Aug 23, 2018

Medicare for All: Explaining the Math

Robert Graboyes Senior Research Fellow

My colleague, Chuck Blahous, recently published a modest paper, “The Costs of a National Single-Payer Healthcare System,” which essentially asked a single question: “How much would the Medicare for All (M4A) bill introduced by Senator Bernie Sanders (I-VT) increase federal government expenditures over its first ten years?” The paper didn’t say, “Don’t pass M4A,” or “M4A is bad,” or “M4A will bankrupt America,” or “M4A will leave cancer patients dying in the streets,” or anything of the sort.

The paper simply asked, “By how much will M4A increase the federal budget?” In other words, how will M4A affect ordinary Americans, in their homes, paying the taxes that finance the federal government?

The answer Blahous reached looked very much like the answer the left-of-center Urban Institute reached when it asked the same question two years ago. It resembled the answers the Vermont and California legislatures obtained when they asked the same question on the state level. In fact, it’s difficult to run the numbers in any sensible way and not arrive at answers in the neighborhood of Blahous’s findings. (We’ll do a scaled-down, easy-to-use version of the numbers below to understand why.)

Despite all this, M4A supporters responded to Blahous’s paper (and Blahous personally) with a blend of ecstasy, agony and excess.

Blahous’s Findings versus Blahous’s “Findings”

The ecstasy came from an incidental datum: The paper estimated that if all of Senator Sanders’s expectations for the bill came true, then American health care spending would be $2 trillion dollars lower over ten years (2022-2031) than would otherwise be the case. While the paper clearly and repeatedly stated that those expectations were highly unlikely to pan out, M4A backers triumphally (and wrongly) celebrated the “proof!” of this cost savings. Senator Sanders released a video and tweet proclaiming: “Medicare for All will lead to a $2 TRILLION REDUCTION in national health expenditures over 10 years. … That’s trillion with a ‘T.’” Countless headline-writers echoed this sentiment.

The agony for M4A backers came from the paper’s chief finding—that M4A would increase federal government expenditures by at least $32.6 trillion over that same ten years and that even doubling personal and corporate income taxes would not suffice to fill a funding gap of that magnitude. And—again, clearly and repeatedly—the paper stressed that in the likely event that not all of Senator Sanders’s expectations panned out, the figure would be even higher.

The paper raised, but did not dwell on, three related, but equally important, questions: “How does the federal government raise that much new revenue?” “How would those new taxes affect the American economy?” and “How would health care professionals react to the law?”

These are questions Congress would have to explore in depth before voting on M4A. If M4A passed, the answers would become the central focus of American economic and political life for years afterward. Yet, Blahous’s cautious and commonsensical calculations resulted in M4A backers labeling him as some sort of ideologue, driven by nefarious motives to trash (their word) M4A.

Many noted that he worked in the George W. Bush White House. Fewer noted that he was appointed by President Obama to serve as one of the two public trustees for Medicare and Social Security or that, after over four years of service, President Obama took the unconventional step of offering Blahous a second four-year term in that position.

Blahous Made E-Z

So, let’s look at a simplified, back-of-the-envelope approximation of Blahous’s numbers, using a handful of readily available statistics from federal government sources. (These numbers are all in “trillions” for simplicity’s sake, so read “$0.100 trillion” as “$100 billion”):

[1] $4.562 trillion = Estimated 2022 National Health Expenditures (NHE, or total health care spending by everyone, including governments, individuals, and businesses). (Source: CMS.gov > National Health Expenditure Data > Projected > NHE Projections – 2017-2026 > Table 3 > 2022 “Total”)

[2] $0.100 trillion = The 2022 portion of the $2 trillion in NHE savings that would occur, if all of Senator Sanders’s expectations for M4A were to pan out. It is important to note that this is the figure that M4A supporters have touted as proof that Congress should pass Senator Sanders’s bill. $2 trillion is the figure that Senator Sanders used in the video and tweet quoted above, and the 2022 portion would be in the neighborhood of $0.100 trillion.

[3] $4.462 trillion = [1]–[2] = NHE after incorporating the hypothetical savings from M4A. M4A would eliminate private insurance and out-of-pocket medical expenses, including deductibles and co-pays. So, virtually all of these expenditures would now fall under the federal government’s budget.

