High Taxes, Lack of Federal Bailout Make Vermont Cancel Single-Payer Plan
Vermont Governor Peter Shumlin has cancelled his longstanding plan to impose government-monopoly health care in the Canadian border state:
Tax hikes required to pay for the system would include a 11.5 percent payroll tax as well as an additional income tax ranging all the way up to 9.5 percent. Shumlin admitted that in the current climate, such a precipitous hike would be disastrous for Vermont’s economy.
“Pushing for single payer health care when the time isn’t right and it might hurt our economy would not be good for Vermont and it would not be good for true health care reform,” Shumlin said. “It could set back for years all of our hard work toward the important goal of universal, publicly-financed health care for all.”
The state had been anticipating $267 million in federal funding to revamp its system, courtesy of a 2013 Obamacare waiver — but the current estimate has fallen to $106 million. Vermont also overestimated by $150 million in federal Medicaid funding. (Daily Caller)
While Vermonters are blessed to be relieved of the risk of government-monopoly health care, I have to regret that the rest of us won’t be able to observe the consequences. I had a secret list of predictions that I was planning to roll out when the plan passed. One was that Vermonters would suffer long queues for treatment. They would have to travel out of state to find it.
Boston hospitals would have to send claims to Vermont’s single-payer health plan. How would that work out? Hospitals in Montreal, however, might find it profitable to treat Vermonters, as long as they had their own money to spend on procedures. (Cash-paying foreigners can jump the queue for access to Canadian hospitals, while Canadians cannot.)
With respect to taxation, I think the governor’s plan underestimated what the plan would need. Canadian provincial taxes are higher than 9.5 percent. Quebec has a progressive income tax that ranges from 16 percent to 25.75 percent. Ontario’s starts at 5.05 percent, hits 9.15 percent at about $35,000 (U.S.), and tops out at 13.16 percent.
And those taxes result in long waits for treatment. To maintain the access to care that Americans expect, they are not nearly enough.
“As medical costs continue to rise, so will ACA subsidies and so will taxes.”
As quoted from John Fembup in “Bye, Bye Bailout”.
The Affordable Care Act is a misnomer.
Makes you wonder how many other ACA financial estimates are inaccurate and in effect detrimental
This is good news on two fronts, in my opinion.
First, it’s a classic example of a comment attributable to the Irish novelist and poet, James Joyce, who said: “The force of idealism is lost when it fails to recognize the reality of things.”
Second, by quantifying the level of taxation that would be required to implement a single payer health insurance system in VT, people everywhere now have a better understanding of the tradeoffs related to financing vs. the current system even after taking into account the supposedly large savings from lower administrative costs claimed by single payer systems. Moreover, VT is a small state with a small minority population and no large inner cities to contend with. A single payer system there would probably easier and less expensive to implement and manage than in any other state.
Why put up with Obamacare or Medicare when you can head for Cuba and get great treatment at a cost lower than what you would pay for your annual deductible, never mind the exorbitant Obamacare premiums.
This is in fact big news.
The advocates of single payer (who I support in many ways)
have been talking about 5% payroll taxes and extra wealth taxes as sufficient funding. (see Gerald Friedman of UMass)
When Wm Hsaou (sp?) and Gov.Shulmin really looked under the hood, the taxes needed were much higher.
The fact is that single payer is too big a “bite” for any American govt entity to digest in one legislative session.
Here are two of the reasons for this:
– if one state raises taxes by a lot, then wealthy persons and high tech businesses will just move to lower tax states
This is already happening to some degree.
and
– we also have what I call the General Motors + Dunkin Donuts problem.
Gen Motors probably spends 20 percent of payroll on health insurance.Dunkin Donuts might spend 3% and would like to spend 0%.
These two corporations might as well be in different countries.
But under any valid single payer plan, each corp would spend about 10% on health insurance
Dunkin Donuts will fire people a heck of a lot faster than
GM will hire them.
In other words, the transition to single payer is too brutal for an American gov or president to authorize.
It sounds like you are saying that employer-based benefits are source of competitive advantage to U.S. based business. What I find interesting is that the unions’ gold-plated benefits were a big factor in the automakers’ inability to respond to the changing environment, resulting in the GM bankruptcy.
I also note that the carmakers’ huge Canadian subsidiaries, which drive the economy of south-western Ontario, have never lobbied for an exemption from the single-payer system there. (The governments of Canada and Ontario joined with the U.S. as owners of the bankrupt GM.)
