In my last post I analyzed whether Bernie Sanders's claim that medicare-for-all would save the average family $5,000 a year was realistic, and ended up concluding that it was at least plausible, and that some amount of savings is likely, due to the lower administrative costs and in particular the lower rates Medicare pays to healthcare providers.
Ezra Klein has some tough criticism of Sanders's plan though. Here's the part that stands out:
Sanders commits the classic liberal fallacy of assuming that Medicare is great health insurance. He doesn't seem to realize that Medicare has copays, co-insurance, and deductibles, that it doesn't cover everything or every provider, that it still denies a portion of all claims.
Medicare is actually fairly crappy insurance. Here's a break down: Medicare Part A is insurance for hospital in-patient stays, Part B is insurance for "outpatient" care (which, confusingly, includes a lot of in-hospital care, even short stays and many kinds of surgery), while Part D covers prescription drugs. Part C is Medicare Advantage, which is an alternative to Parts A and B.
On deductibles, Medicare is pretty reasonable: $1,288 deductible for Part A and merely $166 for Part B. It's everything after the deductible that's crappy. For Part A, after the deductible your out-of-pocket costs actually grow as the severity of your condition worsens: after 60 days of hospitalization you pay $322 per day, and after 90 days you pay full cost (there are an additional 90 "lifetime reserve days" you can apply there though). Part B is actually worse: you pay 20 percent of all costs after the deductible.
This made some amount of sense when Medicare was designed. Back then doctors typically didn't even bother charging patients for outpatient care, because almost everything was done inpatient and outpatient stuff was just insignificant. But because of technological improvements, healthcare overall is shifting from inpatient to outpatient. Currently, Medicare spends about as much on outpatient care as inpatient, and that ratio is growing—CBO projects that by the end of this decade, outpatient care will exceed inpatient care. My point here is that while you could argue that hospitalizations longer than 90 days are very rare, that 20 percent on the other half of your health costs is extremely expensive. Seniors can easily find themselves owing $20,000 on a $100,000 outpatient surgery. Considering that the average social security benefit is only $14,169.60 per year, I don't know many seniors who can bear that kind of medical bill.
The simple truth is that Medicare is no longer sufficient insurance because it does not cap seniors' outpatient expenses. The program has totally failed to modernize in the face of dramatic changes to healthcare delivery. As a result, the vast majority of seniors—86 percent to be exact—purchase additional insurance to cover the rest of what Medicare won't pay. Some seniors qualify for both medicare and medicaid, so medicaid does actually cover these additional costs. But the rest, a solid majority, purchase private insurance one way or another. This includes Medicare Advantage (Part C), which is a private alternative to Medicare and generally has much better coverage, as well as employer-sponsored insurance (the most common option, typically offered as a retirement benefit), or "medigap" policies which are simply private supplemental insurance coordinated through federal exchanges.
Sanders undoubtedly has supplemental insurance as it is an employment benefit he would have received as a result of his years in the US Senate. He doesn't seem to realize that that's not medicare, and that he in fact relies on private insurers for much of his medical coverage.
Ezra Klein has some tough criticism of Sanders's plan though. Here's the part that stands out:
Sanders calls his plan "Medicare for all." But it actually has nothing to do with Medicare. He's not simply expanding Medicare coverage to the broader population — he makes that clear when he says his plan means "no more copays, no more deductibles"; Medicare includes copays and deductibles. The list of what Sanders's plan would cover far exceeds what Medicare offers, suggesting, more or less, that pretty much everything will be covered, under all circumstances.Klein concludes that Sanders has done a bait-and-switch, calling his plan a simple expansion of Medicare, while actually proposing something that works very differently than Medicare. I think the truth is worse than that.
Sanders commits the classic liberal fallacy of assuming that Medicare is great health insurance. He doesn't seem to realize that Medicare has copays, co-insurance, and deductibles, that it doesn't cover everything or every provider, that it still denies a portion of all claims.
Medicare is actually fairly crappy insurance. Here's a break down: Medicare Part A is insurance for hospital in-patient stays, Part B is insurance for "outpatient" care (which, confusingly, includes a lot of in-hospital care, even short stays and many kinds of surgery), while Part D covers prescription drugs. Part C is Medicare Advantage, which is an alternative to Parts A and B.