[4] $0.828 trillion = Estimated 2022 Medicare expenditures (net of offsetting receipts). Under M4A, the current Medicare program for seniors would be eliminated and replaced by the new M4A plan. Thus, this $0.828 trillion expenditure would go away. (Source: The Budget and Economic Outlook: 2018 to 2028, page 49, table 2-2)

[5] $0.465 trillion = Estimated federal portion of 2022 Medicaid expenditures. (Source: The Budget and Economic Outlook: 2018 to 2028, page 44, table 2-1). Medicaid recipients would transition over the new M4A program, so as with line [4], these expenses would go away.

[6] $0.416 trillion = Expected 2022 health care spending by “other” funding sources times 0.50. Some of these expenditures, such as the Veterans Health Administration and the Indian Health Service, fall on the federal budget; some of the expenditures fall on states, businesses, and individuals. We’ll use 50 percent as a crude guess here. A more accurate percentage would make little difference in the overall conclusions presented here. (Source: CMS.gov > National Health Expenditure Data > Projected > NHE Projections – 2017-2026 > Table 3 > 2022 “Other Health Insurance Programs” + “Other Third Party Payers”)   

[7] $2.753 trillion = [3]-[4]-[5]-[6] = The increase in federal expenditures in 2022 under M4A. Do this calculation for all ten years (2022-2031) and you’ll get something close to Blahous’s $32.6 trillion figure.

Now, let’s compare this number to the latest federal government tax estimates:

[8] $1.990 trillion = Expected 2022 federal personal income tax receipts from all 325,000,000 Americans. (Source: The Budget and Economic Outlook: 2018 to 2028, page 67, table 3-1)

[9] $0.353 trillion = Expected 2022 federal corporate income tax receipts from all businesses. (Source: The Budget and Economic Outlook: 2018 to 2028, page 67, table 3-1)

[10] $2.343 trillion = [8]+[9] = Total expected 2022 income taxes, individual and corporate.

[11] 117 percent = [7]÷[10] = The percentage increase in total individual and corporate income taxes required to fill the funding gap created by M4A. In this case, the federal government would have to more than double these taxes to fill the gap.

[12] $1.395 trillion = Expected 2022 payroll taxes. Deducted from wages and salaries, payroll taxes at present fund Social Security, Medicare, and unemployment insurance. Senator Sanders and others have suggested payroll tax increases as a source of funds for M4A. (Source: The Budget and Economic Outlook: 2018 to 2028, page 67, table 3-1)

[13] 197 percent = [7]÷[12] = The percentage increase in payroll taxes required to fill the funding gap created by M4A. In this case, the federal government would have to nearly triple payroll taxes to fill the gap. Economic evidence consistently shows that employees effectively pay these taxes in the form of reduced wages and salaries. A Tax Foundation report, for example, says, “[T]here is hardly such a thing as the ‘employer-side’ payroll tax, because almost the entire burden of the payroll tax is passed on to employees in the form of lower wages.”

The Cruel Tyranny of Math

Several major news outlets’ fact-checking operations have confirmed that Blahous never forecast $2 trillion in savings from M4A. Rather, he stated only that Senator Sanders’s expectations, if fulfilled, would yield savings of that magnitude. Since then, the Senator and others have noted than some academic and advocacy group supporters of M4A believe Blahous underestimated the savings. (It is important to note that these figures represent the savings that would occur if Senator Sanders’s expectations were fully met. They are not Blahous’s expectations as to what would actually occur.)

OK. What if that were true? To be absolutely clear, I don’t believe that Blahous underestimated the savings consistent with Senator Sanders’s expectations. Like Blahous, I suspect the savings are illusory and that M4A would likely increase, rather than decrease overall national healthcare spending (NHE). But let’s pretend that the savings actually would exceed Blahous’s $2 trillion figure.

Let’s pretend that M4A will save $4 trillion over ten years, rather than $2 trillion. That means we have to double the savings figure in line [2] of the table from $0.100 to $0.200 trillion. Now, America’s total healthcare spending drops to $4.362 trillion (instead of $4.462 trillion). And now, Congress only has to increase personal and corporate income taxes by 113 percent, rather than 117 percent. Turning instead to payroll taxes, the required increase would drop from 197 percent to … 190 percent.

Cancel the parade. Whether by income or payroll taxes, this would still count, by far, as the largest tax increase in US history.

