August 23, 2017

Medicare for All: A Non-Solution to a Non-Problem

Robert Graboyes

Senior Research Fellow
Summary

Medicare for All is cargo-cultish: Faith against logic that European-style health insurance will induce Americans to consume like Swedes, Danes or British.

“Medicare for All” is a solution that’s not a solution for a problem that’s not a problem.

There’s much hand-wringing over the isolated fact that the United States spends a larger percentage of Gross Domestic Product on health care than any other country — currently more than 17 percent versus 10 percent in Canada or the United Kingdom. Many fret that this difference proves that American health care is grievously out of kilter.

For many fretters, the answer is single-payer health insurance with superpowers. Expand Medicare to finance everyone’s care and empower that agency to negotiate prices with providers of care. But our health care-to-GDP ratio derives from factors outside health care, and single-payer wouldn’t jostle that ratio significantly.

There are two big reasons for America’s elevated ratio. First, for many purposes (including understanding health care), GDP is a stilted measure. Second, we spend more than other countries because we’re wealthy Americans with predilections that single-payer wouldn’t alleviate (and could exacerbate).

GDP and related national income account statistics are exceptionally ill-suited for health care. GDP crudely measures what a population produces over a year, not what they do with that production nor how much past production they’ve accumulated through savings and investment. My 1994 article, “Medical Care Price Indexes,” described this data’s utter failure to capture quality differentials in health care.

And Americans have long opted to buy higher-quality care than other countries, including more technology and shorter wait times. (Oft-parroted truisms to the contrary, America gets better outcomes in many ways.)

In his recent blogpost, “Spending a Lot on Healthcare Is the American Way,” economist Tyler Cowen explains that Americans spend a higher portion of GDP on health care than other countries because, for a generation, we’ve saved considerably less and consumed considerably more than other developed countries. Very likely, we spend a greater share of GDP on food, education, housing, clothes, and so forth for the same reason. While our health care-to-GDP ratio is quite high, our health care-to-individual consumption ratio is only a bit higher than those of other countries.

Cowen cites the anonymous but competent blogger Random Critical Analysis’ “High U.S. health care spending is quite well explained by its high material standard of living.” That post notes GDP only reflects consumers’ current income and fails to incorporate the effect of accumulated wealth on spending. Americans have more wealth stashed away, and part of our generation-long consumer binge has been fueled by that stockpile. A retiree with little income but millions in a 401(k) will obviously spend more on health care (or food or vacations) relative to income than a working person with scant savings.

Furthermore, Random Critical Analysis notes that health care is a “superior good.” Someone with low income and wealth focuses consumption on food, clothing and housing. As income and wealth rise, there’s more leeway to spend on superior goods like education, vacations and health care. Americans have high incomes, wealth and a propensity to consume from both.

If America shifted tomorrow to Medicare for All, none of these factors would improve. There’s no reason to believe this shift would make Americans more content with lower tech or longer wait times. It wouldn’t lead them to save more or consume less or abandon superior goods.

As for giving Medicare greater control over spending, the agency’s record is atrocious. From 1997 through 2015, the Balanced Budget Act required Medicare to limit the growth of its spending. Throughout that period, Congress overrode that requirement through the notorious “doc-fix.” Neither Medicare nor lawmakers can restrain the agency’s spending because attempts to do so provoke a chorus of “hands off” from the 55 million beneficiaries. Medicare for All would expand that choir to all 323 million Americans.

Empower Medicare to negotiate directly with drug manufacturers and the likeliest outcome would be undue influence for the health care industry, resulting in something like the Defense Department’s $2,228 monkey wrench circa-1980 ($6,600 in 2017 dollars). The common chestnut that Medicare’s administrative expenditures are lower than those of private insurers reflects a failure to understand the statistics.

In the end, Medicare for All is cargo-cultish: Faith against logic that European-style health insurance will induce Americans to consume like Swedes, Danes or British.