Very few issues driving political discourse in the U.S. are more divisive than the debate surrounding the proper structure of healthcare. One of the main features characterizing divisive political topics is the tendency of different people from different ideological camps to reach radically different conclusions after reading the same scientific literature. A good example of this phenomenon can be observed when reading the Jacobin’s interpretation of a cost-analysis of Bernie Sanders’ proposed Medicare for All (henceforth referred to as M4A) policy proposal.

Matt Bruenig, writing for the Socialist magazine, titles his blog post “Even Libertarians Admit Medicare for All Would Save Trillions”, arguing that even a working paper produced by the Koch-funded Mercatus Center reaches a conclusion consistent with Mr. Bruenig’s title. Mr. Bruenig claims that the paper finds that any new costs generated by Bernie Sanders’ Medicare for All policy would be more than offset by cost-savings generated by administrative efficiencies and reductions in unit prices. He writes:

“The report’s methods are pretty straightforward. Blahous starts with current projections about how much the country will spend on health care between 2022 and 2031. From there, he adds the costs associated with higher utilization of medical services and then subtracts the savings from lower administrative costs, lower reimbursements for medical services, and lower drug prices. After this bit of arithmetic, Blahous finds that health expenditures would be lower for every year during the first decade of implementation. The net change across the whole ten-year period is a savings of $2.054 trillion. When talking about Medicare for All, it is important to distinguish between two concepts: national health expenditures and federal health expenditures. National health expenditures refer to all health spending from any source whether made by private employers, state Medicaid programs, or the federal government. It is national health expenditures that, according to the report, will decline by $2.054 trillion.”

Mr. Bruenig subsequently explains that the taxes needed to fund the estimated $32.6 trillion increase in federal health expenditures will be more than counteracted by a larger decrease in private healthcare expenditures. Mr. Bruenig continues by casting suspicion on any libertarian think-thank agreeing with his conclusion. He follows up by claiming that the actual motive of the Mercatus Center is actually to trick “dim reporters” into reporting that Sanders’ Medicare for All proposal will cost the Federal government $32.6 trillion while misleadingly downplaying that health expenditures from any source are estimated to decline by $2.054 trillion. The problem with Mr. Bruenig’s assessment—ignoring the unfalsifiable claims made about the source’s intentions—is that he largely ignores the main theme of the paper written by Blahous (2018).

In the very first page of the paper, Blahous (2018) explains that the above estimate offered above is more correctly interpreted as representing a lower-bound estimate of M4A’s expected costs. As the author quickly explains, the high level of estimated cost-savings is primarily based on a multitude of aggressive assumptions which are unlikely to be realistic. As a result, Blahous (2018) claims that the real cost of implementing M4A will likely be substantially greater than the lower-bound estimate initially proposed. While Mr. Bruenig does not appear to mention this in his article, Blahous (2018) devotes almost the entirety of the paper to criticizing the “aggressive assumptions” underlying the following three sources of cost-savings under M4A:

Lower Provider Payments Lower Drug Costs Administrative Cost-Savings

Lower Provider Payments

Blahous (2018) estimates that the major factor increasing M4A’s expected costs will be caused by induced demand created by the expansion of coverage to the uninsured; elimination of cost-sharing, and the universal inclusion of dental, vision, and hearing care for all participants. He subsequently explains that significant reductions in provider payments under M4A are intended to offset this increased cost. Medicare’s rate of physician payment is expected to equal less than 60% of the insurance physician payment rate at the proposed date of M4A’s implementation.

While universal coverage with Medicare payment rates does appear to be a significant source of cost-savings under M4A, Blahous (2018) argues that this is a very aggressive assumption, representing little more than the lower-bound of the cost estimates. He explains that even without M4A’s implementation, there is much uncertainty about whether current levels of Medicare physician payment will be maintained in the following years. This would depend on the ability of the Affordable Care Act to successfully constrain physician payment rates where previous legislation under the SGR-formula could not. Another significant layer of uncertainty would be added if M4A is passed. Blahous (2018) writes:

“It is not precisely predictable how hospitals, physicians, and other healthcare providers would respond to a dramatic reduction in their reimbursements under M4A, well below their costs of care for all categories of patients combined. The Centers for Medicare and Medicaid Services (CMS) Office of the Actuary has projected that even upholding current-law reimbursement rates for treating Medicare beneficiaries alone would cause nearly half of all hospitals to have negative total facility margins by 2040. The same study found that by 2019, over 80 percent of hospitals will lose money treating Medicare patients—a situation M4A would extend, to a first approximation, to all US patients. Perhaps some facilities and physicians would be able to generate heretofore unachieved cost savings that would enable their continued functioning without significant disruptions. However, at least some undoubtedly would not, thereby reducing the supply of healthcare services at the same time M4A sharply increases healthcare demand. It is impossible to say precisely how much the confluence of these factors would reduce individuals’ timely access to healthcare services, but some such access problems almost certainly must arise.”