Let’s assume Blahous wildly underestimated the savings that M4A would yield (again, consistent with Senator Sanders’s expectations). Senator Sanders cited one M4A-supporting academic who thought savings would be $10 trillion over ten years—five times Blahous’s number. If so, we would change line [2] of the calculations from $0.100 to $0.500 trillion for 2022. Now, Congress only has to increase personal and corporate income taxes by 100 percent, rather than 117 percent. Or increase payroll taxes by 169 percent, rather than 197 percent.

Blahous’s whole purpose was not to take a pro or con position on M4A, or even to estimate M4A’s overall efficiency, but rather to ask the simple, essential question: “How much would M4A increase the federal budget?”

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Still no parade. This academic’s guess as to M4A’s savings is, in my opinion, wildly optimistic and unrealistic. But even his estimate yields the biggest tax increase in US history. And, to repeat, Blahous’s whole purpose was not to take a pro or con position on M4A, or even to estimate M4A’s overall efficiency, but rather to ask the simple, essential question: “How much would M4A increase the federal budget?”

The numbers for 2022 offered here consist of eight present-day government forecasts and five calculations off of those eight numbers. Let me reiterate at this point that these are back-of-the-envelope calculations that gloss over some details in the interest of simplicity. But a more exhaustive, exacting study is likely to give you figures relatively close to those presented here. And if any of the eight numbers displease you, by all means plug in numbers more to your liking. Add in missing details to your heart’s content. And if you enjoy such exercises, do the same calculations for all ten years described in the Blahous paper.

Guaranteed Costs and Speculative Benefits

In the end, it is virtually impossible for a competent estimator to reach any conclusion other than, “M4A will cost the federal government vastly more than it has ever spent on anything else in US history—and more than any government has ever spent on anything else in human history.” If you favor M4A, you ultimately have no choice other than to deal with that reality.

And once you deal with the issues Blahous raised, there are others that are unavoidable. Policy analyst Marc Goldwein notes on Twitter that shifting from private insurance premiums to income-tax-based financing will likely yield a more inefficient financing mechanism, exerting downward pressure on the US economy and long-term growth. (To use an economics term, the deadweight loss of shifting health insurance financing to an income or payroll basis is a worthy topic for a later article.) Blahous and others note that eliminating deductibles and co-pays will likely drive up demand for healthcare goods and services. M4A would instantly wipe out hundreds of thousands of jobs in the health insurance industry, and one can’t take as a matter of faith that those people will be immediately re-employed elsewhere. Provider reimbursement cuts in M4A would make it uneconomical for many hospitals to remain open; the cuts would likely drive many doctors and nurses out of their professions, as well. The magnitude of these effects on economics and on the health of the American people is debatable, but not their existence.

An additional consideration is this: passage of M4A would take the American economy through a one-way door, with the downside guaranteed and the upside speculative.

Federal taxes and spending lurch upward. Very likely, the private health insurance industry is permanently obliterated, along with several hundred thousand jobs. Present-day Medicare vanishes, as seniors move to whatever plan the rest of the country receives. Federal administrators face the permanent prospect of managing the care of an extra quarter-billion souls. And once M4A is implemented, all of these things are guaranteed and none of them are reversible.

The purported upside comes in the form of a series of promissory notes. M4A advocates assure us that the federal government will manage care for the quarter-billion more efficiently than private insurers do today. They assure current Medicare recipients that the new plan will serve them at least as well as present-day Medicare does. They assure us that total healthcare spending will decline slightly (that $2 trillion savings only amounts to a three percent decline overall) rather than surge upward. They assure us that doctors and nurses and hospitals will continue to provide at least the same quantity and quality of care, even as M4A requires them to take pay cuts. They assure the laid-off private insurance employees that they will land in new jobs, and not sink into a state of long-term unemployment. They assure Americans that M4A’s financing structure will not diminish the long-term growth of the American economy. But while the downside changes are guaranteed, these upside promises are speculative—matters of faith.

You can argue that M4A is worth that increase in spending and taxes and is worth the impacts on the US economy and individuals working in the health care sector. But, in the end, you cannot avoid dealing with the downsides that come with the perceived upside. In the near-term, it makes no sense to shriek and cry and wail over the fact that Chuck Blahous did the calculations and raised these questions today rather than tomorrow or next year. 

Photo credit: AP/Shutterstock

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