The Fiscal Consequences of Medicare for All

Proposals abound to increase the government’s role in health care, and few ideas receive as much attention as “Medicare for All.” Despite its name, “Medicare for All” wouldn’t actually be an expansion of current Medicare.  It’s just a catch-all phrase used to describe proposals to replace our current blend of private and public health insurance with a single-payer system run by the federal government.

Different versions of this idea have been introduced by several members of Congress.  These plans would replace Americans’ existing healthcare arrangements with a federal program that provides medical care. Patients would face minimal cost sharing, meaning you generally wouldn’t pay for your health care with copays, deductibles, or other out-of-pocket payments. Of course, health care would still cost a lot of money, but we’d pay for it with new and higher taxes rather than the ways we do now.

Unsurprisingly, the effects of Medicare for All on our economic lives would be huge.

In 2018, I estimated that one plan introduced by Senator Bernie Sanders would raise federal spending by between $32.6 and $38.8 trillion over its first 10-years, depending on assumptions about health provider payment rates, drug prices and administrative costs. Mind you, these federal costs would all be above and beyond current federal spending. And they don’t include long-term care benefits, a feature of more recent proposals that would add trillions to the cost.

For perspective on these numbers, consider that just to finance the lower-bound estimate of $32.6 trillion, all federal income taxes we currently pay as individuals, and all income taxes corporations pay, would have to more than double. Yet even this plan implausibly assumes that Medicare for All would immediately cut payments for hospital and other health services by about 40 percent relative to what private insurance currently pays.  State, federal and international experience all teach us that governments don’t cut health provider payments so dramatically and suddenly, so Medicare for All’s actual costs would likely be much higher.

At the same time, Medicare for All would induce Americans to seek more care. There is an ample economics literature demonstrating that the more of our care is financed by insurance, the more we tend to consume – irrespective of quality, effectiveness, or even necessity.  The Congressional Budget Office, or CBO, recently found that stimulating this additional demand for services while simultaneously cutting provider payments could produce “a shortage of providers” and “longer wait times” for care.

I was unable to calculate how much of Americans’ increased demand for care under Medicare for All could actually be met.  But a more recent study by CBO included such an analysis.  CBO’s federal cost estimate was considerably lower than mine for a number of reasons, including their finding that a significant amount of health care would continue to be financed by states, localities, private organizations and individuals.  But another important factor was care that would simply be denied under Medicare for All.

CBO is more optimistic than I am about the potential for Medicare for All to reduce health providers’ administrative costs.  They projected the time nurses spend on administrative duties to fall by 80 percent. But if nurses’ administrative tasks only fall by half as much, that is by 40%, then if Medicare for All paid providers at Medicare payment rates, 86% of all the new care Americans seek under Medicare for All simply couldn’t be met.  Even more startlingly, 97% of the new demand for hospital and physician services couldn’t be met.  This is largely because the cuts in provider payments would reduce the supply of health services more than any administrative time saved could add to the supply of health services. So in this scenario, Medicare for All would increase Americans’ eligibility for health care, without actually delivering it.

Like every government policy, Medicare for All would have winners and losers. The winners would include state governments as well as those who currently pay for routine health expenses out of pocket. The biggest losers under Medicare for All would be federal taxpayers, hospitals, doctors and nurses, and any patients urgently needing swift access to care.