Monday, January 25, 2016

Bernie Sanders' Medicare For All And Why Single-Payer Generally Doesn't Work So Well

Right before the Democratic presidential debate, Bernie Sanders released his latest bombshell of a policy alternative: Medicare for All, which is Sanders' plan for single-payer health care. Sanders' federally administered universal single-payer health care plan would abolish private health insurance and would "cover the entire continuum of health care from inpatient to outpatient care; preventative to emergency care." Sanders' plan would supposedly do away with copays and deductibles. This plan, according to Sanders, would integrate the system that would contain costs, thereby being able to "avoid provider shortages" and "negotiate fair prices for the American people collectively." In spite of the name, this plan hardly resembles Medicare since Medicare requires cost-sharing and premiums, not to mention that Medicare is nowhere near as comprehensive or generous as what Sanders is promising. It sounds lofty to provide the American people with comprehensive, affordable health care with very little obstacles. However, taking a look at the plan, one has to ask whether Sanders' plan would work in America or even be a good idea.

Let's talk about political feasibility first. Sanders attributes political infeasibility to the health insurance companies since it's in their self-interest not to have a single-payer health care system. While insurance companies would lose out under a single-payer program, Sanders is conveniently forgetting about some other obstacles. A majority of Americans historically have not been in support of a single-payer system. Although there has been some wavering on whether the government should be responsible for providing healthcare, more Americans have been against government intervention in healthcare since Obamacare's main provisions took into effect in 2014 (Gallup). It won't just be the loss of freedom that annoys Americans, but the increased tax rates under Sanders' plan (more on that momentarily). Also, most people like their current plan. Sanders' proposal is that you can't keep your current plan because he is going to replace it with a single-payer system. Even Obama realized that such upheaval was a bad idea. It's why he had to keep promising that one could keep their plan under Obamacare, even though that ended up being a lie. Threatening to disrupt that contentment is not going to make voters happy. An even bigger obstacle is that the Republicans will most probably either have one or both chambers of Congress after the November election. Even when the Democrats controlled both chambers back in 2010, they were unable to pass the public option. Also consider that Bernie's home state of Vermont, which is the one of the most liberal states in the Union, could not pass single-payer health care because it was unaffordable. What makes Sanders think that he could possibly pass such a bill with Republican control of Congress?

