Nov 30, 2019 Chris Conover Contributor
The Apothecary Contributor
Group Opinions expressed by Forbes Contributors are their own.
TLDR: The total
hidden costs of Senator Warren’s Medicare-for-All plan would total $33.1
trillion in its first 10 years. These costs—due to deadweight losses, waste,
rationing and reduced innovation—are roughly equivalent to a surcharge that
would increase overall costs by at least 26% and more likely 64%. In the worst
case, hidden costs would nearly double the cost of the plan reported by Warren
health plan advisors.
In the context
of $210 trillion in unfunded liabilities, the nation cannot afford a new
entitlement larger by far than any other now on the books. The new federal
taxes required to finance the Warren health plan could instead be used to
dramatically reduce our unfunded liabilities by anywhere from $58 to $82
trillion.
Series Recap
Aggregate Size
of Medicare-for-All’s Hidden Losses. Persistent
readers of this series now know that Senator Warren’s misguided
Medicare-for-All plan will produce a myriad of hidden costs that single-payer
champions would prefer to ignore. In its first decade, these costs
would include:
·
$8.7 trillion ($3.5-14.3T) in deadweight
losses from new taxes (part 1).
·
$6.1 trillion ($4.6-7.7) in
additional waste (part 2).
·
$8.9 trillion ($2.6-15.2) in costs
resulting from rationing (part 3).
·
$9.4 trillion ($2.6-10.6) in social
losses stemming from reduced innovation (part 4).
·
So those favoring Senator Warren’s
single-payer health plan evidently are willing to put up with hidden costs
amounting to $33.1 trillion ($13.3-$47.7 a year.
Today In: Business
A picture is
worth 1,000 words in this case. Remember that all of these costs are above and
beyond the officially advertised cost of Senator Warren’s. So while she and her
supporters may well believe they have found a way to bankroll the purported $52
trillion cost of her plan in its first ten years, she obviously has offered no
explanation for how the nation can afford to endure an additional $33.1
trillion. There’s a simple reason: most of the costs listed are hidden costs.
Fig. 1 Compiled by Christopher J. Conover,
Duke University, using sources and methods described in text.
No one will ever
see the hours never worked or the purchases never made as a consequence of the
boatload of taxes needed to pay for her plan. When people die early because a
treatment was denied or a new drug never came to market, most will not chalk
that up to the Warren health plan. Perhaps an enterprising outfit such as
Fraser Institute will see fit to try and codify all the time lost waiting in
line for care, but just as much waste, fraud and abuse passes by unnoticed by
the average American, the same is likely to be true of all the new wasteful
spending this plan would add to the American health economy.
Talk of
trillions and trillions in dollars is beyond the comprehension of most
Americans, but perhaps converting these figures into per capita estimates might
make them easier to grasp. On an annualized basis, $33.1 trillion works out to
roughly $9,500 ($3,800 to $13,800) per U.S. resident!
Hidden Losses
Relative to National Health Expenditures. Another way to
make these absurdly large numbers more comprehensible to express them as a
percentage of aggregate national health spending over the 10 year period they
have been measured.
Attentive
readers will know that I am not claiming that Americans will have to dig into
their pockets to the tune of $9,500 apiece every year over the next decade.
Some losses would be quite real.
· For
example, deadweight losses reflect a genuine reduction in the size of the
economy relative to what it would have been otherwise. Real people will find it
more difficult to find work and/or do without things they could have and would
have been able to purchase absent the added taxes imposed to bankroll
Medicare-for-All.
· In
contrast, while very real, the waste, fraud and abuse I have estimated would
occur should not be construed as an add-on to the $52 trillion in spending
predicted by Senator Warren’s advisors, but instead would be a component of
that spending and one illustrative measure of how inefficient that spending
will be in light of the perverse incentives built into any “free” medical care
system.
Other elements
in my hidden cost figure are intangible losses reflecting the monetary value of
years of life lost because a technology was denied or a life-saving drug never
made it to market. For sure there would be an earnings loss for working-age
individuals who become the inadvertent victims of single-payer health care, but
much of the loss would be intangible, with $150,000 per year representing what
society would have been willing to pay to avert such avoidable deaths etc. So
with that caveat, here is Fig. 1 expressed in percentage terms:
Fig. 2 Compiled by Christopher J. Conover,
Duke University, using sources and methods described in text.