Due to the expected negative effect on the timing- and quality of healthcare, Blahous (2018) cites a couple of studies assuming that physician payment rates must increase in the future to avoid unacceptable declines in these aforementioned aspects. The author explains that any expected increase in future physician payment rates exerts great influence on the final cost-estimates of M4A. For instance, if the universal payment rate under M4A is instead assumed to equal the current national reimbursement rate—the average rate paid from any source—then the expected federal deficit is estimated to increase by $38 trillion during the 2022-2031 period; a significant uptick from the lower bound of $32.6 trillion.

This federal cost increase would represent almost 15% of the U.S. estimated GDP in 2031 and is only expected to increase afterward. Similarly, the national health expenditures are estimated to increase by $3.25 trillion under this assumption. This is also a significantly higher estimate than the lower-bound $2.054 trillion decreases under aggressive assumptions. Finally, Blahous (2018) clarifies that the alternative assumption leads to a cost-estimate in range between the estimates offered by the other papers writing about Bernie Sanders’ M4A plan.

Lower Drug Costs

Another expected source of cost-savings under M4A results from the intent of the bill to empower the secretary of Health and Human Services to negotiate lower drug prices, in addition to the promotion of low-priced generic medicine rather than highly-priced brand-name drugs. Blahous (2018) estimates a total of $846 billion in reduced costs over the 2022-2031 period under M4A. However, this is again estimated under the aggressive assumption that the M4A bill will perfectly replace the use of brand-name drugs with generic medicine for 100% of the population.

The $846 billion estimate is therefore likely an overestimation of actual cost-savings. Blahous (2018) further recognizes both the possibility that some reduction in costs is possible because of the negotiating-power granted to the HHS secretary. Nevertheless, he acknowledges that this is currently a matter of wild speculation in academic literature. Finally, he is explicit that his cost-estimates leave out other possible side-effects of the M4A policy, such as reduced pharmaceutical innovation.

Administrative Cost-Savings

Lower cost of administration under Medicare is cited as the final reason why Sanders’ M4A proposal would reduce medical costs. Blahous (2018) assumes a reduction of administrative costs for insured Americans from 13 to 6 percent under the M4A bill. This is based on a number of academic analyses based on Medicare’s administrative costs, ranging from 4% to 6%, with Holahan et al. (2016) arguing that 6 percent is “the appropriate figure for estimating proposals that build upon the entire Medicare program”.

Mr. Bruenig retorts by citing a Kaiser Family Foundation report that consistently finds Medicare’s administrative costs to be 2%. However, he neglects to address Blahous’ (2018) main argument of this chapter, namely that Medicare’s administrative costs appear so low compared to insurance agencies simply because they are expressed as a percentage of overall per capita costs. Mainly due to the old age of average Medicare patients, their overall per capita cost is more than double the cost of the average patient under private insurance. Under the assumption that Medicare and private insurance agencies have similar administrative costs per patient, this would nonetheless lead to much lower administrative cost rates for Medicare, simply due to the costly nature of Medicare patients.

Therefore, extending Medicare to the entire population would by nature increase administrative cost rates only because the average per capita cost per Medicare patient would drastically decrease. Blahous (2018) reinforces his critique of the aggressive assumption by noting that another reason for relatively high private insurance administrative costs is the fact that insurance agencies are necessitated by solvency concerns and competition to police fraudulent and improper behavior. He argues that government-provided insurance is generally exempt from the aforementioned concerns and their subsequent relative lack of investment in fraud-policing leads to relatively high numbers of improper payments; totaling more than twice the administrative costs for Medicare in 2016.

Costs for improper payments under the M4A program with low investment in administration are expected to be significant. Blahous (2018) cites an HHS study finding that more than 25% of a random sample of Medicare payments were made to ineligible or potentially ineligible individuals. He argues that his estimate leaves all aforementioned factors out of consideration, making it therefore unlikely that the assumption of a 7 percentage-point reduction in administrative costs will be achieved. Yet he continues with another argument:

“Beyond this, other policy and political dynamics of federally administered insurance should tend to increase total costs. This is evident in the text of the M4A bill, which, among its other provisions, includes a line item authorizing expenditures of up to 1 percent of the total national health budget during its first five years for “programs providing assistance to workers who perform functions in the administration of the health insurance system and who may experience economic dislocation as a result of the implementation of this Act.” The policy and political dynamics that gave rise to this proposed spending program would likely give rise to others in the course of enacting and implementing M4A, reducing net savings from lowered administrative costs.”

