What if Ocasio-Cortez is right about how to pay for Medicare-4-All?
By Kent R. Kroeger (January 24, 2019)
When asked by journalist Jorge Ramos about how the U.S. will pay for a Medicare-4-All (M4A) health care system, New York Rep. Alexandria Ocasio-Cortez responded plainly: “ You just pay for it.”
The Fox News-led mockingbirds came out in full force.
Ocasio-Cortez has called for “printing money to pay for her socialist reforms,” said Justin Haskins, the executive editor and research fellow at The Heartland Institute, a pro-free enterprise think tank. “Ocasio-Cortez has suggested the United States create a system of new publicly-owned banks that the government could use to run up the national debt.”
Wait one second. Isn’t running up the national debt how we pay for everything in the first place?
It seems dishonest to suggest the U.S. can’t pay for new social programs on the grounds it will run up the national debt. We are already living in Debtville, USA with our big, shiny bells on.
The national debt is over $21 trillion dollars. The FY2018 budget deficit was $779 billion.
Isn’t it funny how we always have money to bailout banks, offer generous tax cuts to the Top 1%, and fund trillion dollar military adventures in the Middle East (that never end and are never held accountable by clear performance metrics through which taxpayers can judge their cost effectiveness). The national debt is never a problem then.
If I didn’t know better, I’d think the political establishment only brings out the national debt fear-mongering when someone wants to fund a program that actually helps the majority of people. Something like M4A maybe?
But I don’t want to be too cynical. It is possible our chickens will come home to roost and, if we add substantially more debt to our existing pile, we might experience that economic Armageddon Ross Perot once warned us about.
Maybe the U.S. debt is like that very large man from Monty Python’s Meaning of Life. Perhaps that next dollar of debt will be the last our economy can withstand. Oh sir, its only wafer thin. Just…just one? Alright.
It is possible the debt really matters?
In the near-term, however, the U.S. government is not on the brink of default our economy is still strong, and we are the safest investment bet in the world.
But, do we fully understand what our national debt and annual budget deficits do to our long-term economic prospects?
So far, the budget hawks’ admonishments on these debts have been proven wrong.
Is it possible the national debt and deficit spending don’t really matter? Not a new thought at all. But isn’t now the time to settle the question? If the climate change is the existential crisis many believe it to be, we must understand the impact of additional debt on the U.S. economy, if there is any.
As the cornerstone of the progressive movement’s political agenda, M4A is a nice jumping off point (…a bad choice of words…) for such a discussion
What will M4A cost?
According to one study produced by a university-based libertarian policy center, M4A, the centerpiece of Senator Bernie Sanders’ 2016 presidential campaign, would cost $32.6 trillion over the first 10 years of implementation.
In explaining the “unprecedented strain” M4A would place on the federal budget, the study’s author, Charles Blahous, aptly noted that the “federal government would become responsible for financing nearly all current national health care spending, including individual private insurance and state spending.”
Stop right there. Framing is everything when discussing the U.S. health care system, so let us give the $32.6 trillion estimate some context.
The U.S. spent $3.5 trillion on health care in 2017, or 17.9 percent of the country’s total GDP, according to the Centers for Medicare and Medicaid Services (CMS). Health care spending growth is expected to slow in the next decade, according the CMS, and remain around 17.9 percent of GDP.
In 2016, there were about 27.3 million people without health insurance coverage, according to the U.S. Census American Community Survey. This doesn’t include the number of underinsured Americans.
Using the most optimistic health cost inflation assumptions, under our current health care system we will spend $37.5 trillion on health care over the next 10 years. Under the health care status quo, that is what the U.S. will spend for a system that leaves almost 9 percent of the population uninsured.
In contrast, using cost estimates from M4A critics, the U.S. would spend only $32.6 trillion over those 10 years, on a system that would cover all Americans. Their numbers, not mine.
Wait a second. Can that be right? A potential $5 trillion savings if we move to a M4A system? A lot of assumptions would need to be realized, but generally, M4A could save this country trillions of dollars over 10 years.
But the bigger and more defensible point is that M4A will not be anymore expensive than the incoherent, clunky health care system we have now.
It’s the dirty little secret that even the most Democrat-leaning news organizations quickly gloss right over when covering the debate over M4A.
