Colonel “Bernie” Sanders Half-Baked Recipe for Health Care

Presidential candidate, Bernie Sanders rolled out his proposal for a single-payer Medicare-for-All health system, similar to what’s found in Canada and Britain. Sanders’ proposal is a fairytale of wishful thinking and Robin Hood schemes. Whereas Colonel Sanders is famous for a secret recipe with 14 herbs and spices, Senator Sanders indigestible concoction has only one secret ingredient – tax dollars to fund socialized Medicine.

Sanders proposal is built on the premise that most people can have something for nothing. Workers would pay a 2.2 percent payroll tax on wages, while employers would have 6.2 percent tax on employees’ wages. This is a rather disingenuous way of making workers think they’re getting off cheap. Labor economist (and anybody with common sense) understands that anything that makes workers more costly to employ effects their take home pay. Stated more accurately, Sanders’ plan would tax wages at a rate of 8.4 percent (2.2 percent + 6.2 percent) that would reduce workers’ take home pay by, say, around 8.4 percent! Presumably, this is on top of the 2.9 percent Medicare payroll tax. That works out to an 11.3 percent payroll tax for health care. Add in Social Security taxes (12.4 percent) and the first one-quarter of each worker’s wages are syphoned off and flushed down a Ponzi scheme drain. It would also require additional income taxes to pay for a huge increase in government spending. Marginal tax rates on higher-income households would range from 37 percent to 52 percent.

Bernie Sanders is from Vermont. His home state has already explored implementing a single-payer system. The idea was officially abandoned in 2015 as being far too expensive for state taxpayers. One thing that sank the Vermont initiative was that activists supporting single-payer couldn’t fathom a health plan that was stingy or required any cost-sharing. The actuarial value of the Vermont proposal was 94 percent! Faced with little cost-sharing, every trip to the doctors’ office would be an experiment in how many billable services could be crammed into any given appointment. Obamacare plans in the exchange are either platinum, gold, silver or bronze. In terms of actuarial value the backers wanted Vermont residents to have gold-plated platinum plans encrusted with diamonds!

The Rand HI found patients exposed to significant cost-sharing reduced medical expenditure by about 30% without harming their health. Imagine how much utilization would rise with no cost-sharing and care that’s free at the point of service! Proponents like to talk about all the administrative costs the U.S. would save with Medicare for All, and how much care that would buy for poor households. But utilization would go up much more than the savings returned from lower administrative costs.

Senator Sanders’ cockamamie scheme would boost federal health care spending by nearly $14 trillion spending between 2017 and 2026 according to Sanders’ advisor economist, Gerald Friedman of Umass. Forbes columnist Avik Roy factored in state spending and found if savings failed to materialize, federal health spending could rise $28 trillion to $33 trillion. Duke Economist Chris Conover believes free care would undoubtedly create moral hazards. Conover estimates the cost even higher — at $44 trillion, if rationing is weak.

In other words, Sander’s half-baked Medicare for-All plan is a big money loser — unless it pursues the strategy that all single-payer plans have to use. That strategy involves the “R” word… rationing. Any system has to use some type of rationing of scarce resources. That’s why I refer to Sander’s plan (and all Single-Payer proposals) as Medicaid for All. Either taxes have to rise, or benefits have to fall. But the primary way single-payer systems save money is through monopsony power. When there is only one entity legally allowed to pay for health care, that entity has absolute control over price. Not only that, it can also dictate the services it’s willing to pay for and the ones it won’t. Remember the Golden Rule, “he who has the gold makes the rules!” For instance, Canadian Medicare uses monopsony power to assign global budgets to hospitals, set provider fees and uses price controls on drugs, medical devices, medical equipment and so on. For example, the British National Health Service refuses to cover some cancer therapies.

At least in theory, a single-payer would pay prices barely sufficient to entice the lowest number of doctors necessary to (almost) meet the needs of patients. Waiting lists are necessary to ensure hospitals, clinics, facilities and equipment are utilized at full capacity. Waiting lists also lower costs because some people getting better on their own without treatment. In addition, rationing by waiting tempers excess utilization by extracting another price – one’s time.

Bernie Sanders’ proposal is little more than a utopian fantasy where everyone gets health care paid for by the Good Fairy using pixy dust. It’s evident that neither he nor his team have thought it through. If they had and communicated the reality of that vision, you can bet Americans would run away from it fast.