The Canadian autoworkers’ union split from the U.S. union decades ago, and I suppose this had more to with Canadian unions’ role in the social-democratic New Democratic Party, which is more explicitly defined than U.S. unions’ role in the Democratic party.
Nevertheless, why do U.S. unions champion employer-based benefits while Canadian unions champion single-payer, government monopoly, health benefits? Probably something a labor historian can answer better than I can.
Bob,
I think the single payer advocates, especially PNHP, have always underestimated the tax burden needed to finance a single payer plan, overestimated the potential savings from administrative costs and ignored the likelihood of significant fraud which we already see in both Medicare and Medicaid.
For perspective, total federal revenue for fiscal 2015 is estimated at $3.3 trillion of which 32% or $1.056 trillion will come from payroll taxes. Medicare’s share of the payroll tax, which applies to all wages and investment income above $250,000 for a couple, produces about $275 billion. Social Security taxes, which currently apply to approximately 85% of all wages, will raise about $780 billion. If it applied to all wages, it would raise $920 billion. The sum of those two is $1.2 trillion or about 7% of GDP. Combined Medicare and Medicaid spending would be close to that amount including Medicare spending paid by beneficiary premiums and state payments for dual-eligible people. That’s another 7% of GDP.
If employers raised pretax wages by the amount they are currently contributing toward their employees’ health insurance premium, current payroll taxes would probably have to double or close to it and apply to all wages to replace current insurance premiums for the non-Medicare and non-Medicaid populations paid by employers and individuals and cover most of the currently uninsured. Even if the social security portion of the payroll tax were enough to get the job done, it would still amount to 13.3% of all wages.
The potential savings from lower administrative costs would likely be a lot less than single payer advocates think and fraud, which is impossible to quantify precisely, could be significantly higher than they think.
Given our history, our culture, and our preference for choices, I think single payer advocates are barking up the wrong tree here.
Barry, a couple of questions and a comment.
1. Questions
Does you Medicare payroll estimate include both employer and employee share?
Did you back into your estimate of the Medicare investment income tax given that it is not really a payroll tax? (It doesn’t even really go to Medicare does it?)
2. Comment
You are correct about the administrative cost issue. One of Shumlin’s specific reasons for delaying his plans (see his CFO’s presentation) is that the savings estimated by Hsaio were “not practical to achieve.” That is the same thing the legislature in Massachusetts finds every time (not that often) it looks at single payer for Massachusetts (the single-payer bill in Massachusetts has been filed every year for 20 years or so but has only received serious review once or twice)
Dennis,
Yes, my numbers include both the employee and employer share of payroll taxes. From a taxes paid perspective, the employer’s share should really be viewed as both taxes paid by the employee and income paid to the employee. That’s how most economists view it.
I don’t know how much revenue was raised by the new 3.8% tax on investment income. I suspect not very much in the scheme of things.
Another messy problem is that in our current system, many large employers cover spouses and children on the company health plan.
This enables the spouses and adult children to take jobs in small businesses that do not provide health insurance.
In a single payer system, each firm of any size would be hit with the same payroll tax. So basically, state government gets a nice bit of budget relief, and the local beauty shop or Midas Muffler gets a big new tax to pay.
This cannot fly politically and even if it could fly, would hurt the economy.
It might have been Bruce Bartlett, I am not sure, but someone said a few years ago that we could not solve health care financing without a new tax like the VAT. The story from Vermont would seem to bear that out.
It was Bruce Bartlett a number of years back who said that the VAT is a money machine and that’s what we need right now. Ezekiel Emanuel, in his book, “Healthcare Guaranteed,” suggested paying for health insurance with a 10% VAT that would apply to pretty much everything. That would never fly. The broadest based value added taxes in Europe raise about 0.4% of GDP in revenue for each 1.0 percentage point of tax rate. So, to raise 7.0% of GDP with a VAT, which is about what we would need to replace commercial insurance, cover most of the uninsured and leave Medicare and Medicaid intact would require a 17.5% tax rate (7.0 / 0.4). Even though, with the exception of Switzerland, value added tax rates in Western Europe currently range from 20.0% to 25.0%, I don’t think it would make it through the political process in this country.
Even a 5.0% VAT rate aimed at a combination of infrastructure investment and deficit reduction would be a tough sell because people know all too well that the rate could easily be raised later once the tax and the collection infrastructure are in place. The states might get behind a 5.0% rate, though, if the money were used to federalize Medicaid and allow the states to fund most or all of their pension and retiree health insurance liabilities. I don’t see that happening either though because it would be seen as bailing out greedy unions and incompetent and week kneed public sector management and politicians.
