What Democrats are really debating about Medicare-for-all

The Democrats have been spending an extraordinary amount of time debating what to do about America's health-care system. This is partly a reflection of political reality; health care was the main policy rallying cry that led the Democrats to victory in the 2018 midterms, and Democratic-leaning voters regularly say that health care is their top policy priority.

But that same political reality is skewing the health-care debate away from the central policy choices and toward an artificial dispute of less real substance than it appears.

The main debate we are having is over whether America can afford Medicare-for-all. Such a single-payer system would move the overwhelming bulk of health-care spending over to the government's side of the national ledger, and this spending would have to be paid for with an increase in taxes. (Yes, in theory any increase in spending could be financed through debt, but debt is just a tax on future earnings; you can't avoid debating how to structure the health-care system by changing the subject to whether we should be running a higher fiscal deficit.) Opponents look at the overall price tag, blanch, and argue that a more incremental change — like a public option — would be more affordable.

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But the problem with Medicare-for-all is not that it's unaffordable. Indeed, a main argument for Medicare-for-all is that it is more affordable than our current health-care system, as well as being more equitable.

Americans pay approximately 8 percent of our health-care dollar on administrative costs, a large percentage of which could be eliminated with only a single entity to bill. Americans also pay much higher drug prices as well as higher prices for procedures than other countries where the government plays a bigger role in setting prices. Indeed, international comparisons suggest that the fiscally leanest health-care systems are those where the government plays the largest role in allocating aggregate spending on it.

Moreover, most Americans currently pay for health care in a very regressive way. Employers pay premiums per employee, which means that employees are effectively paying for their insurance via a capitation tax, one of the most regressive modes of taxation. It gets even worse when you consider that the tax exemption for benefits is more valuable for higher-paid employees. And those who don't receive benefits from their employers — including many in marginal employment situations — must purchase on the individual market, without the leverage to negotiate lower premiums that large employers have. Even relatively regressive broad-based consumption taxes like the value-added tax would be more progressive than the system we have.

The risk with Medicare-for-all lies not in the overall cost but in the uncertainty around the substantial restructuring it would impose on the health-care industry. Billing administrators at hospitals and insurers are largely a dead weight cost to the economy, but laying them off will still cause short-term economic pain. More seriously, many hospitals and physician practices have business models structured around billing rates that are substantially above Medicare levels. Democratic presidential candidate and former Maryland Rep. John Delaney's claim that "every hospital" would close if they were reimbursed at Medicare rates is a wild exaggeration, but transitioning to a Medicare-for-all environment could still be wrenching, and the government would likely have to spend substantial funds to smooth that transition. Changes this large are very difficult to game out in terms of both the aggregate cost and who will ultimately come out ahead — and that risk is far more salient for those with a stake in the existing system than it is for those on the outside peering in.

Then there's the financing side. Advocates of Medicare-for-all frequently argue that it would amount to a tax cut for the vast majority of Americans because an increase in their take-home pay would more than offset the increase in taxes. But this assumes that employers would pay each employee in cash precisely the value that they previously receive in the form of premiums paid. But is this what would happen? As noted, the after-tax value of cash compensation is different from the value of tax-exempt benefits, and also varies by employee. Many large employers also contribute a portion of premiums at least for some employees, while employees pay another portion. Would those employers contribute that subsidy to take-home pay after Medicare-for-all? Employees currently receiving benefits would reasonably expect a rise in take-home pay under Medicare-for-all, but the amount is going to be a function of their market power and not just the savings to the employer from no longer having to pay premiums.

Would an incremental approach avoid this uncertainty? Only to the extent that it avoids that restructuring — and it can avoid that restructuring only to the extent that it fails to achieve universal coverage or allows costs to skyrocket.

If a public option was relatively stingy in terms of the care offered, or was inadequately subsidized for lower-income individuals, then relatively few people would take advantage of it. But if it was heavily subsidized and provided fairly generous coverage, then it would quickly attract many individuals with substantial health-care needs — and businesses would have a powerful incentive to cut their own health-care costs by gutting the insurance they provide their employees, driving further migration to the government plan. In the end, the government would likely wind up taking as large a role in restructuring the health-care system as it would under a single payer system.

Meanwhile, because it would require individuals to opt in, a public option would almost surely have to be financed by some kind of per-capita tax, albeit with a subsidy for those with low incomes. This would replicate the regressive nature of America's existing health-care financing system. And if the premiums were set artificially low, then once again you'd see a rapid collapse to a Medicare-for-all scenario for most Americans.

The core question in the Medicare-for-all debate is not whether we can afford a single-payer system. It's how much money we're willing to spend to avoid making big structural changes that will cause real pain to numerous stakeholders in the system as it exists.

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