“There are a lot of ways to think about $32 trillion — and one might be that it’s actually kind of a bargain,” wrote Vox’ Dylan Scott soon after the release of the Blahous study.
It is hard to get excited about something that is “kind of a bargain.”
Our current health care system is broken
Few economic sectors have such a clean metric upon which to assess outcome success as does the health care industry. How long do people in your country live? The U.S. does not do well on this measure.
Chileans live longer, on average, than Americans (79.9 years vs. 78.6 years).
The only conclusion one can draw from the cross-national data is that American doctors are over-paid given their level of service delivery.
Among the world’s 44 most advanced economies, the U.S. ranks 29th in life expectancy, according to the Organisation for Economic Co-operation and Development. This comparison is not data-massaging. It’s a cold, hard fact that the U.S., even with the passage of Obamacare, has failed to comprehensively address.
Well, maybe Americans don’t live as long, but perhaps Americans don’t spend as much on health care as those socialist welfare states in Europe? Of course, we know that is not true. The U.S. spends nearly twice as much on health care (as a percent of the total economy) as other advanced economies, according to Kaiser Foundation researchers Bradley Sawyer and Cynthia Cox.
Figure 1: Health consumption expenditures as percent of GDP (1970–2017)
Another canard also pushed out regarding M4A by the national media, both left and right, is this one:
“(M4A) is a complete Washington takeover of America’s health care system,” claims Wyoming Senator John Barrasso, M.D.
In truth, M4A is the government takeover of the private insurance industry. Doctors, hospitals, drug companies and medical equipment manufacturers would remain very much in the private sector, the veteran health care system not withstanding. Under M4A, the government pays health care providers for services rendered, just as the national and state governments already do under Medicare and Medicaid.
But there are many questions and assumptions still unanswered by M4A advocates…
Is M4A a unicorn riding on a pixie dust rainbow?
The potential cost savings from M4A depend on three critical factors: (1) Reduced reimbursement rates to health care providers, (2) Reduced administrative costs, and (3) Lower drug costs.
M4A critics contend these assumptions are untenable. For the sake of brevity, let us just address the first factor, as it is probably the most difficult challenge.
In Sanders’ version of M4A, the biggest assumption concerns reimbursement rates. In his plan, M4A payment rates are assumed to be roughly 40 percent lower than those paid by private insurers. That is, in effect, a revenue and pay cut for every hospital, doctor, nurse, and nurse’a aide in the country.
In our current hybrid health care system, both private and public, when a doctor treats a Medicare patient or an uninsured individual uses an emergency room, those reduced reimbursements are shifted to private, insured patients. Though there are various versions of M4A, the ability of physicians and hospitals to use cost-shifting to lift their incomes would be limited under these reforms.
It is hard to imagine how the physician community would react to any version of M4A. By temperament and training, most physicians might continue to provide care health care to those that need it, even with a significant pay cut. And there will be tough questions about how medical specialties, such as cardiac surgeons, would need differential treatment under M4A? Any government attempt to alter compensation differentials in the medical profession could have a significant impact on whether medical students choose general practice instead of higher-paying specialties.
If hospitals close due to M4A, will these hospitals be replaced by new ones with different cost structures that are financially sustainable?
With potentially lower reimbursement rates, some doctors will quit and some hospitals will close. And though some of those doctors will be replaced by doctors willing to work at lower rates and new hospitals will open with business models that better contain costs, these questions will still need answers before M4A becomes reality.
M4A critics ask tough questions about what will happen under M4A. Yet, these same critics discount the power of the American free enterprise system to address the inevitable gaps, flaws and inequities that will arise when M4A is implemented. If capitalism does one thing well, it identifies unmet demand and exploits it for private gain. Why wouldn’t that happen under an M4A system?
Still, some fear any diminution of the medical profession under M4A will create a higher propensity for lower-quality doctors to emerge. But do we know that will happen? Even with a 40 percent pay cut, doctors will still be making elite incomes.
What evidence suggests the marginal decrease in physician incomes will lower the quality of the physician pool under M4A?
No such evidence exists.
Still, M4A critics will offer up other doomsday predictions, such as:
Longer wait times!
Unfortunately, we already have that.
Health care rationing!
We already have that too.
