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March 4, 2019

Medicare For All - I Like It! How Do We Pay for It?

by Michael Lighty and Robert Pollin

Courtesy of the Sanders Institute.

Medicare for All rally, Feb. 2017, Los Angeles, CA. Molly Adams

Sanders Institute Fellows Robert Pollin and Michael Lighty discuss the findings from Robert Pollin’s recent study, Economic Analysis of Medicare for All at the Sanders Institute Gathering. Pollin and his co-authors find that “on balance you have a system that delivers decent high-quality health care for everybody. Nobody ever has to worry, nobody has to go bankrupt, nobody has to fear about not being able to get care. All of that goes away, and we end up still saving a little less than 10% relative to what we pay now. That’s the core of Medicare For All.”

Economic Analysis of Medicare for All 

Highlights of Study

This study provides an economic analysis of the Medicare for All Act of 2017, which was introduced before the United States Senate by Senator Bernie Sanders (S. 1804). Our analysis also addresses, more broadly, a range of issues that need to be examined seriously in considering any specific proposals for a single-payer health care system for the United States. The most fundamental goals of Medicare for All are to significantly improve health care outcomes for U.S. residents while also establishing effective cost controls throughout the health care system. We conclude that these two purposes are both achievable. This study presents both an extensive review of the relevant research literature and a range of statistical evidence. These serve as the basis on which we establish our overall assessment as to the viability of Medicare for All.

Establishing the Universal Right to Decent Health Care

Under Medicare for All, all residents of the United States will have the opportunity to receive decent health care as a basic right. This will result through establishing a health insurance system that covers all residents in a manner comparable to the coverage now provided for residents 65 years old and older under the existing Medicare program. All health care consumers will also have the right to receive care from the providers of their choice.

Increased Demand for Health Care Services under Medicare for All

At present, roughly 9 percent of U.S. residents are uninsured and 26 percent are underinsured—i.e. they are unable to adequately access needed health care because of prohibitively high costs. The demand for health care services by these population cohorts will rise significantly under Medicare for All. Medicare for All will also provide stable access to decent coverage for those currently receiving adequate insurance coverage but who may face difficulties at later points. As a high-end estimate, we conclude that overall demand for health care services in the U.S. will rise by about 12 percent through Medicare for All.

Cost Saving Potential under Medicare for All

Medicare for All has the potential to achieve major cost savings in its operations relative to the existing U.S. health care system. We estimate that, through implementation of Medicare for All, overall U.S. health care costs could fall by about 19 percent relative to the existing system. The most significant sources of cost saving will be in the areas of: 1) administration (9.0 percent savings in total system costs); 2) pharmaceutical pricing (5.9 percent savings in system costs); and 3) establishing uniform Medicare rates for hospitals, physicians, and clinics (2.8 percent savings in system costs). An additional, more modest source of cost savings, at least in the initial years under Medicare for All, would be to reduce the high levels of waste and fraud that currently prevail in service provision. As a low-end figure, we assume that achievable cost savings in these areas would be about 1.5 percent of total system costs in the first year of full operations. We also assume that further gains in waste reduction and fraud control are achievable in later years, at a rate of about 1 percent per year for roughly a decade.

Overall System Costs

As of 2017, the U.S. is spending $3.24 trillion on Health Consumption Expenditures (other than public health programs). With Medicare for All generating both increased overall demand in the range of 12.0 percent and cost savings of about 19.2 percent, total Health Consumption Expenditures would fall to $2.93 trillion. We therefore estimate that Medicare for All could reduce U.S. Health Consumption Expenditures by about 9.6 percent while also providing decent health care coverage for all U.S. residents.

Financing Medicare for All

There will be two sources of financing for Medicare for All. The first is the same public health care revenue sources that presently provide about 60 percent of all U.S. health care financing, including funding for Medicare and Medicaid. Existing public sources of funds will provide $1.88 trillion to finance Medicare for All. Given our estimate that the overall costs of Medicare for All will be $2.93 trillion, the system therefore needs to raise an additional $1.05 trillion from new revenue sources. 

