The Affordable Care Act (ACA) has been invalidated by a federal district court in Texas. The ruling will certainly be appealed and won’t take effect immediately. Even so, it may lead Congress to consider a bipartisan replacement. That will not be easy.
Some have already called for an even more expansive approach than the ACA — a mandatory, single-payer, government-run health insurance program for all Americans, often referred to as “Medicare for All.” Others will advocate a much smaller bill that bans insurance companies from discriminating against individuals with pre-existing conditions, but only if they maintain more-or-less continuous private health insurance coverage, largely at their own expense. The difficult part there is having a credible enforcement mechanism for the continuous coverage requirement. Even if someone willfully plays the “insurance lottery” and goes without insurance until they need it, most politicians and hospital administrators would have difficulty denying them needed medical care. That is the heart of our healthcare problem. No one wants to play the “bad cop” when healthcare is involved. That was the problem with the individual mandate.
Unfortunately, the same problem exists — to an even greater degree — with Medicare for All. We know that from over 50 years of experience with our current Medicare program for the elderly and studies conducted by liberal-leaning research institutes that would seem to be quite favorably inclined towards the program. The problem is not that government is too tough — imposing excessive taxes and fees or denying benefits with “death panels.” The problem is that Congress is unable to say “no” to a large and vocal portion of the population, and is also unable to impose the annual taxes or fees necessary to pay for its generosity.
If Medicare covered everyone in the society — not just the elderly — the problem of not having the political will to impose adequate taxes or fees could be much worse.
This has been illustrated with painful clarity by a highly respected liberal-leaning research institution. Scholars at the Urban Institute recently updated a study that shows just how much of a typical retiree’s Medicare benefits are actually “paid for” in payroll taxes and premiums. The results are startling, to say the least. For a very large percentage of the population, less than half of the programs costs — closer to 33% in the case of a typical worker — are actually covered by the taxes paid over a working lifetime by the worker and his or her employers.
For example, in the case of a single woman with a lifetime average income of around $51,300 in today’s dollars who retires in 2020, the total costs of her Medicare benefits are $262,000. That is what a lump-sum insurance premium would cost in 2020 to obtain Medicare benefits for the rest of her life, according to the scholars at the Urban Institute. In contrast, the Medicare taxes paid into the system on her behalf would only be worth $79,000 at that time. That includes the taxes paid by her employer and interest computed as if the taxes had been put into a tax-free “lock box” until she reached age 65. The shortfall is $183,000. Expressed differently, only 30% of her Medicare benefits were “paid for” by the taxes paid into the system during her working life, including the taxes paid by her employers and a reasonable return on the funds invested until they were needed.
The shortfall is far worse with a married couple where the single earner made an average lifetime income of $51,300 but benefits are provided for both spouses. There, the value of the taxes paid would grow to the same $79,000 at retirement, but the total cost of the couple’s lifetime Medicare benefits at that time would be a lump sum payment of $486,000. That is a shortfall of $407,000. Less than 17% of that couple’s Medicare benefits were “paid for” by their taxes — according to the Urban Institute methodology.
As income rises the situation gets better, since Medicare taxes are levied at a rate of approximately 2.9% on all wages or self-employment income. Consider a woman making the equivalent of $127,000 per year in today’s dollars before retiring in 2020. Her benefits would cost $262,000 but the value of her lifetime taxes would have grown to $188,000. The shortfall is still there, but it is only $74,000. Her taxes, including those of her employer, would have “paid for” 72% of her benefits.
Although the study does not do the math, it appears that a single man or woman making an annual wage (or self-employment income) of around $175,000 in today’s dollars would be close to breaking even – perhaps paying a little more in taxes than his or her benefits were worth. For a married couple enjoying benefits for two spouses, the earners apparently would need to be making close to $350,000 in today’s dollars to fully “pay for” their benefits through payroll taxes, including those paid by their employers and a reasonable return on the funds until they reached retirement age. Of course, those amounts are far above the average American income.
Skeptics may question the study’s methodology, but it seems quite sound. The Urban Institute scholars computed the total amount of Medicare taxes payable, both by employers and employees, for individuals at different income levels from the beginning of the program in the 1960s. They computed the “future value” of those amounts when the worker reached retirement age by assuming that the taxes were deposited by the employer and employee into a tax-free account earning a “real” return of 2% (i.e., after inflation). They then compared those accumulated amounts at age 65 — which differed depending on income levels and marital status — with an estimate of the cost of a single-premium health insurance policy providing Medicare-like benefits. As indicated, in some cases that would include spousal benefits for a non-working or lower-earning spouse.
There may well be good arguments, both moral and political, for providing what might otherwise be considered a subsidy — or a form of “income redistribution” — to these hard-working Americans when they retire after a lifetime of work. That is not the point. The point is that no one actually took a vote to decide to provide these subsidies, and the beneficiaries themselves were told, or tacitly allowed to assume, that they had “paid for” their benefits. The same, or worse, is likely to occur with Medicare for All. That is, the immediate effects of such a program may not be punitive taxes that punish the economy, or “death panels” to ration healthcare as some have warned. The effects may be a fiscal disaster when we run out of money on an even larger scale than is occurring with traditional Medicare.
In traditional Medicare, at least, there is the “fiction” that one generation is paying for another. That may have been true when Social Security or Medicare were first enacted, and one had to advance the funds, on a one-time basis, to pay for a generation that had never contributed but was being provided with benefits nonetheless. Now that we are talking about people who have been in the program their entire working lives, passing the costs to the next generation is not a solution to the ongoing and permanent failure to collect in payroll taxes — on an individual by individual basis — the present value of what is being paid out in benefits to those individuals. That is, it is not a funding or financing problem of coming up with the cash — the program is designed to be permanently insolvent — unless somehow future generations are much larger or healthier.
In contrast, by leaving most medical insurance for the non-elderly in private hands — albeit with some regulation at the edges — the Congress does not have to play the “bad cop” in setting insurance rates or deciding what procedures and drugs to cover, or not. With Medicare for All, Congress would have to make all of those hard decisions, facing the wrath of 100% of the voters, not only the elderly, if they were too restrictive. History has shown that Congress just cannot handle that kind of fiscal responsibility — particularly when healthcare expenditures are involved. While some argue that a single-payer program like Medicare is more efficient because it uses only a single bureaucracy — even if that was true — and we were saving, say, 10% of the costs by simplifying the bureaucracy — any cost savings would be beside the point if Congress ultimately lacks the political will to charge an average beneficiary more than 33% of the actual costs. If you save a little on administrative costs, but are running a shortfall of 67% for an average worker, you can’t make that up in volume.
Ramin Oskoui, MD, FACP, FACC, is a cardiologist affiliated with Sibley Memorial Hospital, Suburban Hospital, and Washington Hospital Center in Washington, D.C. He advised then-candidate Donald Trump on healthcare policy during the 2016 presidential campaign.