Financing Medicare for All
Financing Medicare for All is far better done at the federal than at the state level.
It’s much easier to consolidate the Medicare and Medicaid programs, but you do have to decide which model you are going to follow. And if you choose Medicare, there are many more copays and deductibles and a lot more uncovered services – e.g. dental care, vision care, and most long-term care. And states are going to need to stay in the long term care business.
At the federal level, it’s much easier to replace the employer and employee financing for private employment based insurance with a payroll tax without fear of falling afoul of the federal rules governing large employer’s ERISA health plans and also losing the substantial tax advantages associated with employment-based coverage.
The current private insurance system is very regressively financed. The premiums are exactly the same for the minimum wage workers as they are for the boss earning who may be six or even seven and occasionally eight figures. The tax advantages associated with it are designed in ways that help extend coverage for higher income employees and individuals the most because they are linked to your income tax bracket. The federal income and payroll tax system is still far more progressive than most states, other than outliers such as California. It would be a better way to pay for coverage.
The federal government is unique in its capacity to clamp down on the wild excesses of drug pricing that have plagued the health care system. The drug companies are not alone in increasing their prices at unsustainable levels; hospitals have done so as well. Medicare forfeited the opportunity to lead in regulating drug prices by farming out this role to Part D private insurers when it expanded Medicare to cover prescriptions. It will need to negotiate directly with the drug companies in Medicare for All.
Health Care Financing (2016)
Private health insurance – 34%
Medicare – 20%
Medicaid – 17%
CHIP, ACA, DOD and VA – 4%
Out of pocket – 11%
Other (e.g. school health, jail health, MCH, workers comp) – 8%
Public health – 2%
Investments – 5%
Health Care Spending (2016)
Hospitals – 34%
Doctors – 20%
Prescription drugs – 10%
Dentists – 4%
Other professionals – 3%
Nursing homes – 5%
Other residential care – 5%
Home health – 3%
Durable Medical Equipment – 2%
Government Administration and Net Costs of Insurance – 8%
Investments – 5%
It will require an increase in federal taxes to replace current private insurance spending (34%). It might also require an increase in federal taxes to replace the role played by state taxes (6%). What kind of money are we discussing? It’s a lot, but it is not new money; instead existing private insurance premiums would be eliminated and replaced by increased federal taxes. Consumer out of pocket spending for copays and deductibles and uncovered services (11%) could be reduced and replaced by federal taxes as well.
Total health spending is about 18% of GDP, about $3.3 trillion or over $10,000 per person. Over half of that is already financed by taxes that pay for Medicare, Medicaid, premium assistance in the Affordable Care Act, grants to community clinics, public hospitals, the VA, etc. Those taxes are in the system; most are federal taxes (a mix of payroll taxes and income taxes); the rest are state and local taxes, such as local property taxes and state income and sales taxes. https://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/NationalHealthExpendData/Downloads/PieChartSourcesExpenditures.pdf
The federal government spends over $4 trillion annually on everything such as defense and social security, from infrastructure to agriculture, from food stamps to the post office to research and development of new technologies. About 1/4th is already spent on health care. https://www.nationalpriorities.org/budget-basics/federal-budget-101/spending/
Replacing private insurance premiums
Just over a third of all health spending is private insurance, primarily employment-based coverage, but also private individual coverage. Private employment based coverage is paid 3/4th by employers and 1/4th by employees on average. Private individual coverage is paid 100% by individuals unless they qualify for premium assistance under the Affordable Care Act as many do. Consumer out of pocket, copays, deductibles and uncovered services, are a bit over ten percent. These are mostly paid by individuals with very serious medical conditions, and by many patients, overwhelmingly elderly, of long-term care.
To make matters more complicated, there are favorable federal tax breaks that help pay for employment-based coverage, for coverage of the self-employed and for those whose medical expenses account for a large share of their incomes. These tax expenditures are large, and they are deeply engrained in our current tax system, and they would need to be changed and melded into a Medicare for All system. They cannot be readily accessed by a state trying to establish a “Medicare for All” program.
