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The real reason single-payer health care is hard to pay for

It’s a big problem — but there’s a solution.

The notion of a single government-run insurance plan — known as “single-payer health care” to wonks, and “Medicare-for-all” to advocates — has made an enormous comeback in progressive circles in the wake of the 2016 presidential election.

Bernie Sanders made this a core issue of his stronger-than-expected primary campaign, and longstanding legislation from Rep. John Conyers (D-MI) to create a single-payer system has garnered more co-sponsors than ever before. Democrats in the California State Senate mustered a two-thirds supermajority in favor of a single-payer health care system, and the New York State Assembly has done the same. Elizabeth Warren endorsed single-payer health care recently, and more senators are speaking warmly, if somewhat vaguely, about it. Sanders himself is expected to unveil legislation once the GOP’s plans to repeal the Affordable Care Act either succeed or fail.

Yet it’s telling that most of the plans out there don’t specify how they will pay for this coverage. It’s also telling that plans that started looking into revenue options — like the ambitious Vermont initiative to create single-payer health care — collapsed once they started to get specific about taxes.

As one House Democrat who supports single-payer explained to me, most of his more left-wing colleagues are aware that foreign single-payer health care systems are cheaper overall than the American private one, and infer from that the idea that paying for single-payer would be easy.

The reality is that’s not the case. Single-payer health care certainly could reduce aggregate national health care costs, but it would greatly increase the need for tax revenue. And while it’s hardly impossible to raise more tax revenue (Americans are lightly taxed by global standards) it’s not politically or substantively trivial either. In particular, it makes a big difference what tax you opt for — with all options presenting significant downsides.

That means it’s worth taking a look at alternative approaches that, in exchange for accepting a slower pace of change, would require much less in the way of direct tax hikes.

Single-payer is expensive because health care is expensive

Exactly how expensive a single-payer health care program is depends critically on aspects of how the program is designed. If cost-sharing exists (as it does in Medicare but generally doesn’t in single-payer plans backed by the National Nurses Union) that reduces the price tag — both because patients shoulder some of the burden and because deductibles and copayments reduce overall consumption of health care services. If things like nursing home care (which Medicare doesn’t cover) or prescription drugs (which Canada’s single-payer system doesn’t cover) are included, that increases the price tag.

But fundamentally, any single-payer health insurance program is going to cost a lot of money because health insurance pays for health care and health care is expensive — particularly in the United States, where it amounts to 16 percent of the overall economy.

That’s not a program flaw, and it doesn’t make single-payer health insurance a bad idea. Indeed, in terms of the aggregate burden on the economy, single-payer ought to reduce health care expenditures — in part by simplifying administration and marketing, but largely by using bulk purchasing to control prices.

Nonetheless, you are talking about a big chunk of change becoming an explicit public-sector cost. To finance it (at least if you want to abide by budget reconciliation rules) you need to pair it with a big tax increase. Some of that can be taxes on the rich. But the program is so big that it mostly has to be funded with a broad tax like the payroll tax that funds Social Security or the Value Added Tax (VAT) that funds most big European welfare state programs. And since the tax is big, the choice between them makes a big difference.

A tale of two taxes

On a 50,000-foot level, universal program financed by a broad-based tax is an idea in use in many places and it works perfectly well. But the choice of details matters a lot.

The payroll tax option makes a lot of logical sense. Right now, most non-elderly Americans get insurance through their jobs. Having everyone pay a job-based tax in exchange for everyone getting insurance would be structurally similar, but you’d get a guarantee of insurance that would be portable between jobs and that could never be taken away from you.

The problem here is that in the short-term you’re talking about a huge windfall for employers. Employees would see take-home pay fall thanks to the new tax, and employers would be relieved of the cost of providing health insurance. In theory, that cost-saving ought to pass-through to workers in the form of higher salaries over the long-term.