An earlier version of this Health Alert appeared in Town Hall.

Comments (13)

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  1. Personally, I prefer Chick-fil-A to Colonel Sanders’ recipe.

  2. Don Levit says:

    Let us remember that taxes go to the Treasury’s general fund
    Assuming pro rata distributions Medicare would get its percentage
    If reserves were able to build recall those are loaned out to the Treasury with unfunded Treasury bills as collateral
    Imagine an insurer with that type of liquidity

  3. dennisbyron says:

    You write “That’s why I refer to Sander’s plan as Medicaid for All” referring to the almost certain rationing that would have to part of the program.

    But you could call it Medicaid for All for a much simpler reason: It basically promises all the things already included in United States Medicaid (but not Medicare) today: Almost “free” (nominal, if any, co-pays) medical services, dental care, long term custodial care, vision care, hearing aids plus no deductibles and no lifetime or per-incident limits like United State Medicare.

    I assume someone decided you couldn’t build a political campaign around the slogan “Medicaid for All.”

    • Devon Herrick says:

      I think you’re correct about Medicaid for All being less appealing that Medicare for All. In addition, I believe part of what keeps Medicare from rationing care (more than it already does) is that private insurance keeps it honest. Seniors would never tolerate Medicare denying them much of what workers get through health insurance or health plans. But if there is only one payer, it will have a lot of power to decide what it will pay for and what it won’t fund. It will also have power to decide how much it will pay.

      Sanders failure in part is due to the fact he’s trying to create a single-payer Cadillac Plan rather than what single payer plans tend to be.

  4. John Fembup says:

    I think any variation of a Democrat single-payer plan ultimately works out to welfare, not insurance. Or Medicaid, if you prefer.

    I also think that, if that’s what a majority of Americans want, they is exactly what we shall have.

    • Devon Herrick says:

      A Medicaid for All program likely appeals more to healthy individuals who don’t have to do much more than see a primary care physician once a year. These are the very same people who are being priced out of the Obamacare private insurance plans. With 78 million Baby Boomers added to Medicare in a dozen years; with 70 million people on Medicaid and 60 million on Medicare now, there will be few people left to object by 2025. Even business will be willing to throw up their hands and abdicate any responsibility. At least, that is my fear.

  5. Big Truck Joe says:

    Correct me if I’m wrong, but didn’t Vermont already try Medicare for all single payer in 2013/2014 and the governor found that an increase of 11.5% payroll tax would be too detrimental to the economy? And that’s for a small uniform state that probably has a healthier per capita population than most. If it’s going to bankrupt Vermont, why would anybody think that single payer is a good idea for a unhealthily balkanized United States with a purported population of 330 million and probably millions more illegal aliens?

    • Devon Herrick says:

      The initiative failed in part because Vermont didn’t understand a single-payer functions by rationing care and using price controls. Backers in Vermont wanted a health plan with an actuarial value of 94% with no rationing.

      By contrast, I wonder what would have happened if Vermont had said it was instituting a system where the state ran Medicaid, the federal government ran Medicare and no other health insurance was authorized. The state could have then said it would follow Medicare’s fee schedule and patients were responsible for 30% of outpatient costs and 10% of inpatient costs. Medicare pays doctors about 82% and hospitals 72% of private insurers’ fees. If Vermont had required a $1,000 deductible with perhaps 50% cost-sharing for the second $1000 with a $1000 coverage gap, the cost would have been much more affordable than the lavish plan design they wanted and failed at.

      • John Fembup says:

        Devon, you suggest the Vermont planners erred in basing their work on a wrong model. I agree and yet I think there’s at least a couple other important factors in the Vermont failure.

        First, trying to solve the medical insurance cost problem while ignoring the underlying cost of medical care, is probably not an effective strategy. Medical insurance is costly because the underlying medical care is costly. Medical cost is driven by demographics and new technologies – but also patient health and expectations. None of these factors is alleviated by using some insurance scheme to underpay physicians and hospitals. I think it would help to find ways to reduce demand (public health) and find ways physicians and hospitals might be able to deliver modern medical care for less cost. It would also be useful for a change if the politicians and “health care experts” were more honest with the public. Seems to me the public expects the best medical care in the world at 1960s prices. Our politicians have misled us for decades by pandering to that expectation. Meanwhile, of course, medical costs have continued to rise.

