The Costs of a National Single-Payer Healthcare System

By Charles Blahous
Mercatus Center, July 30, 2018


The leading current bill to establish single-payer health insurance, the Medicare for All Act (M4A – Senator Bernie Sanders), would, under conservative estimates, increase federal budget commitments by approximately $32.6 trillion during its first 10 years of full implementation (2022–2031), assuming enactment in 2018. This projected increase in federal healthcare commitments would equal approximately 10.7 percent of GDP in 2022, rising to nearly 12.7 percent of GDP in 2031 and further thereafter. Doubling all currently projected federal individual and corporate income tax collections would be insufficient to finance the added federal costs of the plan. It is likely that the actual cost of M4A would be substantially greater than these estimates, which assume significant administrative and drug cost savings under the plan, and also assume that healthcare providers operating under M4A will be reimbursed at rates more than 40 percent lower than those currently paid by private health insurance.

Increased Demand and Utilization

M4A would increase healthcare demand and utilization in at least three important ways. First, the plan would provide health insurance coverage to all Americans who are currently uninsured, greatly increasing their utilization of healthcare services. Coverage of the currently uninsured is estimated to increase their health service costs by roughly 89 percent.

Second, the plan would expand the range of services covered by existing insurance, explicitly covering dental, vision, and hearing care for all participants. This, too, would increase utilization of such services in addition to shifting their financing from private to public spending, especially for those now reliant on traditional Medicare.

Finally, the plan’s requirement that “no cost-sharing, including deductibles, coinsurance, copayments, or similar charges, be imposed on an individual” would also significantly increase healthcare utilization. Providing this first-dollar coverage is estimated to induce 11 percent additional demand for those currently covered by private insurance and 16 percent for those now in traditional Medicare without supplemental coverage.

Provider Payment Reductions

To offset the substantial cost increases created by stimulating additional consumer demand for and utilization of healthcare, the M4A bill would constrain expenditures by subjecting healthcare providers—including hospitals, physicians, and others—to Medicare payment rates. Under current law, Medicare reimburses healthcare providers at much lower rates than private health insurance does. In 2014, Medicare hospital payment rates were 62 percent of private insurance payment rates and are currently projected to decline to below 60 percent by the time M4A would be implemented, and to decline further afterward. Medicare physician payment rates were 75 percent of private insurance rates in 2016 and, per the terms of the Medicare Access and CHIP Reauthorization Act of 2015 (MACRA), are projected to decline sharply in relative terms in future years, also falling below 60 percent within the first full decade of M4A.

The adoption of Medicare payment rates would represent a substantial reduction in provider reimbursements for care provided to everyone now covered by private insurance (though it would also be a temporary increase in physician payments for those now covered by Medicaid, which currently pays physicians at lower rates than does Medicare).

Drug Costs

This analysis credits the M4A proposal with approximately $846 billion in additional savings over the 2022–2031 period from negotiating lower prices for prescription drugs.

Administrative Savings

This analysis assumes substantial administrative cost savings generated by replacing private insurance with national single-payer insurance, specifically a reduction of seven percentage points (from an estimated 13 percent to 6 percent) in the administrative cost of covering those now holding private insurance.

Current administrative cost rates for Medicare as a whole are cited as being roughly 4 percent, though closer to 6 percent for Medicare Advantage. It is unlikely that the population now privately insured could be covered by M4A with administrative costs as low as 4 percent.

Long-Term Services and Supports

The M4A bill contains a “maintenance of effort” provision requiring states to continue their LTSS expenditures under Medicaid at current-law levels, automatically indexing the growth of these commitments going forward.

Effects on National Health Expenditures and the Federal Budget

Table 2 summarizes the financial effects of the M4A bill over its first 10 years of full implementation, which would be 2022 through 2031 if enacted in 2018. One striking finding evident in the table is that, even under the assumption that provider payments for treating patients now covered by private insurance are reduced by over 40 percent, aggregate health expenditures remain virtually unchanged: national personal healthcare costs decrease by less than 2 percent, while total health expenditures decrease by only 4 percent, even after assuming substantial administrative cost savings. The additional healthcare demand that arises from eliminating copayments, providing additional categories of benefits, and covering the currently uninsured nearly offsets potential savings associated with cutting provider payments and achieving lower drug costs. Thus, the essential expenditure change wrought by movement to a single-payer system would be to replace private spending on healthcare with government spending financed by taxpayers. At the same time, more generous healthcare insurance would be provided to everyone at the expense of healthcare providers, who would face reimbursements substantially below their service costs.