The arrows slung at M4A could just as easily be directed at the current U.S. health care system — a private playground that protects the profit margins for special interests such as pharmaceutical companies, hospitals, medical equipment companies, and physician lobbyists. Democrats and Republicans, alike, gladly take campaign donations from special interests with the explicit expectation that they will not let Congress undermine the current health care business models.
That is how the system works, for better or worse.
M4A advocates have not answered the big questions
The most recent public opinion poll on M4A sponsored by the nonpartisan Kaiser Family Foundation shows a majority of Americans (56%) support M4A, at least in principle.
But as someone that has worked with public opinion data his entire career, those numbers are more reflections of recent media dialogues on the subject than predictors of future support. Until a real plan is elucidated and put before the American people, favorable public opinion is a thin reed to lean on.
For M4A to become an actual public policy, important questions need to answered. Questions such as:
(1) When health care access becomes universal, what will happen to utilization rates? People that currently ration their health care will suddenly have affordable access to it. What will that do to cost and delivery models? Demand load will certainly change under M4A and cost estimates will need to realistically account for this.
(2) Similar to the effect of lower reimbursement rates for physicians and hospitals, will presumed reductions in drug and medical equipment costs (which are revenues from the corporate perspective) reduce the incentives for private research and development?
But even these two questions are predicated on understanding the costs associated with M4A. This political obsession with costs may be submerging the more important questions, such as from SUNY-Stony Brook economist Stephanie Kelton, who, if you haven’t heard of her or the Modern Monetary Theory (MMT) she helped pioneer, you will soon enough.
On Twitter recently, she asked a simple question about M4A: What happens to output and employment if we spend substantially less on healthcare *and* we raise taxes to “pay for” it?
M4A, by intent, takes 18 percent of the U.S. economy and aims to shrink it (while providing broader health care service). When the economy gets smaller, it is called a ‘recession’. Will there be an M4A recession? If so, how deep and how long?
The U.S. built its health care system around an employer-based, private insurance model. That goes away under M4A. Companies will be happy, potentially, with no longer administering employee health care benefits. Will they layoff the human resource employees dedicated to employee health insurance? Why wouldn’t they?
How does a country eliminate an entire industry — the private health insurance industry? Do all or some of their employees get rolled into Medicare’s administrative payroll? How is that choice made and who makes it? What will be the aggregate effect on U.S. employment?
Once companies and households presumably save a lot of money under this new health care system, what will they do with it? Spend it on something else? Save it? Blow it?
Will the short-term costs of transitioning to M4A be more than compensated by a long-term investment in other economic activities?
By focusing on how we will pay for M4A, we ignore the more important debates on the goals, fairness and morality of the various health care delivery models. Independent of the costs, what should a ‘good’ health care system look like?
If Modern Monetary Theory is correct, the money will be there if, in the legislative process, a good health care system is designed and put into place.
Has Modern Monetary Theory made, once again, the Democrats the party of big ideas?
I am not an economist and will never claim to understand the difference between Keynesian and neo-Keynesian economics or what an IS-LM model tells us about interest rates and assets markets.
All I ask from economists is that they can tell me what I’ll pay for gasoline and milk next month and if my health insurance premiums will go up again.
So, if you want to learn about Modern Monetary Theory (MMT), don’t look at me. You are better off going here, here and here. And if you want a quick counterpoint argument to MMT, ZeroHedge.com offers mean-spirited ones here and here. And for auditory learners, here is Prof. Kelton’s recent appearance on the Jimmy Dore Show: [Video]
For the rest, here is a brief explanation of MMT from the MMT blogsite Modern Money Mechanics:
Modern Monetary Theory recognizes that the government has infinite capacity to spend and that the constraint on spending is always inflation never insolvency. One of the many myths that crop up about MMT is that it allows an infinite size deficit. This is false. MMT has always stated that the limit to spending are the real resources available. This is just another way of saying spending can be inflationary.
The current orthodox view explains the Government Budget Constraint (GBC) this way:
Fiscal deficit = Government spending + Government interest payments - Tax receipts must equal (be “financed” by) a change in Bonds (B) and/or a change in high powered money (H)
The current orthodox view is that the GBC must be financed by printing money and/or borrowing money from the public. In contrast, the Modern Monetary Theory view is that a currency issuer can issue currency and bonds and the GBC is just an accounting identity. It is nothing to worry about.
