliminate all tax preferences for health care.
The AHCA doesn’t do that. Instead, it retains all existing tax exemptions, creates tax credits that are available only to people who buy insurance, and raises the ceiling on contributions to tax-exempt HSAs. The latter, at least, is a mixed blessing rather than an unalloyed negative. Because consumers decide how dollars put into HSAs are spent, HSAs encourage direct purchasing. They also create incentives for consumers to be more prudent about medical consumption. They provide a tax preference for money that consumers save, rather than only for money they spend. The fact that the tax benefits of HSAs increase after people reach age 65 (at which point the penalty for nonmedical withdrawals disappears) and that HSA funds are inheritable provide further incentives for HSA holders to be prudent consumers. At the same time, however, the tax advantage attached to HSAs does motivate overconsumption by making medical goods and services seem relatively cheap. This leads people to buy health care instead of other things they would value more, such as housing, energy, education, or transportation. The best that can be said about HSAs is that they make a horrible tax policy less horrible.
When it comes to health care, Americans need to go on a diet. By preserving existing tax advantages and adding new ones, the AHCA encourages us to binge.
Michael Cannon, the insightful libertarian health care policy analyst, who also happens to be our editor for this book, harshly criticized the GOP for backing the AHCA. He argued that the bill would not stabilize insurance markets but would cause voters to hold Republicans accountable when they collapsed. He feared that passage of the AHCA would produce “the sort of wave election Democrats experienced in 2008, when they captured not just the House and the presidency, but a filibuster-proof, 60-vote supermajority in the Senate.” If that happens again, Cannon predicts, the Democrats will roll out “a single-payer system,” which is what they’ve really wanted all along.9
Although a wave election seems unlikely—the combination of two interminable wars, the Great Recession, and America’s first black major-party presidential nominee makes 2008 unique in American history—Cannon is surely right that the Democrats will enact some form of universal coverage, if given the chance. Supporting “Medicare for All,” which Sen. Bernie Sanders and other prominent Democrats have endorsed, appears to be becoming a litmus test for Democratic candidates.10 The idea appeals to Democratic voters. A 2017 poll taken by the Pew Research Center found that “[m]ore than eight-in-ten Democrats and Democratic-leaning independents (85%) say the federal government should be responsible for health care coverage.”11 Medicare is the largest health care program controlled by the federal government. It would be a simple matter to expand it to all Americans by eliminating the existing age requirement. (Funding the enlarged program would be much harder, of course.)
Medicare is an example of a single-payer system, but it is not the only possible approach. Under Medicare, the federal government pays for services, but it does not own the hospitals or medical practices that provide them. The VHA, whose health care program provides comprehensive coverage for eligible veterans, does both, as do the military departments that serve active-duty personnel. Although some commentators have suggested that VHA facilities be converted into a government-run health care delivery system for the poor,12 the idea that such a system might service the medical needs of the entire population enjoys no political support.
A so-called “public option” is more popular. With this approach, the government provides insurance to anyone who wants to purchase it. Consumers could still purchase insurance from private insurance companies. In effect, the government competes with those companies. In theory, a public option could provide catastrophic or comprehensive coverage, but it would likely tend toward the latter.
Whatever the model, the main argument for universal coverage is that it’s cheaper. Its proponents contend that it generates fewer administrative costs than private insurance arrangements and that it maximizes the government’s ability to bargain with providers over prices. Senator Sanders’ statement endorsing Medicare for All makes both assertions.
Creating a single, public insurance system will go a long way towards getting health care spending under control. The United States has thousands of different health insurance plans, all of which set different reimbursement rates across different networks for providers and procedures resulting in high administrative costs. . . . Health care providers and patients must navigate this complex and bewildering system wasting precious time and resources.
By moving to an integrated system, the government will finally have the ability to stand up to drug companies and negotiate fair prices for the American people collectively. . . .
Reforming our health care system, simplifying our payment structure and incentivizing new ways to make sure patients are actually getting better health care will generate massive savings.
In addition, Senator Sanders predicts that adopting Medicare for All would “save the American people and businesses over $6 trillion over the next decade.”13
Many informed people believe some or all of these assertions. Elisabeth Rosenthal, the doctor-turned-New-York-Times-reporter who has produced a raft of informative articles on health care, is one of them. In her 2017 book, An American Sickness, she repeats the mantra that “Medicare uses 98 percent of its funding for healthcare and only 2 percent for administration.”14 Rosenthal also chides private insurers for being less efficient. Diane Archer, special counsel and co-director of the Health Care for All Project at the Institute for America’s Future, made the same points years before. In a 2011 column entitled “Medicare is More Efficient than Private Insurance,” she asserted that “administrative costs in Medicare are only about 2 percent of operating expenditures” while the same activities cost private insurers 17 percent of their revenues.15 The members of the growing army of left-leaning thinkers who support Medicare for All regard the proposition that Medicare is efficient as an established fact.