One option to avoid financial disruption is to finance Medicare for All by staying close to the existing distributions of financial burdens– fewer winners and fewer losers. For example, financing of coverage for employees could be a payroll tax divided between 3/4th employers, 1/4th employees. Some employers (low wage employers) and some employees (low income employees) would get significant fiscal relief by moving from premiums to taxes based on a percent of payroll, while others with higher wage bases and salaries would pay more in taxes than they do now in premiums. The problems with payroll taxes are two fold: first we are an aging society with fewer workers to support the financing; second financing from employment impairs some hiring and job creation. We ought to look at other financing options, such as the VAT (value added tax) or closing loopholes and exemptions for the wealthy.
Likewise individuals who are self employed or not working could pay a Health Insurance surcharge on their federal income tax in lieu of private insurance premiums. The self-employed already do so for their Medicare Part A taxes, so there is a mechanism already in place.
The Health Insurance taxes paid by employers, employees and individuals would need to equal about $1.2 trillion to break even with current spending. Alternatively, individuals could pay their shares as premiums for Medicare for All, just as the elderly and disabled do for their Medicare Parts B and D coverage. They pay about 1/4th of the cost of the program. To put this in context, the payroll taxes that finance Medicare and Social Security currently collect about $1 trillion annually.
The current state financing of programs like Medicaid or county health might be able to be captured through a claw back provision from the states. This currently exists for Medicaid prescription drug coverage for the seniors and the disabled. This would need to be a very large claw back equal to 6% of national health expenditures (or $188 billion from the states). States, which have very different levels of Medicaid and CHIP financing and coverage already, will be doing their best to avoid or minimize the claw back. Or the federal government could offer states a 6% state match on the costs of coverage for their citizens. One would think few states could decline that offer, which would otherwise leave many of their citizens uninsured as Medicare and Medicaid coverage would be subsumed into Medicare for All. To avoid constitutional challenges, this may need to be optional for each state. Otherwise it would need to be another new federal tax; in that case states would experience very large fiscal relief; they could reduce their state taxes or could increase funding for vital services like infrastructure or public education, including college and pre-K. In California, that fiscal relief (general and special fund taxes) would be close to 15% of the state’s budget.
Replacing Consumer Out of Pocket
To replace all consumer copays and deductibles and uncovered services costs about $340 billion. Congress would need to decide whether to retain copays and deductibles as Medicare and private insurance do or to make them nominal as Medicaid does. Should copayments be linked to incomes or should they apply regardless of any individual’s ability to pay? There are a variety of uncovered services under Medicare – dental, vision, hearing aids and the biggest single out of pocket cost for seniors is for long-term care.
Some employer plans cover dental and vision; many do not, and very few cover long-term care. Long-term care is fully covered under Medicaid, and it is one of the biggest components of many state’s Medicaid programs. In California, Medi-Cal pays for about 70% of all nursing home residents. However many higher income seniors are not covered for long term care and pay out of pocket. Long-term care is a very expensive service and accounts for about 13% of the nation’s health expenditures, now reimbursed with a mixture of Medicaid, Medicare tax dollars and individual out of pocket. Much of the benefits from reducing out of pocket will inure to seniors and the disabled who use the most services. A full scope Medicare for All would make Medicare Supplemental policies redundant. Seniors and the disabled should contribute towards these benefit expansions in the form of shared premiums.
Coverage of Immigrants
A big hot button issue, in addition to taxes to replace private insurance premiums, involves immigration – i.e. whether Medicare for All coverage includes the undocumented and whether it covers new legal permanent residents.
The 10 million undocumented in the US are primarily young low-wage workers. Some are part of mixed status families where the father or mother is undocumented, and some or all of the children are US citizens, and the other spouse may be a legal permanent resident or a citizen. In California, the undocumented are nearly 6% of the state’s population (about 2.5 million persons); in states like Ohio, Vermont, Maine or New Hampshire less than 1% of residents are undocumented. http://www.pewhispanic.org/interactives/unauthorized-immigrants. Current federal law limits their potential Medicaid coverage to emergencies and childbirth and excludes them from Medicare coverage, if they reach 65 or become disabled, even though they have paid their Medicare taxes. The costs for extending coverage to undocumented persons is relatively low since they are for the most part healthy young workers who infrequently use the health care system. California now extends full scope MediCal coverage to about 200,000 undocumented children, but not to adults, many of whom have coverage limited to emergencies and deliveries..