        Second, can design of insurance by committee ever work? Constituencies represented in insurance committees usually have diverse, often non-negotiable ideas about what is essential in any single-payer plan. So they all get added in. And behold! Somehow, unexpectedly, the final design is unaffordable.

        About 5 years before Vermont, a committee in Connecticut attempted to design a single-payer plan for all its residents. The final proposed plan was laughed out of the State House when its cost turned out to be equal to the entire state budget.

        I think we’re sure to see more proposed “solutions”. I doubt any works better than Obamacare so long as politicians and thought leaders think the underlying problem of medical costs can be solved using insurance and/or by underpaying medical professionals and hospitals.

        • Devon Herrick says:

          I agree. The underlying cost of medical care is very high and has an adverse effect on premiums. I believe high premiums are partly due to perverse incentives (i.e. insurance and third-party payment) and partly due to regulations. For that matter, some of the regulations are also the result of third-party payment.

          Basically, as David Cutler said in his book Your Money or Your Life, we pay a lot and we get a lot. But that does not necessarily mean the current system is sustainable. Our society will increasingly have to decide on priorities and pick the low hanging fruit — and forgo some of the most costly technology that benefits few people.

  6. Big Truck Joe says:

    I have to admit, speaking of obesely costly populations, I do love me a bucket of extra crispy Colonel Sanders.

  7. Bob Hertz says:

    Note to Joe:

    The final proposal in Vermont was an 11.5% payroll tax PLUS a graduated income tax that capped off a 9.5%.

    This happened because small businesses were given an understandable extension of time to comply with the payroll tax.

    In Germany, France, and Scandinavia, the payroll taxes for universal health care all come in at around 15%, so the Vermont numbers are right in line.

    But the European nations have had these taxes for 60 years (longer in Germany), so their economies have adjusted nicely. (Just as American businesses have adjusted to Social Security and Medicare taxes)

    But for America to jump into new taxes at these levels is a frightening transition, which no rational politician would risk.

  8. Barry Carol says:

    As John Fembup, myself and others have said many times, health insurance is expensive because medical care is expensive but why is medical care so much more expensive in the U.S. than in other developed countries? Most of the costs of running a hospital and a physician practice for that matter are wage and benefit costs which are generally set by the market. Getting rid of third party payer or implementing a single payer system will not address that fact.

    I’ll offer several factors that drive up the cost of medical care in the U.S. in no particular order of importance. They are (1) defensive medicine combined with often unreasonable patient expectations around testing that is not invasive or painful but can be expensive, (2) wildly expensive but marginally useful (at best) and often futile care at the end of life that is provided either because there is no living will or advance directive or adult family members can’t let go and they know the bill is being paid by someone else, usually taxpayers, (3) prescription drug prices that are significantly higher in the U.S. than elsewhere including extremely expensive specialty drugs which account for only 1% of prescriptions written but approximately 33% of total spending on drugs, (4) fraud in the unmanaged parts of the Medicare and Medicaid programs, and (5) higher administrative costs due to the complexity of our system that includes multiple private insurers plus Medicare and Medicaid all with different rules and payment rates.

    While implementing a single payer system would address the administrative cost issue, the savings would probably be less than people think and paying doctors and hospitals less than their costs is sustainable without a private sector to shift costs to. Fraud will likely also increase and the decisions around what services are covered will be driven way too much by politics. A single payer system would also lock in all of the rigidities in the current system and could reduce future medical innovation. If out-of-pocket exposure is low or non-existent as Senator Sanders proposed, utilization would rise, perhaps significantly.

    Finally, getting rid of third party payer would give individuals a lot more choice with respect to deductibles, coinsurance and out-of-pocket maximum amounts in the insurance coverage they choose to purchase but it’s not at all clear to me that it would do anything at all to reduce the cost of care per service, test or procedure. Utilization of services like imaging could decline somewhat but I don’t think that will be enough to move the needle. So, while the new freedom and choice to buy the coverage you want rather than have your employer do it for you might be desirable to many, especially healthy people, I don’t think it will do a lot to reduce the cost of healthcare.