On deductibles, Medicare is pretty reasonable: $1,288 deductible for Part A and merely $166 for Part B. It's everything after the deductible that's crappy. For Part A, after the deductible your out-of-pocket costs actually grow as the severity of your condition worsens: after 60 days of hospitalization you pay $322 per day, and after 90 days you pay full cost (there are an additional 90 "lifetime reserve days" you can apply there though). Part B is actually worse: you pay 20 percent of all costs after the deductible.
This made some amount of sense when Medicare was designed. Back then doctors typically didn't even bother charging patients for outpatient care, because almost everything was done inpatient and outpatient stuff was just insignificant. But because of technological improvements, healthcare overall is shifting from inpatient to outpatient. Currently, Medicare spends about as much on outpatient care as inpatient, and that ratio is growing—CBO projects that by the end of this decade, outpatient care will exceed inpatient care. My point here is that while you could argue that hospitalizations longer than 90 days are very rare, that 20 percent on the other half of your health costs is extremely expensive. Seniors can easily find themselves owing $20,000 on a $100,000 outpatient surgery. Considering that the average social security benefit is only $14,169.60 per year, I don't know many seniors who can bear that kind of medical bill.
The simple truth is that Medicare is no longer sufficient insurance because it does not cap seniors' outpatient expenses. The program has totally failed to modernize in the face of dramatic changes to healthcare delivery. As a result, the vast majority of seniors—86 percent to be exact—purchase additional insurance to cover the rest of what Medicare won't pay. Some seniors qualify for both medicare and medicaid, so medicaid does actually cover these additional costs. But the rest, a solid majority, purchase private insurance one way or another. This includes Medicare Advantage (Part C), which is a private alternative to Medicare and generally has much better coverage, as well as employer-sponsored insurance (the most common option, typically offered as a retirement benefit), or "medigap" policies which are simply private supplemental insurance coordinated through federal exchanges.
Sanders undoubtedly has supplemental insurance as it is an employment benefit he would have received as a result of his years in the US Senate. He doesn't seem to realize that that's not medicare, and that he in fact relies on private insurers for much of his medical coverage.
In my previous post, I criticized Bernie Sanders for having a policy specific—always a vote-losing thing to have in an election—without actually having any of the specifics needed to defend it from attacks. As an example, I cited Clinton's charge that the plan raises taxes on the middle class, to which Sanders was only able to respond that it actually saves middle class families an unspecified "thousands of dollars."
At long last, the Sanders campaign has released some more detail on his plan. It would, he now claims, save the average family $5,000 per year after taxes.
That estimate is roughly what you'd get if you naively apply Medicare payment rates and administrative costs to the average existing private insurance plan. Medicare pays hospitals and doctors about 80 percent of what private insurance does, and has substantially lower administrative costs of 3 percent compared to 17 percent for private insurers. Average health spending is $10,000 per person per year, and the average health plan (ESI) has an actuarial value of around 85 percent. Applying the 80 percent lower Medicare prices and the 14 percent administrative savings, I get roughly $7,000 in health spending per person per year, a $3,000 savings per person (that is, after paying Sanders's payroll tax, you'd still be $3,000 ahead in savings because of the lack of private insurance premiums and lower out-of-pocket prices). So for a family of four, Sanders's $5,000 estimate actually has a bit of wiggle room—it's smaller than the most optimistic possible scenario.
However, even though Medicare pays lower prices and has substantially lower administrative costs, it is not a slam-dunk case to argue that Medicare-for-all represents a cost savings. For the full story, you also have to look at utilization. It would be nice if you could just compare average Medicare spending per beneficiary to average private spending, but obviously Medicare beneficiaries are on average quite a bit older, sicker, higher cost patients so we'd expect Medicare spending to be higher even under the null hypothesis that it is identical to private insurance. Indeed, that's exactly what we find: Medicare spends about $11,200 per beneficiary per year (including administrative and other costs), compared to the average private insurance premium of $6,010 per person per year (note: Medicare spending per beneficiary is less than the total health spending per beneficiary due to cost sharing; this figure is most comparable to insurer's revenue per beneficiary).
So the raw numbers aren't conclusive at all—they're consistent with both the claim that medicare is cheaper but current medicare enrollees are higher-cost patients (yes, they are), and the alternative claim that medicare is more expensive, because of higher unnecessary or fraudulent use, in addition to serving an older higher-cost group of patients.