We provide a set of illustrative financing proposals that, in combination, can generate $1.08 trillion, thus producing a revenue surplus of about 1 percent for the system. Other approaches are also workable. We emphasize at the outset that, regardless of the specific funding framework utilized for Medicare for All, all households and private businesses will be able to pay into the system an average of 9.6 percent less than they are presently contributing to the U.S. health care system. This is, straightforwardly, because Medicare for All is able to operate at a funding level that is 9.6 percent below the current overall funding level for U.S. health care. Our proposals include the following:

Business health care premiums cut by 8 percent relative to existing spending per worker. Revenue generated = $623 billion. 

All businesses that now provide health care coverage for their employees will be guaranteed to receive proportional benefits during Medicare for All’s initial 2-3 years of operation. Firms that are not offering coverage for some or all of their employees would pay $500 per uncovered worker. Small businesses would be exempt from these premium payments. We also develop proposals for either an 8.2 percent payroll tax or 1.78 percent gross receipts tax that would apply both to new businesses and more generally after the first 2-3 years under Medicare for All. Both of these measures would generate the same revenue level as the 8 percent premium reduction for those businesses now providing coverage.

3.75 percent sales tax on non-necessities. Revenue generated = $196 billion.

This includes exemptions for spending on necessities in four areas: food and beverages consumed at home; housing and utilities; education and non-profits. We also include a 3.75 percent income tax credit for families currently insured through Medicaid. 

Net worth tax of 0.38 percent. Revenue generated = $193 billion. 

We propose that the first $1 million in net worth are exempted from this net worth tax. The tax would therefore apply to only the wealthiest 12 percent of U.S. households. 

Taxing long-term capital gains as ordinary income. Revenue generated = $69 billion.

Budgetary Impacts on Businesses and Households

Under the transitional program featuring the 8 percent premium reductions for covered employees, businesses that have been providing coverage for their employees will see their health care costs fall by between about 8 – 13 percent, after accounting for administrative savings as well as their premium reductions.

For families, our results show that Medicare for All can promote both lower average costs and greater equity in financing health care. For example, we find that for middle-income families, the net costs of health care will fall sharply under Medicare for All, by between 2.6 and 14.0 percent of income. By contrast, with high-income families, health care costs will rise, but still only to an average of 3.7 percent of income for those in the top 20 percent income grouping and to 4.7 percent of income for the top 5 percent income group.

The Transition into Medicare for All

The transition out of the existing U.S. health care system into Medicare for All will entail formidable challenges. There will be three major sets of issues to tackle: 1) the overall administrative transition; 2) the impact of the transition on both the incomes of physicians and on the capacity of physicians and other providers to meet the increased demand for health care services; and 3) the displacement of workers now employed in both the private health insurance and health services industries. We provide detailed assessments of the range of issues at hand and advance proposals for managing the transition in ways that are workable and costeffective. This includes addressing the impacts on health care providers, health care consumers, and health insurance industry workers respectively.

Macroeconomic Impacts of Medicare for All

As of 2017, U.S. Health Consumption Expenditures are equal to 17.2 percent of GDP. The comparable ratio for eight other large industrial economies ranges between 8.9 percent of GDP for Italy and 11.3 percent of GDP for Germany. In addition, health care spending as a share of the U.S. economy has risen dramatically over time. In 1970, U.S. Health Consumption Expenditures equaled 6.2 percent of GDP. The Centers for Medicare and Medicaid Services (CMS) projects that the ratio will reach 18.8 percent by 2026.

Following from our estimates, Health Consumption Expenditures would fall to 15.8 percent of GDP under Medicare for All, as of the 2017 economy. This would represent a dramatic decline in health care spending as a share of GDP for the U.S., but would still be substantially higher than the figures for all other large advanced economies. We conclude that further incremental improvements in service delivery under Medicare for All should enable U.S. health care costs to stabilize at around 15.8 percent of GDP, even after taking account of the rising cost pressures resulting from an aging population.

Based on these results, we can then develop a 10-year forecast of Health Consumption Expenditures under Medicare for All, and compare this forecast with the projection by CMS of Health Consumption Expenditures assuming that the U.S. continues operating under its existing health care system. We find that, over the decade 2017 – 2026, the cumulative savings through operating under Medicare for All would be $5.1 trillion, equal to 2.1 percent of cumulative GDP.

There would also be broader macroeconomic benefits through operating the U.S. health care system under Medicare for All. Among these are that improved health outcomes will raise productivity; Medicare for All will support greater income equality; and that Medicare for All should support net job creation, especially through lowering operating costs for small- and mediumsized businesses.

The full study can be found here.