Unfortunately, what the consensus really shows is that a lot of smart people are thinking about efficiency in a really dumb way. It makes no sense whatsoever to assess Medicare’s efficiency by comparing its administrative spending to its total budget.
The most obvious problem with this measure is that it rewards Medicare for squandering taxpayers’ dollars. Suppose that Medicare incurred $30 million in administrative costs while paying out $1 billion in claims. Total spending would be $1.03 billion, and the ratio of administrative spending to total program dollars would be roughly 3 percent. Now suppose that, by spending an additional $30 million on audits, Medicare could discover that half of filed claims are fraudulent and pay nothing on them. With that additional money invested in fraud prevention, Medicare’s administrative spending would rise to $60 million and its payments on claims would fall to $500 million. The ratio of administrative spending ($60 million) to total program dollars ($560 million) is now 11 percent—almost four times higher than before. Medicare looks less efficient even though it saved $470 million ($500 million saved on fraudulent claims minus $30 million spent on claim audits) that would otherwise have been squandered. On the measure that Sanders, Rosenthal, and Archer employ, the less care Medicare takes to prevent fraud and the more money it lavishes on criminals, the more efficient it looks.
On their measure, Medicare would look less efficient even if it saved the $500 million paid out on fraudulent claims for free. To see this, just reduce the dollars Medicare pays out from $1 billion to $500 million while leaving its administrative expenditures at $30 million. Now Medicare’s administrative cost ratio is about 6 percent ($30 million/$530 million), twice what it was when Medicare paid the fraudulent claims in full. A measure that makes Medicare look worse when it saves money for free is absurd.
A correctly designed efficiency index would put dollars paid out on valid claims in the denominator and dollars spent on everything else in the numerator. This would enable one to see how much it costs Medicare to pay out $1 to a bona fide medical provider for a treatment that was appropriately rendered to a patient. When one slots the numbers this way, the picture of Medicare’s efficiency that emerges is both more accurate and far bleaker. In our original example, where Medicare spent $30 on administrative claims while doling out $1 billion, half of which was consumed by fraud, the ratio of other spending to dollars paid out on valid claims is 106 percent ($530 million/$500 million). In other words, for every $1 that was appropriately doled out on health care, Medicare spent $1.06 on other things.
On our efficiency measure, investments in money-saving anti-fraud measures have the right effect: they make Medicare look more efficient, not less. If Medicare spent the additional $30 million needed to eliminate fraud, the ratio of other spending to dollars paid out on valid claims would fall from $1.06 per $1 to 12 cents per $1 ($60 million/$500 million 5 12 percent). In other words, the cost of paying a dollar of valid benefits would fall by 87 percent [($1.06 – $0.12)/$1.06]. And, if Medicare could somehow save the $500 million in fraud dollars for free, the ratio would be even lower—6 cents per $1 in valid benefits paid out ($30 million/$500 million 56 percent).
It should now be clear that the advocates of Medicare for All are using a nonsense measure to assess Medicare’s performance. Fraud, waste, and abuse are enormous problems for the program. They are estimated to consume one-third of its budget, as we discussed in Chapter 7. Considering that loss alone, Medicare spends 50 cents on such overhead for every $1 it pays out on appropriate care. To make matters even worse, fraud, waste, and abuse persist because the U.S. Centers for Medicare and Medicaid Services spends too little money policing the system it oversees. Proponents of Medicare for All treat the paltry amount that Medicare spends on administration as evidence of superior efficiency when it actually reflects the government’s staggering profligacy with taxpayers’ money.
The measure used by Sanders, Rosenthal, and Archer has another serious defect. It says nothing about Medicare’s administrative costs per enrollee. The omission is important because Medicare for All would greatly increase the number of people Medicare oversees. Today, Medicare covers about 56 million seniors.16 If Medicare for All were enacted, the program would cover all 323 million Americans. That’s about a six-fold increase.
On a per-enrollee basis, Medicare’s administrative costs exceed those of private insurers. Robert Book, who wrote about this subject in 2009, contends that, in 2005, “Medicare’s administrative costs were $509 per primary beneficiary, compared to private-sector administrative cost of $453 [per enrollee].” Nor was 2005 an unusual year. The imbalance favored private insurers across the 2000–2005 period.17 Because Medicare’s administrative cost per enrollee is higher, expanding the program would not save money.