There are two ways in which Medicare can still be more expensive than private insurance inspite of lower administrative costs and lower payment rates: more fraud and more "moral hazard" (by which I mean beneficiaries' non-fraudulent but voluntary choice to use more healthcare than they would with other kinds of insurance). The FBI puts the rate of fraudulent health insurance payouts at 3 to 10 percent, but does not differentiate between private insurance and Medicare (see also). Even assuming no private insurance fraud, this is simply not large enough to even offset the higher administrative costs of private insurance (It appears that private insurers' fraud prevention programs are cost-ineffective!).
Maybe there's a lot more fraud going on, in spite of the lack of evidence. Or maybe private insurers really are getting enrollees to avoid unnecessary costly care. In either case, those effects would have to be quite massive to offset the lower prices and administrative costs of Medicare. So, in the end I do believe Sanders's medicare-for-all plan would represent a net cost reduction on average—the opposite hypothesis, while not impossible by the numbers, is pretty far fetched. Moreover, I think Sanders's $5,000 figure is a reasonable (but highly uncertain) estimate of the average family savings, though it should be noted that a large share of "middle class" people with above average incomes will in fact pay more because the payroll tax is a flat tax while the health benefit is lump-sum.
At long last, the Sanders campaign has released some more detail on his plan. It would, he now claims, save the average family $5,000 per year after taxes.
That estimate is roughly what you'd get if you naively apply Medicare payment rates and administrative costs to the average existing private insurance plan. Medicare pays hospitals and doctors about 80 percent of what private insurance does, and has substantially lower administrative costs of 3 percent compared to 17 percent for private insurers. Average health spending is $10,000 per person per year, and the average health plan (ESI) has an actuarial value of around 85 percent. Applying the 80 percent lower Medicare prices and the 14 percent administrative savings, I get roughly $7,000 in health spending per person per year, a $3,000 savings per person (that is, after paying Sanders's payroll tax, you'd still be $3,000 ahead in savings because of the lack of private insurance premiums and lower out-of-pocket prices). So for a family of four, Sanders's $5,000 estimate actually has a bit of wiggle room—it's smaller than the most optimistic possible scenario.
However, even though Medicare pays lower prices and has substantially lower administrative costs, it is not a slam-dunk case to argue that Medicare-for-all represents a cost savings. For the full story, you also have to look at utilization. It would be nice if you could just compare average Medicare spending per beneficiary to average private spending, but obviously Medicare beneficiaries are on average quite a bit older, sicker, higher cost patients so we'd expect Medicare spending to be higher even under the null hypothesis that it is identical to private insurance. Indeed, that's exactly what we find: Medicare spends about $11,200 per beneficiary per year (including administrative and other costs), compared to the average private insurance premium of $6,010 per person per year (note: Medicare spending per beneficiary is less than the total health spending per beneficiary due to cost sharing; this figure is most comparable to insurer's revenue per beneficiary).
So the raw numbers aren't conclusive at all—they're consistent with both the claim that medicare is cheaper but current medicare enrollees are higher-cost patients (yes, they are), and the alternative claim that medicare is more expensive, because of higher unnecessary or fraudulent use, in addition to serving an older higher-cost group of patients.
There are two ways in which Medicare can still be more expensive than private insurance inspite of lower administrative costs and lower payment rates: more fraud and more "moral hazard" (by which I mean beneficiaries' non-fraudulent but voluntary choice to use more healthcare than they would with other kinds of insurance). The FBI puts the rate of fraudulent health insurance payouts at 3 to 10 percent, but does not differentiate between private insurance and Medicare (see also). Even assuming no private insurance fraud, this is simply not large enough to even offset the higher administrative costs of private insurance (It appears that private insurers' fraud prevention programs are cost-ineffective!).
Maybe there's a lot more fraud going on, in spite of the lack of evidence. Or maybe private insurers really are getting enrollees to avoid unnecessary costly care. In either case, those effects would have to be quite massive to offset the lower prices and administrative costs of Medicare. So, in the end I do believe Sanders's medicare-for-all plan would represent a net cost reduction on average—the opposite hypothesis, while not impossible by the numbers, is pretty far fetched. Moreover, I think Sanders's $5,000 figure is a reasonable (but highly uncertain) estimate of the average family savings, though it should be noted that a large share of "middle class" people with above average incomes will in fact pay more because the payroll tax is a flat tax while the health benefit is lump-sum.