Earlier today, presidential candidate Sen. Elizabeth Warren released her proposal to ostensibly pay for the costs of Medicare for All (M4A) without raising taxes on the middle class. As published, the plan would not actually finance the costs of M4A. First, I will provide a top-line summary of the financing proposal. The remainder of this piece will provide additional details underlying the estimates.
To summarize, the Warren proposal understates M4A’s costs, as quantified by multiple credible studies, by about 34.2%. Another 11.2% of the cost would be met by cutting payments to health providers such as physicians and hospitals. Approximately 20% of the financing is sought by tapping sources that are unavailable for various reasons, for example because she has already committed that funding to other priorities, or because the savings from them was already assumed in the top-line cost estimate. The remaining 34.6% would be met by an array of new and previous tax proposals, most of it consisting of new taxes affecting everyone now carrying employer-provided health insurance, including the middle class.
Here’s how the numbers break down.
The Costs of Medicare for All from 2020-29. My 2018 paper estimated the costs of M4A at $32.6-$38.0 trillion over 2022-31, depending on how provider payment rates were set. For 2020-29, the years covered in the Warren proposal, this range translates to $29.2-$33.9 trillion. My study, however, was of an earlier bill that lacked a long-term care benefit, unlike Sen. Warren’s plan. Correcting for the inclusion of long-term care produces a range of $32.9-$37.6 trillion. For this piece’s comparison purposes, $37.6 trillion is the best starting place, because the Warren proposal envisions a different provider payment rate structure than the one I analyzed. Only if we use $37.6 trillion as the starting point, can we quantify the amount of savings Sen. Warren aims to generate from provider payment cuts.
Provider Payment Cuts: A memorandum supplied by the Warren campaign indicates that under her proposal, physicians would be paid at Medicare rates, while hospitals would be paid at 110% of Medicare rates. These equate to immediate payment rate cuts of about 35% for hospitals and more than 25% for physicians relative to current private insurance rates, with the cuts growing more severe over time. Most analysts regard such cuts as unrealistic. Historically, Congress has repeatedly balked at much smaller cuts, as did the state of Washington earlier this year. Regardless, the rate cuts proposed by Sen. Warren total about $4.2 trillion over 10 years, reducing the estimated cost of her M4A plan from $37.6 trillion to $33.4 trillion.
Assuming Costs Away: The Warren campaign memorandum provides a cost estimate of $20.5 trillion over ten years, much lower than the accepted analytical consensus which includes my estimate as well as others from the Urban Institute, the Center for Health and Economy, the Rand Corporation and Ken Thorpe. In short, the Warren proposal simply assumes away more than one-third of the cost of M4A.
Specifically, the Warren campaign lowers the cost estimates via the following techniques:
- Assuming that states and localities redirect $6.1 trillion in funding to the federal government. If the federal government enacts M4A, this would free state and local governments from much of what they now spend on health care. The Warren campaign assumes states will send all of this savings to Washington. The federal government cannot, however, compel this. This is why it was deemed unconstitutional for the Affordable Care Act (ACA) to require states to expand Medicaid. The fact that states would be relieved of much of their own health spending under M4A does not reduce the federal cost, let alone $6.1 trillion of it.
- Savings from “comprehensive payment reform.” The Warren plan also credits itself for an additional $2.9 trillion in savings from provider payment reforms relative to the Urban Institute estimate, which equates to about $2.7 trillion in savings relative to the baseline cost estimate I’m using in this piece. This Warren campaign is basically double-counting these savings. At best, these reforms might make some of her proposed provider payment cuts more tolerable, but the campaign has already taken credit for those cuts elsewhere. These savings can’t be counted again unless the campaign is actually proposing to reduce provider payments far below current-law Medicare rates.
- Additional unrealistic cost-lowering assumptions. The Warren campaign uses other assumptions to reduce its cost estimates by a further $4.6 trillion relative to the Urban Institute analysis, or about $4.1 trillion relative to my baseline. This is done by assuming that insurance administrative costs, drug prices and national health cost growth will all be substantially lower than under the analytical consensus. Senator Warren’s article declares an intent to attain these slower cost growth rates by using various enforcement mechanisms, but these are presented only as options in the supporting memorandum, and are premised on other plan features reducing costs much more than they realistically could. By relying on such exaggeratedly favorable assumptions, the campaign memorandum crosses a critical line between analysis and advocacy, much like a batter who calls his own balls and strikes to favor himself. While it would be wonderful if M4A lowered drug prices and health costs as much as its advocates desire, simply assuming this result does not constitute balanced analysis. The proposal would be more credible if it did not assume away so much of the costs experts generally agree would occur under M4A.