The appearance of superior efficiency arises because Medicare pays out far more dollars per patient than private insurers do. Its relatively old and infirm beneficiaries tend to receive more expensive treatments than the general (insured) population.18 According to Book, Medicare spent $11,000 per beneficiary in 2014, more than double the amount, $4,600 per covered person, that private carriers did.19 The fact that Medicare spends more on treatments per enrollee does not mean that it is more efficient.
Consider an example. Suppose that a third-party payer spends $100 managing claims relating to Patient A, who winds up receiving $1,000 worth of medical treatments. For this patient, the ratio of administrative cost to dollars paid out is 10 percent. Now suppose that the same payer spends the same $100 managing claims for Patient B, whose care costs $10,000. The ratio for this patient is only 1 percent. But the difference does not indicate that the payer handled Patient B more efficiently. It is a simple consequence of the fact that Patient B received more expensive medical treatments.
When one focuses on administrative cost per enrollee, one sees that Medicare’s seeming efficiency advantage would disappear if the program were enlarged to cover the entire U.S. population, as advocates of Medicare for All propose. If the program were to expand, hundreds of millions of younger and healthier people would enter it. These people would tend to need treatments that cost less than those used by Medicare’s current beneficiaries. The ratio of administrative cost to benefits paid out per enrollee would increase substantially, and Medicare’s make-believe efficiency advantage would disappear.
On any sensible measure of efficiency, Medicare scores poorly. Because Medicare for All would spend more per enrollee than private carriers do, Book predicts that adopting it would increase total administrative costs by $12.5 billion a year.20 If fraud losses were considered, the increase would be tens or hundreds of billions of dollars larger.
Finally, consider Senator Sanders’ contention that Medicare for All would enable the government to negotiate fair prices for prescription drugs and other medical treatments. Again, this is a belief that many people share, including the 16 Democratic co-sponsors of Sanders’ bill. But it too is laughable. To see this, just ask why Medicare doesn’t bargain over prices already. The program spends more than $630 billion a year, so its financial clout with doctors, hospitals, and drug companies is enormous. But, throughout its entire existence, Medicare has been a price-taker. It has never bargained over prices. Congress forbids it.
The reasons for this are simple. First, health care providers exert great influence on Congress, and they don’t want Medicare playing hardball with them over money. When Medicare was on the drawing board in the 1960s, the Democrats needed the industry’s support. They got it by handing doctors and hospitals the keys to the federal treasury, that is, by agreeing to pay them whatever they billed. If Medicare for All is to become a reality, the Democrats will have to strike a deal with the devil again. The threat of using Medicare’s leverage to obtain lower prices for drugs and medical treatments will be the first thing to go.
Second, if Medicare is ever going to negotiate over prices effectively, it must be willing and able to walk away from the bargaining table when a seller’s demand is too high. But Medicare cannot say no. The first time it tries, a political firestorm will erupt and cries of “rationing” and “death panels” will fill the air. Remember the attack on the U.S. Preventive Services Task Force that followed its negative assessment of mammograms, and Congress’s race to reverse that decision? No sensible Medicare administrator would risk a repeat of that experience by refusing to pay for an effective drug or treatment because of its price. Health care providers will know that, when bargaining with Medicare, they’re playing a stare-down game with an opponent who always blinks.
Medicare for All and other single-payer programs would bring most of the health care sector under the federal government’s control. Putting government in charge of another $2 trillion worth of economic activity will seem like a good idea only if one ignores what has happened during the half-century that the government has run Medicare, Medicaid, the VHA, and other programs. History provides no basis for believing that the government will ever improve quality, reduce spending, or get fraud, waste, and abuse under control. Yet Medicare for All’s proponents persist in thinking that the government will magically run an enormous single-payer program better than it has ever run any other health care program before, if and when it takes over the entire health care economy.