I live by the rule: If I don’t understand something, I must reject it. And that is where I am at with MMT right now.
For one, I am drawn to ZeroHedge’s criticism: “Since under MMT the central bank is responsible for financing government programs through printing money, it falls to the institution with authority over tax and budget policy — the U.S. Congress — to make sure prices are stable by raising taxes and moving the budget deficit into surplus.”
“But it is extremely difficult to imagine Congress responding to an overheating economy by legislating tax increases. If anything, the opposite is easier to imagine: When households are being hit with price increases, the natural inclination of an elected representative might be to increase their disposable income by lowering taxes, not raising them.”
According to MMT, however, the Federal Reserve will still be able to use interest rates to attack high inflation, along with Congress’ ability to raise taxes or impose price controls. So, ZeroHedge may have set up a straw man version of MMT for its criticisms.
My non-economist reading of MMT is more basic. For one, it feels more descriptive than theoretical. MMT offers (perhaps) a more realistic lens through which to describe how the economy actually works. We’ve been told large government budget deficits increase interest rates (which then crowds out private investment). However, economic studies show a limited — but non-zero — connection between budget deficits and interest rates in the U.S. (Two summaries of this connection can be found here and here).
Though a healthy skepticism towards MMT’s leniency towards large and growing budget deficits is in order, it does appear (at least in the U.S.) as if MMT maps well to the government budget deficits and low-inflation economic growth we’ve experienced in our nation’s history.
My lingering reservations towards MMT aside, I can’t ignore how this theory has energized idea generation, particularly among progressive Democrats. Medicare-for-All, a Jobs Guarantee program, and a Green New Deal are all ideas that could (literally) change the world.
Not so fast…there is still the problem of the Democratic Party establishment
Three House Democrats — Tulsi Gabbard, Ro Khanna and Ocasio-Cortez — voted against Nancy Pelosi’s House rules package that included the PAYGO rule — which states that new expenditures can only be financed with funds that are currently available rather than borrowed.
That is the absolute antithesis of MMT.
Sure, the PAYGO rule can be waived, but guess who controls that decision? Nancy Pelosi.
For all of the ideas bubbling within the Democrat’s progressive caucus, none of them will see the light of day under the party’s current leadership.
But the post-Reagan political equilibrium has eroded and the country is at a pivot point. This nation will either step back from real change or decide to embrace it. Whatever happens in 2020, it will not be an easy decision, regardless of who sits in the White House, to choose the unknown over the status quo’s certitude.
But ideas are back, replacing the tortuous triangulations and gaslighting methods politicians have mastered when discussing policy in public over the past 25 years.
Wiffle-waffling politi-speak is out.
The Democrats of the 80s were devoid of ideas. They were just anti-Reagan and didn’t want to be associated with Jimmy Carter. There were no FDRs or LBJs — instead, they had Walter Mondale and Michael Dukakis.
The Republicans had the big ideas: Cut taxes and reduce government regulations to spur investment and growth. Break the power of unions and their influence on wages. Privatize government functions. Confront the Soviets by outspending them.
Democrats were so happy when Bill Clinton, a Democrat, finally put them back in the White House, they looked the other way when his brand of neoliberalism proved to be nothing less than a complete capitulation to the anti-government, free market idolatry of the Reagan years.
He was a Democrat. That’s all that mattered. As for ideas? Clinton farmed that task out to the Wall Street investment banks.
It worked for him. Not even ten years out from his presidency, Bill and Hillary were already quarter-billionaires with dreams of even greater power and wealth once Hillary finished out her eight-year presidential term.
As for ideas? Bill Clinton talked a lot. He sounded like he knew stuff. But I believe the motto shared by Bill and Hillary Clinton was: Just win baby— ideas are for losers. It worked for them, for awhile.
But times have changed. Ideas matter again.
Big ideas supported by core beliefs and principles that can be clearly stated are the new thing. Puffy and vague stump speech platitudes can’t compete.
With Bernie Sanders, Tulsi Gabbard, Ro Khanna, and Alexandria Ocasio-Cortez, big ideas are back — but maybe this time its the Republicans playing catch-up.