I am sure no one will be surprised at this but the national single payer lobby — a group called Healthcare-NOW, which is loosely connected to PNHP — sort of claims the insurance companies used their political influence to kill single payer in Vermont, that the delay had nothing to do with financing. (See http://www.singlepayernewyork.org/category/announcements/)
There’s a lot of inside baseball in the linked blog post from the single payer lobby. At least four items popped out for me:
1. The single-payer lobby implies part of the problem was the “Medicare people.” I don’t know if folding in Medicare folks was ever part of the Vermont plan but Shumlin specifically and loudly denied it during the recent campaign.
2. One of Shumlin’s major (but not singularly important) stated reasons for not moving forward at this time — amounting to quite a bit of money — was that there was no guarantee of a needed Medicaid waiver. The single payer lobby said the problem for Shumlin was that that would require Congressional approval. But that is not true (at least it wasn’t true here in Massachusetts); CMS can grant Medicaid waivers (and PPACA waivers which Vermont also needed).
3. The lobby implies that Vermont’s insurers in the individual market — there are only two apparently and the biggest by far is Blue Cross — is a big opponent of single payer. There is no indication of this from the governor. I thought it was pretty much established that Blue Cross would administer whatever finally came out the other end just as companies such as Blue Cross administer Medicare.
4. The lobby says the real story is being hidden by Shumlin. That is true. In fact a Democratic legislator sued Schumlin to see various material, particularly the contract with and work product from MIT professor Jonathan Gruber. The suit might now be considered moot but it would be interesting to see the detailed calculations Gruber did (ditto on the national level)
Someday I would like to understand what a ‘Medicaid waiver’ is. Does it mean that the feds give back their share of Medicaid costs because Medicaid recipients are now in a new state program?
Anyways, my own contribution to this discussion is that the “savings” from single payer are perhaps less tangible than the advocates of single payer always assume.
Say that every clinic and hospital can fire 3 people because claims are now so simple.
In theory then the clinics would accept lower fees. (ignore for now what this does to the economy.)
But these fees are not revenue! In fact the clinic pays lower payroll taxes, so revenue is down.
And the savings do not bear fruit unless the government lowers all fees and the clinics accept this.
Overall, it is anything but a simple transaction that ‘pays for itself’.
Bob,
To the extent that healthcare costs can be reduced by lowering administrative costs, it’s a good thing if looked at in isolation. Lower costs allow for lower prices (contract rates) while net income is maintained. Some people will indeed lose their jobs but from an economic standpoint, money previously spent on healthcare is freed up for other things.
Think about the recent sharp reduction in gasoline prices. While there have been layoffs in the oil and gas industry as oil and gas producers cut back on exploration and drilling in regions with high production costs, the overall economic effect is a significant tax cut for the American people which frees up money for other things. It also cuts our costs for oil that we continue to import. It’s a huge net positive for the economy and especially for the airline and cruise ship industries.
My problem with a single payer healthcare / health insurance system is that it is likely to create more problems than it solves. The folks who like lower administrative costs the most are primary care doctors. Dealing with insurers is a big hassle for them in terms of both and time and expense as well as wage and benefit costs as a percentage of their practice revenue. For everyone else, including hospitals, it’s not a big deal in the scheme of things. At the same time, it is likely to reduce both insurance and provider choices for the American people and result in more fraud as well because the government is the payer. Too many in government view fraud as acceptable collateral damage and crooks often think it’s OK to steal from the government especially if they perceive their chance of being caught as extremely low.
Bob
I think a Medicaid waiver can be for anything the state wants waived with the principal (or is it principle?) being budget neutrality to the federal government. We have had one in Massachusetts since 1997 and each time it comes up for renewal the explanation is basically along the lines of “you will get the same amount of money you would otherwise get if you followed the national Medicaid rules.” The most famous or infamous Massachusetts Medicaid waiver was the 2006 waiver that enabled RomneyCare but that was only the third in the series with the most recent — the sixth or seventh — granted only a month or so ago.
I believe Arkansas in 2013 used a Medicaid waiver to implement Obamacare by saying that all the people who newly qualified by Medicaid under PPACA would get/have to “buy” an Obamacare plan instead. This was the basic philosophy of RomneyCare here in Massachusetts as well back in 2006.
No: A section 1115 waiver allows the state flexibility in operating Medicaid, in exchange for ensuring that the federal government bears no more financial risk than it already assumes. (That is a very colloquial definition that I hope does not sacrifice accuracy.)