But let's assume that Sanders had the votes to pass such legislation. While it is commendable to see Sanders put out actual numbers, the numbers he presents should give us great reason to pause. Health care spending reached $3.0T in 2014. Sanders' plan promises to only cost $1.38T in addition to current health care costs. A 54 percent price differential from the status quo seems too good to be true, so let's see how he plans on paying for the plan, and then I can go item-by-item as to the feasibility of each figure:
  • 5.9 percent income tax on the employer: $630 billion
    • Sanders is disingenuous if he is passing this off as a tax on the employer. With the employer-sponsored tax exemption, the amount that the employer pays into that translates into lower wages for the employee. Although the employer and employee pay roughly the same for the payroll tax, guess where the brunt of the incidence falls? On the employee in the form of lower wages. Commentators have already picked up on this idea, and there is no reason to believe that Sanders' so-called "tax on the employer" would be any different. Regardless of tax incidence rate, saying that there would be a new 8.4 percent payroll tax would in net terms (the current 15.3 percent FICA tax, and removing current Medicare still only accounts for 2.45 percent, which still translates into a net increase of 5.5 percent, i.e., 8.4-2.45=5.5) that creates a net total of a 5.95 percent FICA increase doesn't have as good of a ring to it. 
  • 2.2 percent flat income tax on households: $210 billion
    • Sanders' tax exemption would still have a family of four making $50K a year only pay $466 (if said family is making $40,000 a year, it's still a 1.16 percent tax). If you are a family of four making beyond that, well, you're paying the full tax on your income. In 2014, the median household income in this country was $53.6K. For someone who is campaigning to help the "shrinking middle class" and said only a month ago he would only raise taxes for the middle class for paternity leave, it seems odd that he would now be open to increasing taxes for the middle class.  
  • Increasingly progressive income tax with marginal rates at 43.9 percent for those making at least $500K, and 52 percent for those making at least $10M: $110 billion
    • This tax hike would affect not quite 5 percent of the population. While it might sound nice to "stick it to the rich," the benefits of marginal income tax hikes are overstated. Historically, tax revenue as a percent of GDP has hovered between 14 and 20 percent since the end of WWII [mostly between 15 and 18 percent], regardless of what the marginal income tax rate has been. High income taxpayers are more responsive to marginal tax rates (Gruber and Saez, 2000), and a drop in the marginal tax rate would have a positive effect on the GDP (Mertens, 2013). The Brookings Institution also published a report last year saying that increasing marginal income taxes to 50 percent would have a negligible effect on income inequality, which has indirect effects on the health care market. This all gives me reason to doubt that Sanders' marginal income tax-based estimations are high. 
  • Taxing capital gains and dividends the same as income from work: $92 billion
    • This is effectively supposed to increase the top rate on investment income from 23.8 to 54.4 percent. However, taxing capital gains in this country is not the same as taxing income from work because capital gains and dividends are double-taxed in this country. First, 35 percent of one's profits are hit by the corporate tax. Then, Bernie would take 54.4 percent of the remaining 65 percent, which would only leave 35 percent. Going from taxing 50 percent of investment income to 65 percent is a bit much, even for liberal economists like Peter Diamond and Emanuel Saez, who think the peak of the Laffer Curve is effectively at 54 percent. I would go as far as to say that lower capital gains tax rates are better because such a high tax rate would greatly disincentivize investment (see here, here, here, and here). 
  • Limit tax deductions for the rich: $15 billion
    • Sanders does not state which tax deductions will be limited, so I cannot comment further on the efficacy. Even if Sanders could actually deliver on these tax deductions, it would still account for a little over 1 percent of the overall revenue for this proposal.
  • Responsible Estate Tax: $21 billion
    • Sanders makes this sound nice with having something "responsible," but I don't know how responsible it is to not thinking something through. In 2014, the revenue collected on the estate tax was $19.3B. The estate has an exemption of $5.34M and a 40 percent top rate. In order to reach this goal, Sanders would have to more than double current revenues. Sanders could either lower the exemptions, raise the estate tax rates, or a combination thereof. Estate taxes are already unpopular, not to mention that the Republicans tried repealing the estate tax last year (see more about that in my analysis on the estate tax). Sanders provides no plausible way of doubling estate tax revenue to fund "Medicare for All."   
  • Projected savings on health care expenditures: $310 billion
    • Sanders' argument is that because there is a single payer, it is more efficient than having multiple insurance companies, which cuts down on the costs. Under these figures, Sanders predicts that his plan would cost $6.9T less for the American people than the status quo, which is hardly a ringing endorsement for Obamacare. I am not skeptical of Sanders simply because our president already promised us lower healthcare costs, and all the American people received was higher health care costs.  
    • Intuitively speaking, Sanders is promising much more health care coverage than what even Obamacare is covering. Even with no cost-sharing requirements and the elimination of the $150B employer-sponsored health insurance tax deduction, people will no longer have a reason to question the price of their health care. If anything, health care costs are going to skyrocket. 
    • Larry Levitt at the Kaiser Family Foundation thinks that Sanders being able to save $6T over ten years is an unrealistic form of aggressive cost containment. We also have evidence showing that single-payer actually drives up costs, mostly due to waste: 
      • Ezra Klein recently mentioned the Rand Corporation's Health Insurance Experiment (HIE). Although conducted from 1971 to 1986, it is still the largest and most comprehensive study on U.S. health policy to date. The purpose of the study was to find out two factors regarding health care financing: 1) whether people consumed more health care when it was free, and 2) whether it caused a change in one's health. Not only was there a negligible difference in health quality, but less services were used, which also led to less health care expenditures. In this Experiment, 34 percent of spending under the free health care system was waste, whereas it was only 4 percent under the cost-sharing system. 
    • His cost containment figures are specious at best. Sanders assumes that the slowdown in health care costs of 3.6 percent is going to continue, when in fact, actuaries over at the the Center for Medicare and Medicaid Service show that health care inflation is going to pick up once more, which is to say that his estimation here is rosy. 
    • Sanders also fails to take in account another factor in terms of cost savings. In the United States, there is a significant amount of health care spending done at the state and local levels. Sanders' plan assumes that all of health care spending is done at the federal level, which means Medicare for All would also be replacing state-level spending. Essentially, Sanders fails to take in account the state-level spending into his figures. As Avik Roy of the Manhattan Institute points out, once Bernie's plan accounts for state-level spending, Sanders' plan does not save us $6T, but rather, it ends up costing an extra $28T over the next decade! What that means for Sanders' tax numbers for this plan is that he would either increase them more in hopes to acquire more tax revenue or run up a whole lot of debt to make it work. 
    • In his proposal, Sanders leaves out deadweight loss. Deadweight loss is the "loss of economic wellbeing imposed by a tax." This loss occurs because the price differential induced by taxes causes a good or service to be less attractive to consumer. Whether or not Sanders likes it, the economic reality is that higher taxation creates less incentive to consume. The fact that Sanders does not remotely address deadweight loss renders the proposal to be, at the very least, incomplete.  
I have taken a good look at the particulars of Sanders' "Medicare for All," and they don't work. Perhaps we need better figures. Perhaps seeing if there are any success stories of single-payer health care would help the case of proponents. I took a look at the single-payer system about three years ago, but it was more from the lens of economic theory. This time, I would like to take a look at three large countries that use a single-payer system: Canada, the United Kingdom, and Taiwan. Before continuing, let me differentiate between universal health care and single-payer. Single-payer is a form of universal health care that refers to the the funding mechanism, i.e., health care is financed by a single [public] fund. Single-payer says nothing about how the health care is delivered or for whom the doctors work. There are other types of universal health care, such as the two-tier system and mandated insurance. The countries I selected fall under the definition of single-payer. The countries I selected are also on the larger end, which is important considering the diseconomies of scale that take place with larger countries. By getting a better sense of how single-payer is implemented in other countries, we can see whether the argument for single-payer health care has merit or if it's mere speculation.

