Financing Medicare for All
A Modest Proposal Toward Democratic unity on Health Care
The proposals of progressives seeking the Democratic nomination for president, such as Bernie Sanders and Elizabeth Warren, to establish a universal federally-funded and administered health care system in the United States address real and unresolved policy and political problems.
The most fundamental challenge for any health care system is what economists call “adverse selection”: those individuals who exercise the opportunity to opt out of a non-universal system tend to be healthier than those who opt in, and as a result there is inexorable upward pressure on system costs. A universal federally-funded system is the only way to address the problem of adverse selection at a national level.
Ingenious policy alternatives such as Obamacare chronically threaten to collapse from the adverse selection effect. For example, the various stratagems incorporated in Obamacare to address adverse selection, like the individual “mandate”, are constant targets of political efforts to undermine the system.
The complex division of healthcare among Medicare, Medicaid, and a spectrum of private insurance plans prevents effective cost-control measures. Only a universal health-care system in which everyone is automatically included both as a beneficiary and also as a contributor to the finances of the system can address these unresolved problems.
Bernie Sanders’ proposal realistically confronts these issues by proposing to extend the model of Medicare, which is financed by payroll and income tax revenues through the federal budget, to a universal system. Sanders envisions a payroll tax of around 12%, to be paid half by employees and half by employers to finance this system. Sanders argues that this increase in taxes would be more than offset, at least for individuals of median incomes, by the elimination of premiums on private insurance plans and by lower administrative costs and better coverage.
But the politics of a shift to a universal health-care system have proved more treacherous than the relatively simple tradeoff of taxes for premiums Sanders presents. Politicians fear that they will be blamed for the increase in taxes necessary to finance a universal system but will not get credit for the presumed offsetting reduction in insurance premiums. Political opponents of a universal system, including advocates for the private insurance industry, raise the specter of a public backlash against a reform that would “take away” private insurance many citizens find satisfactory. Many of these arguments are disingenuous distortions of the substance of the Medicare-for-all proposals, for example, because they do not acknowledge the better coverage and reduced administrative burdens a universal health-care system can deliver. Nonetheless, these political concerns have defeated state plans for universal health care systems at various stages of the political process in Vermont, New York, and California. Political gridlock threatens to frustrate the strong public support for universal health-care and leave the country with an economically and politically unstable Obamacare-style compromise that has many gaps and unfair outcomes built in.
There is, however, a simple and transparent way to eliminate many of the political objections to Medicare-for-all financed completely by taxes. This is to allow a credit against the taxes financing a universal health-care system for individual (or employer) payments of premiums to private health insurers. This minor revision would translate the trade-off between increased taxes and reduced insurance premiums to the level of the individual household budget. Either the individual household would contribute to the financing of the universal health-care system through paying payroll or income taxes dedicated to this purpose, or the household would contribute by paying premiums to private health insurers. Any household could estimate the net change in its health-care expenditures on various assumptions about its (and its employers’) decisions about private health insurance.
Just how would this work? Congress would enact a universal health care system modeled on Medicare, but available to all as in Sanders’ proposal. This legislation would state the objectives and philosophy of universal coverage and create administrative mechanisms to implement these objectives and philosophy in a specific package of benefits. The legislation would also establish a tax-based system to pay for the benefits. This tax system would probably combine an increase in current Medicare payroll-tax rates with some kind of charge through Federal income taxes. (Payroll taxes tend to be regressive in incidence, in that people with lower incomes pay a larger part of those incomes in the payroll tax, while Federal income taxes are somewhat progressive, in that people with higher incomes pay a higher marginal tax rate.) This system automatically enrolls everyone in the system both as a beneficiary and as a contributor to costs, as in Sanders’ plan. Everyone would have a universal health care account through which covered medical services would be billed and paid to providers.
Where the tax credit would apply is in cases where individuals or their employers or unions continue to buy health insurance. In this case the individual premiums paid for health insurance would provide a tax credit against the payroll or income taxes dedicated to financing the universal health care system. This tax credit might appear to compromise the universal character of the system by allowing individuals (and employers and unions) to “opt out” of the universal system, but a careful analysis of the resulting payments system shows that this appearance is deceiving. Suppose an individual continues to receive health care as an employment fringe benefit from their employer. When the individual receives covered health care services, the provider bills through her individual universal healthcare account, which pays the bill, just as in the Sanders’ proposal. The universal health care system would then bill the provider of the individual’s employer-provided health insurance. In this scenario private health insurance is an alternative vehicle for collecting the revenues required to fund the universal system.
From the point of view of the individual participant in the universal system, either her budgetary costs of health care would remain the same, if her employer continued to offer the same benefit, or she would find herself covered through the tax system at a lower budgetary cost. The universal health-care system itself would not “take away” any existing options. In some cases employers and individuals might find it advantageous to shift to relying on the universal system, in order to save money compared to private insurance coverage. If individuals wanted to purchase supplementary coverage from private insurance companies, they would be free to do so. Some individuals who are currently not covered by any kind of insurance except the notoriously unfair and inefficient use of emergency rooms, would, as in Sanders’ plan, start to pay into the universal system through the tax system, in exchange for very complete coverage of health-care costs.
It is not easy to guess just how big a private health insurance industry would emerge from this system, and for low long, but these details would not matter very much to the operation of a Medicare-for-all system financed by taxes with credits for private insurance premiums. Private insurers might continue to maintain networks of health-care providers they finance directly from premiums, but they might also simply buy into the universal system directly. To the degree that the universal system could reduce administrative and other costs, the direct buy in would become more financially advantageous to the private insurers. As a fallback, the legislation establishing the universal health-care system could require private insurers to reinsure their risks through the federally-finance system. The premiums insurers paid for this reinsurance would balance out any residual deficit private insurance might impose on the universal system.
A universal health-care system is the only way to address the adverse selection problem that threatens the viability of any incremental adjustment of Obamacare. Everyone is part of the universal system and everyone is responsible for contributing to it financially in proportion to their ability to pay as the legislation specifies. With a credit for private insurance, however, individuals could pay either directly in the form of taxes or indirectly by paying premiums (or having their employers pay premiums) to private insurers. As long as everyone is covered and everyone pays into the system through one channel or another, the financial viability of Medicare-for-all is assured. A properly crafted system would also make the advantages of the universal system crystal clear to individuals at the level of their household budgets.
Duncan K. Foley is Leo Model Professor of Economics at the New School for Social Research. He is the author of Adam’s Fallacy: a Guide to Economic Theology (Harvard, 2006) and papers on political economy, Marxist economics, mathematical economics, and the economics of climate change.