Medicare for All—with No New Taxes?

Democratic candidates and activists appear all-in on “Medicare for All.”

Many supporters of the idea envision a nationwide universal healthcare system that would be financed primarily by increasing taxes on the super-rich. A recent Echelon Insights poll, for example, found that 74% of voters who support Medicare for All believe it could be financed entirely by raising taxes on billionaires.

This is a pipe dream. No country in the world makes health care universally free, paid solely by their wealthiest taxpayers.

The latest Medicare Trustees Report predicts that Medicare’s Part A Trust Fund (hospital insurance) will be exhausted in 2033. Part of the reason is that premiums paid by Medicare enrollees cover only about 14% of the program’s cost. If the rest of the country could join by paying only 14 cents on the dollar, Medicare would go bankrupt overnight.

Although most of what is being said about Medicare for All borders on being silly, Nobel prize-winning economist Paul Krugman has a proposal that is worth serious attention.

Krugman would let everybody voluntarily enroll in Medicare. But, they (and their employers) would have to pay actuarially fair premiums, equal to the average expected cost of their health care. So, there is no free lunch here and no need for additional taxes.

Why would people choose this option? Because Medicare is less costly than private alternatives for the same services. According to the RAND Corporation, private payers (employers and commercial insurers) are paying about 2½ times what Medicare pays for inpatient hospital care. For outpatient care the difference is nearly three times greater. So, in theory, the Medicare premiums people would pay would be substantially lower than what they’re now paying for private health insurance.

Krugman implies that we could all get the same health care for a lot less money. But would we?

Right now, Medicare accounts for 25% of hospital revenues and private insurance and private payers account for 38%, according to the Centers for Medicare & Medicaid Services’ National Health Expenditure Data.

Suppose all the people currently in private sector plans joined Medicare and got their care at Medicare rates. What would happen?

Krugman admits he doesn’t know a lot about health-care economics. But any run-of-the-mill economist, much less a Nobel laureate, should know that if you take 38% of an organization’s revenues and reduce it by as much as two thirds, something is going to change.

Studies show that when hospitals suffer large reductions in their revenues they reduce staff, halt capital spending, provide fewer services and even close down altogether. As a result, we would experience less hospital care and rationing by waiting—perhaps as bad as what we see in Britain and Canada.

There also are other likely changes.

In principle, hospitals compete on three dimensions: price, quality and amenities. In India, which has the freest hospital marketplace in the world, hospitals compete on all three. According to a study published in the journal, Health Policy and Planning, patients know the price of procedures for nonurgent care in advance. Apollo Hospitals (a large hospital chain) publishes their quality measures: mortality rates, readmission rates, and infection rates, for example.

As I showed in Health Affairs, in our highly regulated, bureaucratic system, hospitals do not compete on price or on quality. That leaves amenities.  If you cut American hospital revenues, there will be fewer of them.

When Americans enter a hospital, they normally expect a private room. By contrast, in a typical hospital in the British National Health Service (where the government pays all the costs), most beds are in multi-bed bays, commonly 4–6 patients per bay. Moreover, the few private rooms that are available are normally allocated for medical reasons (such as avoiding infections) and not out of respect for patient privacy.

Canada has a two-tier system, in which patients have to pay out of pocket for privacy. For example, London Health Sciences Centre in Ontario describes its standard accommodation as a four-bed room. A patient can request a semi-private or private room if they pay extra.

Another amenity is food. In Britain and in Canada hospital patients receive what Americans would regard as traditional “hospital food,” delivered on a rigid schedule.

Many American hospitals, by contrast, offer made-to-order meals, served at the patient’s request (hotel-style ordering) and even gourmet menus. Overall, American hospitals spend six times as much on food service as Canadian hospitals ($129.65 per patient day versus $21.38).

Under Krugman’s proposal people might pay less. But they also would get less.