Tapping Unavailable Financing Sources: To finance its artificially lowered cost estimate of $20.5 trillion, the Warren proposal names a number of financing sources. For various reasons, several of these are unavailable to provide financing. These include:
- The Warren campaign memorandum asserts that $1.4 trillion in new taxes would be collected, because the elimination of employer-provided health insurance would increase worker take-home pay subject to taxation. This is true, but it is already accounted for in the top-line cost estimate. Were it not for this effect, the cost estimate would be even higher. It cannot be credited a second time.
- The memorandum asserts that taxes on the top 1% already proposed by Sen. Warren would provide another $3 trillion. But the Warren campaign has already proposed to use most of this to finance other programs. In addition, economists not affiliated with the Warren campaign generally agree that she has overstated the revenue gains.
- The campaign asserts that another $2.3 trillion can be collected from reducing the “tax gap” through more effective IRS enforcement. Congress has been trying to eliminate the “tax gap” for decades. If it were a mere matter of choosing to have better enforcement reduce the tax gap, it would have been done long ago.
- The campaign also asserts that another $800 billion will be generated by eliminating Overseas Contingency Operations military spending. This doesn’t really work because of the budgetary distinction between mandatory spending (such as Medicare for All) and appropriations spending (such as military spending). A program such as Medicare, or Medicare for All, is a mandatory spending program. This means that its spending continues automatically and can even increase each year, without additional legislation. Appropriations such as military spending, however, are only enacted one year at a time. Although current congressional practice certainly permits this type of budget maneuver, it’s not really possible to commit to appropriations cuts lasting ten years and beyond, in order to finance a mandatory spending program.
New Taxes, Including Middle Class Taxes: The Warren financing framework includes several taxes she has previously proposed, as well as other new taxes that would be felt by everyone (including those in the middle class) now carrying employer-provided health insurance. These include:
- $8.8 trillion from a new “Employer Medicare Contribution.” Under M4A, employers would no longer provide health benefits to their employees. The Warren proposal would have employers, instead of paying private health insurance premiums, make tax payments directly to the federal government. But regardless of whether such payments go to private health insurance or as federal taxes, they still come directly from worker compensation. For the same reason that economists generally agree that workers pay both the employee and the employer shares of current Social Security and Medicare payroll taxes, this new tax -- despite being called an “Employer Medicare Contribution” -- would be paid directly from the earnings of any workers now carrying employer-provided insurance. Labeling it an “employer contribution” does not change the consensus among economists that such taxes are borne by workers. Sen. Warren would certainly be justified in arguing that this new tax would be balanced by these workers being relieved of the burden of employer-sponsored insurance premium costs. However, she cannot claim that such relief benefits middle class workers, without also recognizing that these same middle-class workers will shoulder the burden of her proposed new tax.
- Other taxes. Sen. Warren has proposed new taxes ($2.9 trillion) on large corporations and on financial transactions ($0.9 trillion), as well as immigration reform (which her campaign projects will raise $0.4 trillion). Taken together, the campaign projects these taxes will net $4.2 trillion over ten years. I have not independently verified these estimates.
In sum, the Warren framework cannot fully finance Medicare for All because it does not acknowledge most of its costs. Over half of the purported financing is a mirage, consisting of either assuming away the costs (34.2%) or tapping financing sources that are unavailable (20.0%). This leaves less than half of the costs to receive realistic financing. Of the lesser portion of M4A that would be realistically financed, the predominant shares would come from taxes shouldered by middle-class workers who currently carry employer-sponsored health insurance, and from steep payment cuts affecting physicians and hospitals.
Charles Blahous is the J. Fish and Lillian F. Smith Chair and Senior Research Strategist at the Mercatus Center, a visiting fellow with the Hoover Institution, and a contributor to E21. He recently served as a public trustee for Social Security and Medicare.
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