The hidden costs
I’ve calculated essentially are equivalent in dollar terms to a 64% “hidden
tax” on the advertised cost of Senator Warren’s plan. If we’re really lucky,
the tax may be as low as 26%. But it also may be as high as 92%.
Thinking such
enormous costs are worthwhile is literally beyond my own imagination. So for
purposes of discussion, I will instead imagine a single-payer proponent as
smart as Albert Einstein who arrives to demolish each and every one of the top
4 reasons the Elizabeth Warren’s single payer health plan is a singularly bad
idea. There still would remain one very large inconvenient truth that is the #5
reason to oppose this misguided idea: our nation cannot afford it.
What Will the
Warren Health Plan Actually Cost?
Recall from Fig.
1 in Part 1 that estimates of Medicare-for-All are all over the map
in terms of their predicted effect on national health spending. The most
optimistic estimates indicate that spending would be reduced by 26%, while the
estimates I view as more realistic show that spending might rise by as much as
13.6% even after taking into accounted the purported savings Medicare-for-All
is supposed to deliver (e.g., lower administrative costs). To simplify matters,
I invite you to consider two estimates:
· Lower
Bound. The advisers claim that national health spending will be just under
$52 trillion in health spending between 2020 and 2029 and that only $19,590
billion in new federal revenues will be required to finance the plan.
· Upper
Bound. My own estimate is that NHE will be $56.1 trillion during this same
decade, necessitating new federal revenues of $27,702 billion.
Readers will be
happy to know they do not have to choose between the estimate of Warren health
plan advisors and my own because it will quickly become apparent we cannot
afford Medicare-for-All even if the lower bound estimate turns out to be 100%
accurate!
Current U.S.
Unfunded Liabilities
As of 2017, the
U.S. faced a fiscal gap of $242 trillion. The fiscal gap is the sum
of the current federal debt held by the public (i.e., excluding the
portion owed to other federal agencies such as the Social Security
Administration) plus the present value of all future tax revenues minus all
future federal program costs calculated over an infinite horizon [1].
Fig. 3 Compiled by Christopher J. Conover,
Duke University, using sources listed
This is a present
value figure meaning it is the additional amount Americans need
to have banked today earning interest at the U.S. Treasury
bill rate in order to finance all our downstream promises (above and beyond
whatever downstream revenues might be available to pay for them).
This sounds
complicated but the idea is simple. Think about your lifetime income from all
sources. Think about your lifetime spending and add that to whatever debts you
currently have. If your spending plus debts exceed your income, you have a
fiscal gap. And even though the gap between your income and expenses would vary
from year by year, you can simplify your thinking about it by just considering
how much you’d need saved right now to pay it off all future shortfalls knowing
that any amount you have saved could earn interest in the years before it was
spent.
In the case of
the United States, closing the fiscal gap would require either raising all
federal taxes by 58% OR cutting all federal spending by 38%. Imagine you’d
figured out that in the context of your lifestyle and income you either had to
increase your lifetime income by 58% or cut your spending by 38% in order to
balance the books. How many would run out and buy a new house that would
increase your annual spending by 60%? The very idea is lunacy and it would
be nice if there were bipartisan acknowledge of this hard reality.
Admittedly, health
programs such as Medicare, Medicaid and Obamacare are not the sole reason
we have such enormous unfunded liabilities. However, elsewhere I have shown
that in 2012, health-related federal spending accounted for 55% of the unfunded
liabilities facing the nation at that time (footnote 2), so they certainly are a major contributor to the
problem we face.
·
The current debt ($3.1 trillion)
and unfunded liabilities of state and local governments would add $38 trillion to
this tab, but for purposes of discussion, I will focus solely on whether Uncle
Sam can bankroll all the promises made by politicians on his behalf.
·
The federal fiscal gap of $202
trillion amounts to $652,000 per U.S. resident. Only
a minuscule fraction of Americans would have that amount in
savings ready to hand over when Uncle Sam passes the hat.
·
That is nearly 10 times this year's
GDP. Do you know any financial advisors who would recommend that a family take
on a mortage equal to 10 times their annual income?
·
We could seize all of the wealth in
U.S. households ($107 trillion) and it barely cover half of this enormous
obligation.
·
To close the 2015 fiscal gap would
have required either raising all federal taxes by 58.5% that year OR cutting
all federal spending by 37.7%. Any takers?
Now voters are
hardly clamoring for either increased taxes or massive cuts in spending, so we
can all understand why today's politicians keep kicking this can down the road.
