Daringly deceptive: Elizabeth Warren’s Medicare-for-All financing plan is replete with mythical math, constitutional kabuki, and imaginary savings

Under pressure for months for having refused to release detailed plan to pay for her single-payer, everyone-and-everything-covered government health care plan dubbed “Medicare for All”, Sen. Elizabeth Warren finally released such a plan on Friday. The plan is being highly praised among single-payer ideologues. Some are even trumpeting the fact that she put out a plan at all - the bare minimum that should be expected of someone running for president - as heroic.

I’ll pass.

Warren released a financing plan that is hasty, one that appears designed more to quell the criticism that she doesn’t have a plan to finance her single-payer proposal than to actually pay for her single-payer proposal, and one that looks more like swiss cheese than Swiss healthcare.

The savings from Elizabeth Warren’s single-payer Medicare for All financing plans aren’t even close to what she claims, and the plan won’t raise nearly as much revenue as she hopes.

Let’s delve into the financing plan’s major savings and revenue provisions.

OVERESTIMATING SAVINGS

Warren’s financing plan accepts the basic framework of a report published by the Urban Institute last month. The report examined multiple health care coverage expansion ideas, among them three different versions of Medicare for All. The option in that report that most closely resembles Warren’s plan is estimated to cost the federal government an additional $34 trillion over the first decade of implementation.

But Warren says her plan is better and it will require the federal government to raise just $20.5 trillion. How? Warren claims to have found $7 trillion in “savings” and believes that Congress can directly tax state governments to the tune of $6.1 trillion.

Warren fails the administrative cost vs. health care utilization challenge.

Almost $2 trillion in savings in Warren’s plan comes not from an actual policy but from an assumption. Warren’s plan simply assumes that traditional Medicare’s 2.3% administrative cost will remain flat, which allows for a $1.8 trillion in savings against the analysis from the Urban Institute. Having studied the idea, the Urban Institute says that holding administrative costs for Medicare to 2.3% when it is required to cover both everyone and everything, is impractical.

a single-payer approach exposes the federal budget to greater financial risks than other reforms, processes to prevent fraud and abuse and programs to manage care and monitor quality and access under centralized provider payment rates will be even more important than they are today. Such programs require significant federal investments.

- The Urban Institute

Warren’s paper counters that “traditional Medicare already performs all of these functions with administrative spending of 2.3%”, but that is flatly not true. Traditional Medicare does not cover everybody; it doesn’t even cover everybody on Medicare. Traditional Medicare does not, in fact, “manage care” in any real sense since traditional Medicare is a fee-for-service system. A procedure is performed, billed, and Medicare pays the set rate.

One of the reasons administrative costs are ridiculously high for private insurance - let’s agree with single payer advocates that it’s 12% - is that private insurance often tends to manage-care people to death. A happy medium between nickel-and-dime management of care and nearly no management of health care utilization at all, the Urban Institute says, is that 6%. In fact, without this increase in administrative spending in the form of care management, utilization (and fraud, according to the Urban Institute) will significantly rise.

Perhaps the point of keeping the resources relatively low for administrative expenses is to do less utility management and allow people to use services more. After all, cost is consistently cited as a reason people, despite having insurance, choose not to obtain care. But with increasing utilization, costs also increase. It’s simple. If not just more people are using medical services but also using more of the services, the cost goes up. Medicare spending is growing at a slightly faster rate than overall health spending. That is at least partially due to the already increased service utilization among Medicare participants. Utilization is likely to rise a lot faster under an all-encompassing single-payer system, the costs of which the federal government must pay for. This would be perfectly fine if Warren adjusted for that cost by increasing the total cost of her plan.

She doesn’t.

Warren admits to making stuff up.

Not only does she not account for the increased cost from increased utilization, Warren further claims her plan will save an additional $2.3 trillion through “payment reforms.” While half of it comes from cutting payments to doctors and Warren’s plan is upfront about that, the other half is derived from “bundled payment reforms” that Warren’s campaign “adjusted... to reflect the desired policy outcome of reducing this spending.” This is almost literally another way of saying “we made stuff up so the numbers will look like whatever Elizabeth Warren wants the numbers to look like.”

It bears mentioning here that a single-payer system is not required for payment reforms. In fact, the opportunity to try multiple payment models in the private market is a much better way to finding reforms that actually work (improve health outcomes and reduce total cost of care) than a massive government plan trying one universal thing at a time. What the government needs is better regulations and incentives for insurance companies (as well as Medicare and VA) to try new payment models.

Warren severely overestimates savings from prescription drugs.

Turning to prescription drug pricing, Warren’s plan counts $1.7 trillion in savings over what the Urban Institute report estimates. Warren claims to get there by prescription drug negotiations and extending those lower drug prices to everyone. Warren’s plan draws on HR 3, a House Democratic bill sponsored by Speaker Nancy Pelosi to lower prescription drug costs. HR 3 limits negotiated prices paid for brand name drugs to 20% more than the average price paid by other developed economies. Warren’s plan says that it would reduce costs further because (a) single-payer would mean extending those savings to all drug spending, not just the current Medicare population, and (b) Warren would limit the negotiated maximum for brand name drugs to 10% (rather than 20%) above the average price paid by other developed countries. This, Warren asserts, would save 70% on brand-name drugs compared to prices Medicare currently pays.