Senator Sanders is one of these magical thinkers. Despite having seen firsthand how corrupt and inept the federal government is, he supports the creation of a comprehensive Medicare for All program that would “cover the entire continuum of health care, from inpatient to outpatient care; preventive to emergency care; primary care to specialty care, including long-term and palliative care; vision, hearing and oral health care; mental health and substance abuse services; as well as prescription medications, medical equipment, supplies, diagnostics and treatments.”21 His optimism shines through especially clearly when he compares the United States to other countries: “Other industrialized nations are making the morally principled and financially responsible decision to provide universal health care to all of their people—and they do so while saving money by keeping people healthier. Those who say this goal is unachievable are selling the American people short.”22
It’s far from clear that our government can perform these tasks. Relative to governments in other developed countries, the U.S. government appears to be unusually subject to pressure from special interests and uniquely incapable of rationing. It also often behaves as though it is run by idiots. Its saving graces have been that, for most of this country’s history, the government has been comparatively small (when measured in terms of the fraction of GDP it takes in through taxes) and relatively protective of property rights.23 By massively increasing the size of the federal government, single-payer optimists like Senator Sanders would eliminate these advantages.
Nor is it clear that the United States should want to follow other developed nations. From 2003 to 2009, per capita spending on health care, measured in real dollars, rose at an average annual rate of 2.47 percent in the United States. The median rate for all Organisation for Economic Cooperation and Development (OECD) countries was higher: 3.1 percent. From 2009 through 2013, in the aftermath of the Great Recession, the average annual increases were smaller and nearly identical: 1.5 percent for the United States and 1.24 percent for the OECD.24 Thus, all developed countries are experiencing rising spending, including those that currently spend much less per capita than the United States. Universal health care does not appear to be a recipe for keeping spending growth low.
Senator Sanders contends that his Medicare-for-All plan would be a bargain. His website puts the cost at “$1.38 trillion per year.” It also boasts that his plan would “cost over $6 trillion less than the current health care system over the next ten years.”25 These claims are implausible on their face. They require one to believe that, even though tens of millions of Americans who are currently uninsured or underinsured will be given comprehensive coverage, spending on health care will decline. There is no precedent for this. In the past, whenever the reach of third-party payment arrangements has expanded, spending has risen. The same thing has happened every time Congress has waded into the health care swamp. For example, as Obamacare was phased in from 2013 to 2015, national health expenditures rose from $2.9 trillion to $3.2 trillion. The Medicaid expansion alone added $100 billion in spending per year, and it would have cost far more if all states had opted into the program.26
It is true that Obamacare cut Medicare payments to some providers. That was possible only because the program offered health care providers $2 in government subsidies for every $1 in cuts. Even left-leaning pundits like Jonathan Chait27 and Ezra Klein28 acknowledged that the Medicare cuts imposed by Obamacare would not have been possible without the more-than-offsetting increase in spending generated by expanding Medicaid and covering the uninsured. Spending an additional $2 to achieve $1 in cuts is not a recipe for cost control.
When thinking about costs, one must also remember that Senator Sanders’ soup-to-nuts Medicare for All plan is far more generous than Obamacare was, and even more generous than the universal coverage plans used in other developed countries. As the Health Policy Center at the Urban Institute observed, Sanders’ plan promises “comprehensive first-dollar government-financed health insurance for all Americans, with no benefit limits.”29 Obamacare does not come close to that. In fact, “no health care system anywhere in the world provides everyone with unlimited care,” as Michael Tanner, the prolific libertarian policy analyst, points out.
[M]any of the [foreign] systems [that American single-payer advocates] admire are neither single-payer nor free to patients. . . . There are frequently co-payments, deductibles, and other cost-sharing requirements. In fact, in countries such as Australia, Germany, Japan, the Netherlands, and Switzerland, consumers cover a greater portion of health-care spending out-of-pocket than do Americans.30
With no deductibles or copays to encourage people to use medical services prudently, consumption and spending would both increase. When the Health Policy Center at the Urban Institute crunched the numbers in 2016, it concluded that, with immediate implementation of Sanders’ program, “national health expenditures would increase by a total of $518.9 billion (16.9 percent) in 2017, and by $6.6 trillion (16.6 percent) between 2017 and 2026.”31 Chris Conover, a health policy researcher at Duke University, estimated that Sanders’ plan would cost 40–49 percent more than advertised. To raise the revenues needed to fully cover the rise in spending, federal taxes would have had to increase by 71 percent.32 The impact on the economy would have been terrible—a 12.8 percent reduction in after-tax income for all Americans and a 9.5 percent decline in GDP, according to the Tax Foundation, a nonpartisan group.33
Not surprisingly, Senator Sanders rejects these assessments. They err, he contends, by “underestimat[ing] the savings in administration, paperwork, and prescription drug prices” that his plan would generate.34 It is remarkable that anyone could be so utopian after spending a lifetime in politics. The U.S. government has never reduced spending on health care, but Senator Sanders believes that, if Congress enacted Medicare for All, suddenly—magically—it would.