"Knowledge will forever govern ignorance"

--James Madison--

"The real division is not between conservatives and revolutionaries, but between authoritarians and libertarians"

--George Orwell--

Beyond The 50% Myth: Paying For Single Payer

First posted at The Smirking Chimp, July 31st, 2009.

In the first 2 installments, I examined tax burdens borne by both typical and upper income Americans, and compared increased taxes to existing health care costs. I then promised to look at how much taxes would need to be raised to pay for a single payer system.
I know this comes a bit later than promised. Real life sometimes gets in the way. Also, I had originally planned to do this based on some rough "back of the envelope" calculations. Turns out nobody makes an envelope that big.

"Medicare for all" is frequently touted, but what does that really mean? Medicare Part A is a hospitalization only plan that pays for up to 100 days of inpatient treatment. The patient is responsible for:
$1068 in costs for the first 60 days.
$267 per day for days 61-90.
$534 per day for days 91-150.
100% of costs past 150 days.
Medicare Part B is a more traditional health insurance plan that pays for doctor visits, outpatient procedures, etc (there are many, many details, and I'm only giving a rough view). To get Part B, you must generally pay a monthly premium, which is currently $96.40/month for most people.
Part B has a $135/year deductible, with 20% coinsurance (the beneficiary pays 20% of the cost of care). Obviously, this leaves "gaps" in coverage.
Which brings us to Medicare Part C. "Medigap" health insurance policies, sold by private insurers. The premiums are tax subsidized, and the government dictates the policy terms. There are different plans, labeled "a" through "j". "J" is the policy that pretty much brings you to full coverage. Most J plans cost about $150-250/month in premiums.
So, in order to get the benefits of a Canadian or French type system, everybody needs all of the benefits provided under parts A, B, and C (plan J). I won't even talk about prescription drugs here. Most single payer systems don't provide drug benefits, and the whole issue is plenty enough fodder for a future column.
So, how much does all of this cost?
Currently, the Medicare system has about 44 million beneficiaries. To cover everybody then, we are looking at about a sevenfold increase in beneficiaries. However, we are also diluting the risk pool. Those 44 million people are mostly elderly and/or poor and/or disabled, for the most part. Bringing in another 260 million or so mostly healthy people would bring per beneficiary costs down.
Based on my limited knowledge and understanding of actuarial tables, I'm going to make the conservative assumption that a 700% increase in beneficiaries is going to cost about 350% more than the current system.
Let's look at some numbers. Remember, I'm condensing to a few paragraphs subject matter that thousands of pages of books can't adequately cover.
Current costs for Medicare A and B are about $440 billion/yr. Part C plans pay out another $180 billion or so per year. Total Medicare benefit payments add up to about $620 billion all told.
$620 billion x 350% = $1.86 trillion/yr.
Let's just say that full coverage universal single payer for everyone would cost about $2 trillion/yr.
Before I go over current funding numbers for A, B, and C, remember that not everybody has B or C. I will make the rather liberal assumption, though, that closing the gap to cover everybody would be offset by reduced administrative costs. Probably not a realistic assumption, but it makes the numbers easier.
Current funding for A and B (from tax receipts and premiums) is about $460 billion/yr. Part C premiums bring in about another $39 billion/yr. The balance is funded through borrowing and general revenues.
So, our goal here is Medicare A, B, and C/plan J coverage for all, paid for entirely by tax rfeceipts, correct? For a long time, I thought that tripling the Medicare portion of the payroll tax to 8.7%, and applying it to investment and pension income ("unearned income" in tax parlance) as well ought to do the trick.
I was off a bit, I think.
In tax year 2006, Americans had $5.8 trillion of earned income, and $2.2 trillion of unearned income, for a total of $8 trillion. So, if we eliminated the Medicare portion of the payroll tax, and replaced it with a 25% surtax on all income, with no deductions, we'd be about there. That would be in addition to income tax and the Social Security portion of the payroll tax.
Obviously, to actually pay for such a plan, more is needed than just increased tax rates (although that has to be part of it). We also need:
Reduced health care costs in EVERY area of health care. Not just administration, but also physician and provider income, devices, supplies, etc.
Reduced government spending on EVERYTHING ELSE. But especially the military, which is always the proverbial elephant in the budget room.
At least some people will need to pay premiums, copays and coinsurance.
$1 trillion over 10 years is easy to fund. $2 trillion PER YEAR, every year, isn't.
I don't want to discourage anyone, and I still support a universal single payer plan. I just wanted to take a realistic look at it.
Want to wade through some of the same numbers that I have over the past few weeks? Maybe make some different assumptions and come to different conclusions? I encourage it. Here are some links:
IRS Tax Stats:
Budget of the US from the Government Printing Office:
US Census Bureau:
Social Security Online:
That's a start. I've also pored over insurance company sites, consumer services sites, Congressional sites, etc. I can't begin to tell you where all. But just keep in mind that Google is your friend here.
I also used rate quote software and actuarial tables that I use in my business. Sorry, but I can't share those.
I think that my next article will be about the prescription drug cost problem. Or maybe prison reform. Or maybe I'll just spend the rest of my life watching TV and not thinking too hard.