Canada
Canada is one of the most infamous cases of single-payer health because of notoriety. Even with the rise in the rate of doctors in Canada, it has not done anything to mitigate Canada's waiting times, which are horrific. According to a 2015 report from the Canadian think tank Fraser Institute on Canadian waiting, waiting times in Canada for a general practitioner is 8.5 weeks, which is 130 percent longer than it was in 1993. A consultation with a specialist takes 9.8 weeks on average. These long waiting periods have created a backlog of 894,449 procedures. This has cost the average waiting person $1,289, or the entire Canadian health care system $1.2B per annum. These waiting times also affect the mortality rate by causing an estimated 44 thousand female deaths between 1993 and 2009 (Barrua et al., 2014). This could explain why in 2014, 52,000 Canadians received non-emergency treatment abroad. The province of Ontario, which accounts for nearly 40 percent of the Canadian population, is dealing with an acute case of hospital cuts.

Single-payer systems use the immense bargaining power to lower prices for health care services. Artificially pushing health care costs below the equilibrium point, i.e., what the prices would be in a competitive market without government interference, creates fiscal solvency issues in the long-run. The World Health Organization has estimated health care expenditures for each country, and Canada comes out at 10.9 percent of GDP. Granted, this is better than the USA's 17.1 percent. However, Canadians pay still pay a substantial amount because many health care expenditures are not earmarked as such, which makes them all the more difficult to track and compare. According to Canadian government statistics, total expenditure has increased in real dollars, and health care expenditures as a percent of GDP have increased by 3 percentage points since the implementation of single-payer in Canada. So much for cost containment!

Single-payer uses bargaining power to lower the prices not just for doctors, but for those doing research and development in pharmaceuticals and medical devices As such, a single-payer system provides little incentive to invest in new medical technology. Canada's investment in pharmaceutical research has dropped 35.8 percent between 2004 and 2013. Even the Canadian government concedes that the United States has a 36.3 percent market share in the medical devices market that is disproportionate to its overall representation in the world economy of 23 percent (see IMF data here).

Taiwan
The Brookings Institution published a policy brief (Cheng, 2015) highlighting some of the major metrics to determine health care success. In Taiwan's favor are healthcare costs as a percent of GDP (only 5.4 percent), high public satisfaction, near-universal coverage (99.6 percent coverage), and short waiting lines. To be fair, those short waiting times seem to exist because Taiwan's average consultation time is lower than average. Even looking at Taiwan's budget numbers, it had been running deficits up until a few years ago, all of which have been paid off (p. 31). Cheng, however, did point out some disadvantages. One is that Taiwan's population is rapidly aging. All developed nations are dealing with a rapidly aging population, but it's more pronounced for a single-payer system because the system relies on tax revenues. Much like with Social Security, if we reach the point where there are more beneficiaries and less taxpayers, the accounting is not in favor of long-term solvency. Aging population won't just put pressure on revenues, but also on doctors. Taiwan already has a doctor and nurse shortage. Taiwan has 1.7 doctors and 5.7 nurses per 1,000 people, while the OECD average is 3.3 doctors and 8.6 nurses.

Another is that by the the admission of the Ministry of Health and Welfare, the agency that runs that National Health Insurance Administration (NHI), Taiwan does not provide high-quality care. Taiwan is one of the Four Asian Tigers, so it's not as if it's some dysfunctional, developing country that is incapable of providing high-quality health care. The lack of quality is predictable because lower prices provide less incentive for quality or even research and development.

