The economist’s critique of Warrencare begins with supply and demand — or, specifically, the additional demand for health services with little additional supply.
The senator from Massachusetts wants us to believe that we can extend health care to 32 million uninsured Americans while letting everyone else consume all the tests and procedures they want without worrying about co-pays and deductibles — and do it all at the same cost, and with the same number of medical professionals, MRI machines and operating rooms.
As I read the blueprint laid out by Warren’s health advisers, this feat of medical voodoo is to be accomplished two ways.
First, by freeing medical professionals from the burdensome administrative chores now required by private health insurers (an hour a day for docs, four hours a day for nurses), giving them time to treat more patients.
And second, reducing the amount of medical care an American consumes on average. She’d do that by changing the way doctors and hospitals are paid, moving away from the current fee-for-service system that encourages too many expensive tests and procedures, and toward “bundled payments” and “managed care” that give providers the financial incentive to keep people healthy at the lowest possible cost.
These are both good ideas — so good, in fact, that Medicare and private insurers have been trying to implement them for years, with only limited success. For it turns out that managing care often means telling doctors they have to practice medicine in a different way, telling patients they can’t have a drug or a procedure they think they need. Both meet with stubborn resistance.
It also turns out that effectively managing care requires more, not less, administrative time and expense than a fee-for-service payment system. So while Medicare spends only 2.6 percent of its budget for administrative expenses, the managed and bundled system envisioned by Warren would require substantially more — a wrinkle her advisers seem to have overlooked.
Warren, however, not only promises to reduce the amount of health care an American consumes on average, but she also assumes she can get doctors and hospitals to accept lower Medicare-like payments for those services for the 150 million Americans now covered by private insurance, which pays significantly more.
Again, the rationale behind the assumption is that without the time and expense associated with filing insurance paperwork, provider costs will go down and their revenue will go up. That may be the case for some providers in some regions. But it won’t be true for the big hospital chains in urban areas that command rates from private insurers that are double those paid by Medicare, or those highly sought-after cardiologists, surgeons and dermatologists who now take home anywhere from $400,000 to $800,000 a year or more.
Those hospitals and doctors will form the vanguard of the political opposition to Warrencare. And unless Warren succeeds in making it illegal (which would very likely be ruled unconstitutional), many of the doctors would decide to opt out of Medicare and spend their time treating patients willing to pay higher rates.
The beginnings of such a two-tier medical system already exist in cities such as Washington, where many practices do not accept private insurance or Medicaid. And it has long been a feature of the health-care system in Britain and a number of European countries, where many middle- and upper-class households routinely buy supplemental private insurance.
There are also problems with the way Warren proposes to pay for her new government-run health-care system.
Warren would require companies with more than 50 employees — plus any smaller ones that offer health insurance — to pay a Medicare tax nearly equal to what they were previously spending for employee health insurance. Those payments would gradually adjust over time so that eventually they would all be paying the same amount for each employee. Meanwhile, small firms that never offered employee health insurance would pay no tax at all.
This arrangement manages to be both unfair and economically inefficient. Not only would the most responsible companies be saddled with higher operating costs than their smaller competitors — to the tune of about $14,000 per employee — but they would lose the advantage they once had of being able to use generous health benefits to attract and retain the best employees.
A better, simpler and more progressive way to get employers to help pay for Medicare-for-all is to do it the way we already do — impose a percentage tax on employers on all wages and salaries, regardless of firm size. That’s what many European countries do. And that’s what Bernie Sanders proposes, raising the employer share of the Medicare tax to just under 9 percent.
With her Medicare proposal, Warren has also gone over the deep end when it comes to taxing the investment income on the ultrarich. When her Medicare taxes are added to the other taxes she wants to impose on the ultrarich to pay for expanded Social Security, universal child care, housing subsidies and free college tuitions, Warren has entered the realm of punitive, confiscatory tax rates.
To illustrate, imagine a large corporation owned by a billionaire that earns $100 million in profit.
Under Warren’s proposals, that profit would first be taxed at the corporate rate of 35 percent, plus a 7 percent surtax for the largest corporations, leaving $58 millionfor the billionaire owner.
If $28 million of that were distributed as a dividend, Warren would tax that just like wage and salary income at a top tax rate of just under 40 percent, plus Social Security and Medicare tax of about 18 percent, reducing the after-tax dividend to just $12 million.
The other $30 million retained by the firm would, roughly speaking, generate a $30 million increase in the book value of the company. Warren would tax that unrealized capital gain in the same manner as the dividend, reducing it to about $13 million.
That would leave the billionaire with $25 million of the original $100 million corporate profit, or an effective tax on his capital income of 75 percent.
But it wouldn’t stop there. Every year thereafter, Warren proposes to tax that $25 million in added wealth at the rate of 6 percent — 3 percent for Medicare on top of the 3 percent for her other initiatives.
As a result, over the ensuing decade, that $25 million would be reduced to $13 million. And if the billionaire were to die at the end of the decade, Warren would tax his estate at a rate of 75 percent, leaving just over $3 million — or about 3 percent — of the original $100 million.
That, by the way, is only the federal taxes. Add in state taxes along the way and the billionaire would be looking at an effective tax rate on capital income of somewhere around 99 percent. At that rate, it wouldn’t be long before there would be no billionaires left to tax.
Warren likes to portray herself as the only candidate in the Democratic presidential field with the guts to speak the truth and put forward bold proposals. But to my mind, the truly courageous progressive candidate is the one willing to tell Americans that every American should have access to health care, day care, a college education and a comfortable retirement, and that every American should be willing to contribute their fair share to pay for them.
Promising that billionaires and big corporations will foot the bill isn’t being tough or courageous — it’s a cop-out. It’s bad economics and it’s bad politics.