Unfortunately, however, such cowardice has resulted in the fiscal gap more than
doubling between 2004 and 2014 [2].
And there can be
no dodging the inconvenient truth that this generation's failure to close the
fiscal gap essentially ensures that we will simply pass this enormous debt onto
future generations. Waiting even 20 years to start addressing the problem means
that the required revenue increase will have grown to over 70% while the
required spending cuts would exceed 43%. Waiting, of course, means that
millions of today's voters never will have to pay the piper. They will have
enjoyed the $3 in Medicare benefits for each $1 they paid into the system and
essentially left the tab for future generations to pay.
Are there any
readers who can look their children or grandchildren in the eye and say that's
fair? Is there anyone who thinks being party to this massive
intergenerational theft is a good idea?
Assuming my cost
estimate is correct, the additional federal spending required by the Warren
plan—unless funded through higher taxes that hypothetically could have instead
been used to reduce our existing massive unfunded liabilities—would increase
Uncle Sam's fiscal gap by a minimum of $82 trillion. If you believe the Warren
plan advisors, the figure is “only” $58 trillion.
Are single-payer
proponents so eager to adopt Medicare-for-All that they're willing to forego
the chance to knock $58 trillion off the tab that’s going to be handed to the
next generation? I wonder how millennials will feel about that once the
money has been spent and they discover that Boomers elected to bankroll a brand
new entitlement rather than pay down the debt on the massive entitlements that
already exist. How grateful will said Boomers feel about “free” health care
once they’ve discovered that as a consequence, Uncle Sam no longer is in a
position to fully fund Social Security, for example?
Bottom Line
Let's review the
bidding. The Sanders plan will impose hidden costs ranging from $1.3 trillion
to as much as $4.7 trillion per year. These are costs that will be
unavoidably borne by all Americans in various ways too often hidden from view.
Unlike taxes, there is no possible way to arrange for these costs only to be
borne by the top 1 percent.
Moreover, even
if Americans collectively decided that the benefits of free care for all
outweigh these enormous costs, the sad reality is that Americans cannot afford
this expensive new entitlement. Until Americans demonstrate their willingness
to either be taxed enough to finance the enormous panoply of entitlements and
government programs already on the books OR their willingness to endure massive
spending cuts so that costs match up with the willingness of Americans to be
taxed, it is completely irresponsible to bury our head in the sands and wish
away the unsustainable path that irresponsible policymakers have put us on.
Stealing from
future generations is deeply immoral, which is why you will never see
a single-payer advocate explicitly endorse the notion. But until and
unless we get our fiscal house in order, stealing from our children and
grandchildren is exactly what will happen should Senator Warren’s
Medicare-for-All plan be enacted into law. From where I sit, putting us on that
path cannot possibly be on the right side of history. Isn’t it time for an
honest debate about this?
Update #1:
December 1, 2019
I’ve decided to
add a link to this video from 2010 in which then-House member (later to become
House Speaker) Paul Ryan explains why it is unconscionable to add a brand new
health entitlement at a time when we could not even pay for the existing
entitlements already on the books. As well, the smoke and mirrors surrounding
Obamacare are reminiscent of the same sort of fiscal shenanigans Senator Warren
has used to mask the true costs of her plan and greatly understate the amount
of new federal revenues required to bankroll it. Well worth a listen for those
who may have forgotten this rare moment of honesty by a politician about our
unsustainable fiscal path.
[1] Boston
University professor Laurence Kotlikoff's testimony before the Senate does as good a job of
explaining in layman's terms exactly how the fiscal gap is calculated and the
rationale for using an infinite horizon instead of doing the calculation over a
shorter period of time such as 50 years or 75 years. There are more
recent estimates prepared for the Peter G.
Peterson Foundation of the fiscal gap using 25-, 50- and 75-year time
horizons, but these only represent a misleading partial picture since they
count much of the lifetime taxes paid by those who will retire 75 years from
now, but none of the costs to pay for the Social Security and Medicare expenses
of such individuals once they retire. The infinite horizon calculations avoid
this problem and are the most accurate way of depicting the ability of the
federal government to pay for all its promises over the long haul. For example,
in 2013, the 75-year US fiscal gap was only 40 percent of the actual $205 trillion fiscal
gap calculated using an infinite horizon.
[2] Kotlikoff
provided a nifty chart in his Senate testimony showing how the fiscal gap
more than doubled between 2004 and 2014.
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