I am not sure what the word “no” refers to in John Graham’s comment about the meaning of Medicaid waiver because he and I are saying basically the same thing in describing it.
Going back to my suggestion that large employers are the secret financial engine of our health care system……….
Gov. Shumlin’s plan in VT was extremely dishonest about this.
His projections were based on large self-funded employers like IBM paying the payroll tax even as they kept their own plans.
(which under ERISA they cannot be forced to relinquish.)
Does anyone believe they would agree to do this?
A local writer named Wendy Wilton has been pointing this out for 3 years. Don McCanne also notes this on his PNHP blog.
I didn’t know about the expectation that self-funded employers would be expected to keep their existing health insurance plans and pay the new payroll tax as well. It is indeed dishonest. It also largely eliminates much of the potential administrative savings that single payer advocates claim would come with a single payer system. In addition, without the self-funded employers keeping their insurance plans, the payroll tax rate needed to finance a true single payer plan would be higher than 11.5% and the income tax might have to be higher as well.
It’s very helpful, though, that more honest numbers regarding the level of taxation needed to replace private insurance with a single payer system are starting to see the light of day as opposed to the unrealistically low numbers thrown around by the zealots advocating for the change.
The advocates of single payer often say that in their system, firms and individuals will pay no more in taxes than they have been paying in premiums, and for better coverage too.
This statement is naive and self-serving, I am afraid.
#1 — there are vast numbers of businesses (especially outside New England) that pay nothing for their employees’ health insurance today.
An 11.5% payroll tax (as in Vermont) would be a major disruption for them.
Governor Shumlin knew this, incidentally. It was a main reason he pulled back.
#2 — the vast majority of families with incomes over $100,000 get health insurance from their employer. They might have to pay part of the premium, maybe $3,000-$5,000 a year as their share, although about 15% of employee still have no premium-sharing.
Under the Vermont plan, families like this would be hit with a 9.5% income tax.
Very few employers could gross up their salary to cover a tax hit like this.
Even if the above numbers were not so drastic, many American firms and individuals will not buy the argument that paying higher taxes will really lower their health care costs. They are suspicious that even if basic health premiums go to zero, they will have to pay more for supplemental insurance…..or that the government will run short of money, and the blessing of free insurance will be taken away for high earners.
Thank you. I think the evidence in favor of your argument is that Canada, for example, does not have higher wages for people doing the same jobs as their American peers. Indeed, after paying taxes and health-insurance premiums, the American takes home more after-tax pay than the Canadian.
(Obviously, I can’t go through the whole income distribution in a blog comment, so don’t ask me to!)
The American citizen needs that higher after tax pay to cover his/her deductibles, if they get sick, and to save money for college tuition, if that applies.
I have had the impression from just casual observation that Europeans and Canadians seem to have higher disposable incomes than Americans.
They go on longer and more expensive vacations, without a doubt.
That might be because once they are done paying taxes, they have fewer things they need to buy in health care and education. The Germans especially have much better saving habits, maybe that is the difference.
Hard to generalize, though.
I have no idea what percentage of Europeans go on vacation to distant places, what their vacations cost or how long they last compared to American vacations. I do know that when I go on a cruise or a land based European vacation, I generally meet the 20% of people who do 80% of the traveling including, on cruises, many people from Canada, Australia, New Zealand and the UK.
I don’t know if you know it or not but the home ownership rate in Germany is about 40% of the adult population as compared to 65% in the U.S. It’s 36% in Switzerland. Also, Europeans live in much smaller houses and drive tiny cars because gas costs $8.00-$9.00 per gallon, most of which is taxes of course.
They pay half or more of their income in taxes of one sort or another. It costs a lot more money than even in expensive U.S. cities to go out to eat because restaurant employees make $15.00-$20.00 per hour in some countries. That all said most Europeans like it that way. They like their safety net and think they get pretty good value for their tax dollars. I think the American culture, thought process and value system is very different. I’m not making a judgment about which is better. I’m just saying we’re different and the majority of people in the U.S. don’t want us to become Western Europe or Canada or Australia. That includes opposition to taxpayer financed health insurance whether it’s single payer like Canada or it uses insurance companies like Germany, Switzerland and the Netherlands. We like choices even if it costs somewhat more.
Thank you. There is no need to go by casual observation and impressions. Household disposable income, adjusted for purchasing power parity, has been well measured and compiled by OECD for years. The U.S. ranks higher than any other country, by a significant margin. See http://www.oecdbetterlifeindex.org/topics/income/.