Warren's Healthcare Plan—Fasten Your Seat Belts

Healthcare as an issue is not going away. And it isn’t going to get any less complicated or easier to understand.

But try to understand we must if we are to make reasonable choices. Candidate Warren raised the ante this week with a detailed plan for paying for her version of Medicare for All (MFA). It was immediately met with a firestorm of responses and will likely be subject to much debate as long as she is a candidate. Considering even part of it in a fact-based and rational manner requires more words than normal. But let’s try.

Today’s goal: Assuming you have better things to do than read the full 9,000-word plan posted on her website, we’ll summarize it here and provide some context for understanding it.

Then, we’ll compare three components of the plan to best practices of other countries. In a later Commentary, we’ll discuss the logic of several of the new taxes that she proposes.

Caveat

The MFA discussion involves 10-year estimates of healthcare spending which are difficult to make and nearly impossible to evaluate. It also involves estimates of how much will be paid by government, employers, and households. As with all long-range estimates, results vary considerably depending on the source. Not surprisingly, advocates of particular policies pick and choose from those that support their positions.

To her credit, Warren has been fairly transparent about her sources. Despite that, the plan is difficult to foot without considerable research beyond her citations. In the past few days, most journalists have chosen to focus on the area of the plan they like or dislike as opposed to the totality of it, thereby ignoring this weakness. The Editorial Board of the Wall Street Journal did call out the discrepancy in their Opinion piece entitled Warren Has a (Fantasy) Plan.

Despite these uncertainties, there are substantive issues contained in Warren’s proposals that merit consideration.

What is it?

In Warren’s version of MFA, all current private and public insurance programs are replaced by a single-payer system that is entirely free to households. This part is well known. What hasn’t been clear, until now, is how she plans to pay for it.

Spending under current law

Let’s use as a baseline what the future looks like under current law. (Given the caveat on estimates, this analysis is anchored by the estimates from the Centers for Medicare & Medicaid Services, which roughly align with Warren’s various sources.)

Total spending on all healthcare is estimated to grow from $4 trillion in 2020 to $6 trillion in 2029 for a 10-year total of $52 trillion. Funding of this expenditure is expected to be made by the following groups ($ in trillions):

$17	Federal government (Medicare, Medicaid, veterans, etc.)
$6	State governments
$9	Employers (health insurance for employees)
$12	Households (premiums, copays, deductibles, Medicare supplements, Medicare Advantage, and Medicare drug insurance)
$8	Spending unaffected by MFA. (military, foreigners, nonprofits, prisons)
$52	Total projected healthcare spending 2020-2029

Projected spending under MFA

Since MFA would expand access to the 9% of Americans who have no healthcare insurance and to several million Americans who are underinsured, it is assumed that healthcare spending under MFA will increase. Estimates of how much vary; Warren relies on Urban Institute estimates that her plan will add $7 trillion to healthcare spending over the 10-year period, bringing the total to $59 trillion.

Revenue sources prior to new tax proposal

Beginning with total spending of $59 trillion, Warren makes several adjustments involving spending that is already anticipated, as well as estimating savings from cost reductions:

$59.0	Warren’s 10-year healthcare spending estimate with MFA
-$8.0	Spending unaffected by MFA. (military, foreigners, nonprofits, prisons)
-$17.5	Projection of federal government spending based on current law for Medicare, Medicaid, veterans, etc.
-$6.0	Projection of state government spending based on current law. Warren proposes to maintain state spending at the current level but channel it through MFA.
-$7.0	Warren projects $7 trillion of savings through reduced administrative costs and drug, hospital, and provider price negotiation.
$20.5	This is the amount of additional federal government spending that Warren projects will require additional funding.
-$8.8	First, she proposes that employers continue to pay approximately what they contribute today toward employee healthcare. She calls this the Employer Medicare Contribution.
$11.7	This is the funding gap that requires new taxes. This gap is roughly what American households are projected to spend on healthcare over the next 10 years under current law. Therefore, you could argue that Warren’s plan is about how to raise taxes to pay what households will no longer have to pay under her version of MFA.

New tax proposal

Here is how she proposes to close the final $11.7 trillion funding gap:

$3.8	Increased taxes on corporations, including raising the top rate back to 35%, changes in depreciation rates, capturing of more offshore income, adding a financial transactions tax, and a fee on large banks.
$1.0	New tax on billionaires. She previously proposed an annual wealth tax of 2% on fortunes above $50 billion. She now proposes increasing this tax on billionaires to 6%.
$2.0	New taxes on the wealthiest 1% of households. She proposes to tax unrealized capital gains each year at ordinary income tax rates. Specifically, each year investment portfolios would be marked to market and the gains would be taxed.
$.4	Through immigration reform, she believes that more immigrants will become taxpayers.
$2.3	Reduction in tax evasion and fraud. She believes by strengthening IRS enforcement on the wealthy she can reduce tax evasion and fraud by this amount.
$1.4	Additional taxes on increase in ordinary employee income. Employee premiums are currently excluded from taxable income. Since those premiums will no longer exist, employee taxable income will rise and be taxed at ordinary tax rates. She also expects to eliminate HSAs and the related tax deduction.
$.8	Reduction in Overseas Contingency Operations (Defense)
$11.7	Total Tax Increase

What can we observe?

Not surprisingly, much of the discussion regarding her proposals has focused on the tax component, which many have argued is unrealistic. As forecast above, however, for today we will stick to what we can learn by comparing three important elements of her plan to best practices of three other countries: France, Germany and Japan. Each of these countries provides universal healthcare, does so at close to half the cost of our system, and obtains better outcomes across the board than we do in America. How does Warren’s plan for paying for MFA compare?

The question of “free.”

If Warren’s plan prevails, ours will be the only system in the world in which the consumer does not share in the cost. As shown in the Kaiser analysis highlighted in a previous Commentary, in the three example countries, and in several others that are relevant, households contribute to healthcare based on their ability to do so. In fact, at a certain income level in Germany you can opt out of the public plan altogether. Even in the best of systems, therefore, healthcare is not entirely “free” to the consumer. Given how ambitious it is to make any move in the direction of universal healthcare in the US is, one might ask why not start with something more incremental? In other words, why not start by providing access to those who truly can’t afford it before making it free to everyone, rich and poor? Why shouldn’t those of us who can contribute something do so?

Cost savings

Secondly, while Warren addresses cost savings, her estimated $7 trillion in savings does not come close to reaching the levels of cost reduction obtained by the comparable countries. If we were able to achieve their spending levels per capita or as a percentage of GDP, the $7 trillion would nearly triple. Two specific observations here: First, her estimate of administrative cost savings resulting from the elimination of for-profit insurance is consistent with the results obtained by these countries as well as by Medicare itself (2.3% versus 8% of GDP). Her estimates for cost savings on pharmaceutical and healthcare providers, however, fall far short of what these countries have achieved. It is well understood how formidable the AMA and pharmaceutical lobbies are, but this goal is not by comparison particularly ambitious.

Employer Medicare Contribution

What Paul Krugman called “the cleverest item in the plan” is in fact quite typical in countries that provide universal healthcare and exists in varying forms in each of the countries compared. In Japan, for example, large companies are required to provide insurance at their own cost; small companies do so with subsidies; and the government also subsidizes the self-employed, unemployed, and elderly. In each of these cases, individuals pay a reasonable share of the total cost with certain maximums.