PriceWaterhouseCooper (PWC) published an interesting report on Taiwan's healthcare system last year. There are worries that low prices are delaying development in the development of pharmaceuticals and medical devices. Taiwan already has to import the high-quality medical devices because it only produces lower-quality devices. Related to the idea of quality is that the number of hospitals has been decreasing in Taiwan, while the number of clinics has been increasing.

United Kingdom
Great Britain has the National Health Service (NHS) that directly funds health care through tax revenue. What's more is that most of health care practitioners in the United Kingdom are government employees, which is a facet that turns single-payer into a bona fide system of socialized medicine. The King's Fund Quarterly Monitoring Report sheds some light on the problems that the NHS presently faces. The waiting list size is 3.5 million people, which is about five percent of the overall population. 64.4 percent of provider organizations are recording deficits at year end. Professor John Appleby, the chief economist of the King's Fund, stated last year that "the next government will inherit a health service that has run out of money and is operating at the very edge of its limits."As the King's Fund brought up in its Budget Brief last July, the NHS is facing real financial challenges.

Quality also suffers as a result of single-payer. In the United Kingdom, cancer survival rates are much lower than those in the United States. The same issues of quality can be said for strokes. For those who were worried about "death panels" in the United States, it is a reality under the British health care system. The National Institute on Clinical Effectiveness (NICE) is the entity that rations health care by declaring what services are too expensive. When drug prices hit around the £30,000 mark (around $44.5K), the government won't pay any further. Effectively, the puts a price tag on the life of each citizen at £30,000.

Postscript
The effects of single-payer health care are not just sound economic theory. In practice, single-payer health care results in creating considerable barriers to access health care, reduces quality of health care, disincentivizes health care innovation, and does nothing to contain health care costs. With the rapidly aging populations of the countries in the developed world, the problems with single-payer and its ability to be solvent in the long-run will be more pronounced with time.

To think this is what Sanders wants for the American people: Medicare for All. With how single-payer systems perform, why should we destine ourselves to such mediocrity? The fact that Sanders wants Medicare for All says lot, considering how Medicare presently performs. In 2014, Medicare made $60B in improper payments. Medicare has been labeled "high risk" by the Government Accountability Office (GAO) since 1990. When Sarah Kliff over at the Left-leaning Vox, who is by no means a free-market advocate, says that Medicare is not great to begin with, it should make us wonder why we should entrust the government with providing "Medicare for All" when the federal government cannot even handle what it manages now.

Sweden recently switched from single-payer to a system with private insurers, and Switzerland rejected single-payer last year via a referendum. It is possible to provide universal healthcare coverage and keep the healthcare market relatively free, much like we see in Switzerland and Singapore. Just because I do not like single-payer system doesn't mean that I am going to defend the American health care system as the best system of health care. There is plenty to criticize regarding the American health care system, including employer-sponsored health insurance, including insurance mandates under Obamacare, and FDA regulations over research and development for pharmaceuticals. Government regulations have made it difficult for the health care industry to innovate. As the Manhattan Institute elucidates in its recent report on health care reform, government intervention in health care has made it impossible to use the digital revolution to innovate health care, an "Uber for healthcare" of sorts. Multi-payer health care systems that have a semblance of a liberalized health care system work best. I hope that as voters head to the voting booth for the presidential primaries, they can see Sanders' single-payer plan for what it is: a snake oil cure completely divorced from reality.


1-31-2016 Addendum #1: Emory University health care expert Kenneth Thorpe, who was the same expert who created the plan for the failed single-payer plan in Vermont, released a study on Sanders' plan. Unsurprisingly, this study found that Sanders' plan would cost the American people twice the amount that Sanders had estimated.

1-31-2016 Addendum #2: The Tax Foundation released their analysis of Sanders' tax plan, of which the taxes for the single-payer plan play a major role. When looking at Sanders' tax plan as a whole, it is projected to shrink the size of the United States economy by 9.6 percent over the next decade.

2-4-2016 Addendum: The bipartisan Committee for a Responsible Federal Budget (CRFB) released their analysis on Sanders' plan. Even assuming that Sanders' cost-savings are accurate, the CRFB calculates a shortfall of $3T over the next decade, which would translate into an additional 13 points to the debt-to-GDP ratio. However, if Thorpe's calculations are accurate (see first 1-31-2016 addendum), then the extra $14T that Thorpe estimates will increase the debt-to-GDP ratio to about 150 percent.

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