Besides the nature of political rent-seeking potentially leading to similar assistance programs for administration workers, Blahous (2018) attempts to undermine the aggressive assumption by noting that the M4A bill includes direct additional federal financing to multiple health-related areas including innovation and capital expenditures. Neither this factor nor any expected costs due to the aforementioned assistance programs are incorporated in the author’s cost-estimate of M4A, likely leading to overestimations of cost-savings.

Additional LTSS Costs

Blahous (2018) devotes a short section of his paper to the expected increase in Long-Term Services and Support (LTSS) costs, referring to costs associated with long-term services and daily assistance used by individuals with chronic illnesses or functional limitations. The M4A policy plan incorporates a “maintenance of effort” provision, obliging states to continue current-law levels of LTSS Medicare spending in order to avoid crowding-out effects due to universal coverage. Blahous’ (2018) study conservatively assumes that this provision will be successfully implemented, leading to a lower cost-estimate.

Similarly, the estimate relies on the assumption that no increase in LTSS utilization will occur as a result of Sanders’ M4A plan. An assumption, notes Blahous (2018) is very unlikely once healthcare coverage is expanded to the entire population. Once again, these conservative assumptions contribute to the possibility that the projection offered in the paper underestimates the actual costs associated with the M4A program.

Conclusion and Implications

Even under the most favorable assumptions to the M4A program, the act of doubling tax-revenue associated with personal and corporate income taxes would be insufficient to successfully finance the program without having to rely on significant deficit spending. However, even the assertion by Mr. Bruenig that private spending on premiums, deductibles and co-pays will be fully replaced by a tax is challenged in the very paper he cites to support this conclusion. Blahous (2018) notes that his paper’s assumption of replacing private financing by public financing is again an aggressive one, with international experience suggesting that private financing still retains a substantial role under universal coverage. Even nationally under the current Medicare program, supplemental or separate insurance is often used by people enrolled in the program.

Next, Mr. Bruenig’s most substantive criticism of Blahous (2018) concerns the amount of induced demand caused by the M4A program. He argues that aggregate health service utilization is dependent on the capacity to provide these services. Thus, he argues, that healthcare utilization could hit a hard limit below the level projected by Blahous (2018). However, Blahous (2018) explicitly bases his estimate of additional induced demand on a very large series of previous literature on the nature of actually increased healthcare usage due to increases in coverage.

While this makes it unlikely that supply-side limitations to utilization have not been taken into account, Blahous (2018) explicitly mentions his cost-estimate under slightly less aggressive assumptions to be consistent with other studies that explicitly take provider capacity into account: “Even with a higher payment rate assumption, the UI team determined that not all increased demand could be met because provider capacity would be insufficient. This constraint is reflected in their final cost estimates.”

Additionally, it is important to note that even if in the unlikely scenario that Blahous (2018) has refused to take provider capacity into account, hitting a “hard limit” means that healthcare demand will far exceed supply once M4A is implemented. This has the implication that both the timely access to healthcare, as well as the quality could suffer significantly due to facility over-utilization. As explained previously by Blahous (2018), negative pressure upon supply coupled with sharp increases in demand almost certainly gives rise to healthcare access problems. While Mr. Bruenig offers his final conclusion on the paper, therefore:

“But even if you take the report’s headline figures at face value, the picture it paints is that of an enormous bargain. We get to insure every single person in the country, virtually eliminate cost-sharing, and save everyone from the hell of constantly changing health insurance all while saving money. You would have to be a fool to pass that offer up.”

He omits the paper’s nature and implications to his audience in two important ways. First, to take a paper that very critically offers a lower-bound cost-estimate, only to take this lower-bound at face-value undermines the entire purpose of the paper itself. He even goes so far as to call this misrepresentation a “useful bit of rhetoric“. This is especially worrisome because Mr. Bruenig accuses the source of both disingenuously presenting its own research, and of being surprised by the low cost-estimate. Secondly, Mr. Bruenig presents to his audience three advantages supposedly making it worth it to adopt Sanders’ Medicare for All proposal. However, no cost-benefit analysis should only look at the benefits while ignoring potential drawbacks.

Potential drawbacks include—but are not limited to—increased waiting times and quality-reductions due to higher utilization; reduced hospital facility margins leading to solvency problems; reduced physician compensation in conjunction with increased work-pressure, and possibly reduced pharmaceutical innovation. On the whole, if Socialist magazines such as Jacobin desire to make a convincing case for Medicare extensions, they need to give honest and fair reviews to both the papers concerning this topic, as well as the intentions of their authors. Yes, this extends to papers and authors from different ideological camps too, including libertarians.

References:

Blahous, C. (2018). The Costs of a National Single-Payer Healthcare System (Mercatus Center Working Paper)

Holahan, J. et al., (2016). The Sanders Single-Payer Healthcare Plan: The Effect on National Health Expenditures and Federal and Private Spending (Washington, DC: Urban Institute)