But that’s asking citizens to take a pretty big leap of faith. And even if average wages do rise, that’s not a guarantee that your wages in particular will rise. This is a particular problem for union workers whose pay and benefits are set in collective bargaining agreements, which in turn is a huge political problem since it’s difficult to imagine ambitious new social welfare legislation being enacted without union support.

The VAT option solves this problem but creates a different one. A VAT is basically an up-to-date version of a sales tax that would be levied on the purchase of everything — not just the cash register sales picked up by a typical sales tax. The price of almost everything people buy would go up a little, but in exchange the price of health care would go down a lot. Some people might not like the tradeoff, but it’s a perfectly plausible idea.

The problem is that a VAT would be paid by everyone, including senior citizens who already have Medicare. For non-elderly Americans, the offer would be higher prices in exchange for free health insurance. But elderly Americans would be getting higher prices in exchange for nothing. Social Security benefits would automatically rise to adjust for the higher prices so the most vulnerable seniors would be protected, but more affluent ones would be paying the price for other people’s health care.

Note that in both cases the main issue is that most Americans already have health insurance. Because health insurance is something that most people already have, there are tough trade-offs involved in paying for it.

This argues for a more gradualist approach. The desired end goal could still be Medicare-for-all, but the immediate crisis that needs to be addressed is delivering help to the people who currently have either no insurance or very bad insurance.

The AmeriCare option

But even if the paths are difficult, there are some plausible options out there. Take, for instance, former Rep. Pete Stark, (D-CA) who had a plan that he called AmeriCare.

AmeriCare was modeled on Medicare both in terms of the generosity of its coverage, and its payments to health care providers. And his idea was that AmeriCare would take on everyone ensured by Medicaid and SCHIP, and would automatically enroll all children at birth. Here's the kicker: Employers could buy into the plan. They'd have to pay 80 percent of the premium, leaving 20 percent to employees, but it'd be an alternative every company got to buying their existing private plan.

The nonprofit Commonwealth Fund hired the Lewin Group, a widely respected health care policy research group, to look at the AmeriCare proposal and other congressional plans in 2007 and 2009. The Lewin Group concluded both times that the vast majority of employers would switch their plans to the new government program.

Over time, in short, AmeriCare would create a system in which virtually everyone was enrolled in either Medicare or AmeriCare. For the sake of making this a Medicare-for-all plan, we can just call both programs Medicare. But crucially, people would end up with Medicare coverage primarily because employers would choose to enroll them in Medicare due to its lower cost.

"The combination of lower administrative costs and lower provider payment rates under Medicare makes Medicare coverage very attractive to employers," Commonwealth's Karen Davis wrote in 2007. "When given the choice, most employers would purchase coverage for employees through Medicare."

This means that most of the money to pay for the program would be diverted from the existing stream of money that employers are already spending on health insurance. The difference is that instead of paying an insurance company, they’d be paying it into the Medicare fund. Small businesses and the self-employed who currently find it difficult to buy insurance would have a nice risk pool to buy into, and lower-income individual market purchasers could be subsidized with the existing Affordable Care Act revenue stream.

Taxing the rich

The AmeriCare plan would still need some additional revenue, of course. Taking Medicaid and SCHIP enrollees and placing them in a more generous, Medicare-like program wouldn’t be free. And even though insuring children is relatively cheap, it’s not free either.

But this is the kind of thing that could be paid for overwhelmingly through taxes on affluent households — the very same people who, thanks to growing economic inequality, have reaped the majority of the economic gains over the past 20 or 30 years.

Doing the same for a full-scale, sudden switch to a Medicare-for-all system would, in some ways, be politically easier than trying to pay for it with broad-based taxes. But even though there’s certainly room for taxes on the rich to play a role in financing universal health care, there’s no realistic way to raise the total amount of money required. Private health expenditures are around 8 percent of total American economic output, and to make that work you need a broader base of revenue.

That means going for either a payroll tax or a VAT with the problems that entails, or else embracing a measure of gradualism to create an elegant way to redirect the funds currently being spent on private health insurance.

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