U.S. Democratic presidential aspirants Elizabeth Warren and Bernie Sanders have both proposed ambitious “Medicare for All” plans, where the government would provide free health care, eliminating most forms of private health insurance. Warren’s plan, which she detailed on November 1, is mostly about redistribution, taxing the rich and sparing the middle class, and savings in drug prices, health services and administrative costs. The Sanders plan, announced in April and detailed later, makes similar assumptions.

The big questions, of course, are around how realistic their assumptions are on new revenue sources and cost savings. Ezekiel (Zeke) Emanuel, Wharton professor of health care management and chair of the department of medical ethics and health policy at the University of Pennsylvania, weighed the assumptions made by Warren’s Medicare for All proposal in a recent interview on the Wharton Business Daily radio show on SiriusXM. Emanuel helped craft the Affordable Care Act when he was special advisor for health policy in the Obama administration (January 2009-January 2011).

Warren’s plan assumes both new revenue sources and cost reductions, as tabulated by a New York Times report. The new revenue sources, over a decade, include $8.8 trillion in fees from employers, which is almost the same as what they now spend on their employees’ health care; payments from state and local governments similar to what they now spend on Medicaid and government employee benefits ($6.1 trillion); higher corporate taxes ($2.9 trillion); new taxes on capital gains by individuals ($2 trillion); estimated higher income tax collections ($1.4 trillion); a higher wealth tax on billionaires ($1 trillion); a new tax on stock trades ($800 billion); and assortments such as assumed tax revenues from immigrants, a “risk fee” on banks and elimination of a Pentagon overseas fund ($1.3 trillion).

The cost reductions under the Warren plan would come from savings in payments for hospital stays and for doctors in hospital-owned practices; lower administration costs; aggressive drug discounts and lower prices for branded prescription drugs; lower payments for hospitals than what private health insurers now pay; and assumptions of slower growth in health spending over time.

The Big Ifs

There is some tailwind for the Warren plan. Examples abound of governments centralizing health care spending and distributing that to private entities, such as in the U.K., Canada, the Netherlands and Germany, said Emanuel. He also dismissed criticism that Warren’s plan is unaffordable, explaining that it will cost slightly less than the $52 trillion in projected health care spending in the U.S. over the next decade.

“The real issue is not ‘Can we pay for it?’” Emanuel said. “The question is: Who pays? How much of that comes from the private sector, employers/employees, and from the federal and state governments?” Currently, the private sector and governments share health care costs roughly equally, with the former paying slightly more, he noted.

However, it would be tough for the Warren plan to be passed, said Emanuel. He noted that even the Affordable Care Act “barely” made it through the House of Representatives in November 2009, when 39 of the 257 Democrats in the House voted against it. Also, the Warren plan would not secure the 60 Senate votes needed to pass legislation. “To pass something even bigger than the Affordable Care Act, and even more transformative, is going to be really hard,” he predicted.

But the challenge with Warren’s plan is that it leaves a $11 trillion funding gap over 10 years “because she doesn’t want middle-class people to pay premiums, deductibles or copays,” said Emanuel. “That’s a substantial amount of money – about $1 trillion a year. So, she has to fill it in.”

“To pass something even bigger than the Affordable Care Act, and even more transformative, is going to be really hard.” –Ezekiel (Zeke) Emanuel

Devil in the Details

The cost savings assumed by the Warren plan are overly ambitious, according to Emanuel.

“If you want to control costs, there are at least three main areas you have to look at: drug costs, hospital costs to the private sector, and administrative costs,” he said. “All of them are out of whack. All of them are ballooned.”

On drug costs, for example, it is not clear if that would be achieved through negotiations with drug companies or by the government setting a price ceiling, Emanuel said. He suggested a way out: “We should have negotiations informed by value-based pricing,” he said. “How much health benefit does the drug give? The more the health benefit, the higher the price of the drug. But we do need to have caps.”

Emanuel also faulted Warren’s idea to limit payments to hospitals at 110% of Medicare rates as unwise. He suggested 120% of Medicare rates, adding that it would “probably have no real pushback from most of the health policy people, especially if you do have a reduction in administrative costs and a reduction in drug costs.” he said.

Emanuel pointed to a recent Rand Corporation study which showed that on average, private health plans pay more than 240% of Medicare rates for hospital services. “That seems way out of whack,” he said. “There are a lot of hospital monopolies, and consolidation has led to price increases – not quality increases as claimed. We do have to rein in hospital prices.” The big question is how that could be achieved, which may include placing a cap on those prices, he added.

“We should have negotiations informed by value-based pricing. The more the health benefit, the higher the price of the drug.” –Ezekiel (Zeke) Emanuel

On reining in administrative costs, Emanuel saw hope. He noted that the private sector spends an average of 12% on administrative costs, and he blamed that on insurance companies and employers wanting to design their own employee health plans. He suggested a set of five or 10 standardized plans from which employers could choose, adding that common health plans work well in countries like the Netherlands, Germany and Switzerland. Japan has 1,600 insurance companies, but standardized health plans and a centralized clearinghouse helps keep administrative costs low, he added.

“Right now each [U.S.] insurance company and each plan has a different format for the claims, and [asks for] different [types] of information,” Emanuel said. “[The U.S.] would also need a clearinghouse, so all of the bills look the same, use the same forms, and we don’t have a lot of variation.” He expected insurance companies to support such standardization, adding that when it was tried a few years ago, it was employers who resisted it.