There are 13 million legal permanent residents (green card holders) in the US, of whom 9 million would be eligible to become US citizens if they so chose. The standard waiting period to start the process of becoming a naturalized citizen is 5 years, less for spouses of US citizens. California is home to about 3.3 million green card holders. https://www.dhs.gov/sites/default/files/publications/LPR%20Population%20Estimates%20January%202014.pdf Federal law limits Medicaid coverage for new (less than 5 years) legal immigrants to emergency care and deliveries, but provides full scope to them through the Exchanges. The Trump Administration seeks to disqualify all legal permanent residents from becoming naturalized US citizens if they have received any federal funds for their health coverage. California provides full scope coverage to legal permanent residents who otherwise meet the income eligibility requirements.
If Medicare for All limited or excluded coverage for legal permanent residents, there would be strong incentives for all of them to become naturalized citizens. Twenty million US residents are already naturalized citizens, meaning they migrated to the US and eventually took and passed their citizenship exams and met eligibility requirements.
Nearly 10 million Californians (about 1/4th of the total state population) were born outside the US, and naturalized citizens make up half of all immigrants living in California. http://www.ppic.org/publication/immigrants-in-california/ Contrary to common myth, most recent immigrants coming to California are from Asia, and most have a very high degree of education. They contribute greatly to the state’s and the nation’s economic prosperity.
There are several areas of potential savings from adopting Medicare for All: the elimination of private insurance and improved administrative simplicity and changes in provider reimbursements.
Medicare for All would eliminate private health insurance and the multiple state and federal eligibility determinations. This could save about 5% of current health spending since Medicare spends only about 2.6% of program expenditures on administration and the US (including private insurance, Medicare and Medicaid) spends 8%. https://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/NationalHealthExpendData/Downloads/PieChartSourcesExpenditures.pdf Administrative simplification also refers to the back offices of hospitals, doctors and other providers that bill many different health plans and programs, and argue with insurers about how much they should be paid. There is great debate about the extent of total administrative savings; the estimates range from 7% to as high as 14% of National Health Expenditures.
http://govinfo.library.unt.edu/ota/Ota_1/DATA/1994/9417.PDF The complexity of our current system could be radically reduced, and compatible IT could further simplify the billing and payment systems. Whether Medicare for All can actually capture these administrative savings is uncertain and would depend on cutting provider reimbursements to reflect the savings associated with better administrative simplicity.
The biggest difference between the US and other developed nations is that we pay our doctors, hospitals, nurses, and pharmaceutical companies, durable medical equipment manufacturers much more. https://www.healthsystemtracker.org/chart-collection/how-do-healthcare-prices-and-use-in-the-u-s-compare-to-other-countries/#item-on-average-other-wealthy-countries-spend-half-as-much-per-person-on-healthcare-than-the-u-s On average, we pay twice as much and Americans use fewer health services. We see doctors less frequently; we stay in the hospitals less frequently, and we use fewer days. We do use some higher technology care such as MRIs, knee replacements and C-section deliveries more than in other developed nations. It’s the price difference on the very same health care that makes US health care twice as expensive as other highly developed nations.
For Medicare for All to reduce American health costs towards the levels of our peer nations, it would need to dramatically cut reimbursements to providers, and that is extraordinarily difficult to do. Whether through Congress and the federal or state governments, or through the private sector health plans, we have shown very little appetite or ability to control excessive provider reimbursements. In fact the cost control efforts of our private sector employer plans have proved to be far less successful than government coverage through Medicare and Medicaid. A new Medicare for All program will need to revise traditional Medicare fee for service reimbursement methodologies which are inherently inflationary. The Affordable Care Act made a start with bundled payments and ACOs; this would need to be extended and expanded. A model reimbursement system would encourage better quality and greater efficiency and reduce program costs. We don’t have such a system, and it would need to be developed as a part of the federal legislation. In my opinion, it should be based on competitive contracting, which is far more flexible than trying to set, alter and change reimbursement rates.
The challenges of financing Medicare for All at a federal level are surmountable, but only after an honest, informed and reasoned dialogue and debate. That is not the hallmark of our President and our Congress, nor of many of the interest groups pro and con. The politics are very difficult and will require business, labor and consumers to ally with those providers favoring such a system.
Personally, I think it will be far easier politically and financially to build from the foundations of the ACA (Affordable Care Act).
Prepared by: Lucien Wulsin