While these estimates show little net change in NHE, the same cannot be said of the projected effects on the federal budget. Table 2 includes an estimate for the net increase in federal health budget commitments of $32.6 trillion from 2022 through 2031, which, by itself, is more than all federal individual and corporate income taxes projected to be collected during that time period.

It should be noted that M4A’s elimination of employer-sponsored insurance, including the federal tax preferences now accorded to it, should increase worker wages net of employer- provided health benefits. These estimates incorporate the increased federal revenues CBO projects to arise from subjecting these higher expected wages to federal taxation. Thus, at the same time that M4A would dramatically increase federal spending, it would increase taxable worker wages net of employer-provided benefits, while also relieving individuals, families, and employers of the substantial health expenditures they would experience under current law. It would also relieve states of such Medicaid expenditure obligations as are transferred to the federal government. These offsetting effects should be considered when weighing the implications of requiring federal taxpayers to finance the enormous federal expenditure increases under M4A. These estimates should be understood as projecting the added federal cost commitments under M4A, as distinct from its net effect on the federal deficit. To the extent that the cost of M4A is financed by new payroll taxes, premium collections, or other revenue increases, the net effect on the federal budget deficit would be substantially less.…

This and other analyses of Senator Bernie Sanders’ Medicare for All Act should not be considered definitive since the bill is not complete and there still is considerable disagreement on the specifics of the bill. The bill will certainly not become law in its present form.

That said, this analysis is not that much different from previous analyses from the Urban Institute and from Emory’s Kenneth Thorpe, both of which contain disputed assumptions, as does this analysis. Considering the similarities, it is interesting that this was done by the Mercatus Center’s Charles Blahous. The mission of Mercatus is “to generate knowledge and understanding of the institutions that affect the freedom to prosper.” Charles Koch is a member of its board.

The media is covering this analysis with headlines that Medicare for All would cost a “stunning $32.6 trillion,” “ridiculously expensive,” “over $32 trillion with a T,” “massive tax increases,” etc. The Mercatus release and the paper’s abstract also emphasize the resulting federal budget commitments. The $32.6 trillion federal spending is for the entire decade of 2022-2031.

Much more important is the total national health expenditures (NHE). Buried in the report, but left out of the media coverage, is this statement: “aggregate health expenditures remain virtually unchanged: national personal healthcare costs decrease by less than 2 percent, while total health expenditures decrease by only 4 percent.” Also, “the essential expenditure change wrought by movement to a single-payer system would be to replace private spending on healthcare with government spending financed by taxpayers. At the same time, more generous healthcare insurance would be provided to everyone.”

Thus they are not claiming that total national health expenditures will increase when compared to current projections, but only that much of our current private spending will shift to the government-administered Medicare for All with the benefit that everyone will be covered with a more generous program. That is a tremendous plus.

There are several problems with this study, but here I’ll mention just a couple.

Blahous predicts an 89 percent increase in costs for the previously uninsured. But he leaves out the fact that other transitions to single payer, such as that in Canada, resulted in a shift of care to those with greater needs. Excess care that was of little value that was provided to the wealthier “worried well” declined, but without any decrease in truly beneficial health care services and thus without adverse outcomes. Attention must still be given to ensuring adequate capacity in the system while avoiding wasteful excess capacity, but we can be assured that there will not be an abrupt increase in excessive queues for essential health care services. Or to Blahous’ point, because of this offset, increased access for the uninsured and underinsured will not result in a dramatic increase in health care spending.

Blahous states that there will be a 40 percent reduction in physician and hospital payment rates compared to private insurance. (He does provide an alternate analysis in which this reduction does not take place.) Although rates will be negotiated and publicly administered (ideally with global budgeting of hospitals), and there should be some increased efficiency in allocation of services (see prior paragraph), we can look to Canada to see what would likely happen. In actuality, there was little net change in income due to the implementation of the provincial single payer systems. We can expect the same here (though eight figure physician incomes will likely not be tolerated).

For an analysis of single payer, Blahous really misses the boat on recovery of administrative waste. He credits a savings of 7 percent of only the administrative cost of covering those now holding private insurance, but ignores all of the other profound administrative excesses that characterize our fragmented, dysfunctional health care financing system. For the first year of full implementation of Medicare for All (2022), he calculates a mere $78 billion in administrative savings, far less than the hundreds of billions that likely would be saved if the ultimate legislation were designed properly.

The link above is to the full Blahous analysis. You may want to save it to be able to show Medicare for All opponents what he actually concluded. Blahous, a conservative/libertarian economist, tells us that Medicare for All will not increase our spending and yet will include everyone and provide them with a much more generous program. Both Republicans and Democrats need to hear this message.

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