Warren seems not to realize that with that HR 3 already extends savings negotiated by Medicare to plans outside of Medicare. HR 3 estimates negotiated discounts to save about 50% in drug costs (the average of the drug price discounts received by Medicare and Medicaid). Warren’s claim that she can do better than Speaker Pelosi is specious, unproven, and unlikely.

Warren also plans to raise $6.1 trillion by taxing the states directly.

Warren plans to directly tax state governments, which is constitutionally dubious.

If Warren’s savings appear unlikely to be realized, her plan to reduce the federal government’s burden another $6.1 trillion by simply making the states pay for it is worse. That $6.1 trillion is composed of money coming directly coming from the state and local government in the following categories:

1. States would continue to spend the same amount of money they do now on Medicaid and the Children’s Health Insurance Program (SCHIP), but would now write one check to the US Treasury ($3.4 trillion).

2. States and municipalities would also have to continue to spend the money they are now spending on health care premiums for state and local government employees ($2.7 trillion).

Together, these payments are known as “maintenance of effort”, signifying that state and local governments would still have to pay the the amount they would otherwise spend on health care for their employees and on Medicaid and CHIP beneficiaries.

Warren argues that she can do this - force states to make “maintenance of effort” payments - because that is what was done when Medicare Part D prescription benefits were created in 2003. Congress directed that states make payments to Medicare based on the amount it would have cost a given state to cover prescription drugs for every Medicare-Medicare dual eligible individual who signed up for Part D.

A closer examination of the actual Part D legislation reveals, however, that the only enforcement mechanism Congress created for this payment was that if a state didn’t pay, the Treasury would deduct the payment from the amount that would be otherwise due to that state in Medicaid money, not by sending IRS agents to governors’ offices. This only worked because there continued to exist a Medicaid program in which states received money from the treasury. Warren’s plan, on the other hand, eliminates Medicaid itself, leaving no way to enforce the payment.

Except, of course, as a direct tax on state treasuries.

That is hugely problematic, both practically and constitutionally. I hope I do not have to explain the practical problem of having the federal government stick its tentacles into state coffers and the protests that would cause. Constitutionally, the federal system in the United States operates on a dual sovereignty principle, meaning that neither the states nor the federal government is allowed to directly tax one another. In the few instances that the Supreme Court has allowed Congress to tax state interests, it explicitly held that it did so because that curveout did not count as a tax on the state per se. Elizabeth Warren is proposing a tax on every state, per se. The states are going to sue, and they are going to win.

Next, Warren dives into the revenue part of the equation.

UNDERESTIMATING REVENUE.

Warren’s plan to pay for what is a completely inadequate $20.5 trillion she does think she needs to add to the US treasury over 10 years are even less practical than imagining into existence many of the savings.

The first of these revenue raisers is a $8.8 trillion tax from employers.

Employers are currently projected to spend about $9 trillion over the next decade in employee health care premiums. Warren’s plan would require that those payments be made to the federal government instead, to fund Medicare for All. This is similar to the “maintenance of effort” described for states above, but not as problematic constitutionally, because, well, corporations are not people, my friend, and they’re not states either.

But the practical problems with this are numerous. During the transition period, large corporations who are required to provide health benefits under Obamacare may move to more aggressively reduce employer payments, passing more of the cost on to the employees. This can cause a higher share of premiums paid by employees or plans with higher deductibles.

Warren’s plan is also a great way to get small businesses to hurry up and drop their employee health benefits. Businesses with fewer than 50 employees who provide health care for their employees will have to continue to pay in the form of a ‘maintenance of effort’ payment, but their counterparts that do not offer health insurance will owe nothing. In other words, Warren will lock in, via taxation, higher business expenses for employers who do the right thing and perversely, let those who don’t slide.

These moving pieces on the employer health care chessboard make the actual revenue that may be realized through this method highly uncertain, and Warren knows that. She has a contingency plan. Sort of.

If needed to meet the $8.8 trillion revenue target, there would be a Supplemental Employer Medicare Contribution requirement for large firms with extremely high executive compensation and stock buyback rates.

- Elizabeth Warren’s plan to pay for Medicare for All

Ah, the confidence-inspiring “We’ll see if this works, and if not, we’ll make something up then” plan.

Warren also assumes that this will result in $3.7 trillion in additional, taxable pay for workers who will no longer have to pay their pre-tax deduction for their portion of an employer health plan. Her campaign extrapolates that taxing this extra income will raise another $1.4 trillion.

I think we all know that if Warren doesn’t know for certain how the employer payments will work out, the extra employee income, and the taxation thereof, is just as much in limbo.

Further, it is more than likely that employees will not, in fact, turn the money they might save on employer-sponsored health insurance into taxable income. They might redirect the money to a college fund, use it to better fund their 401(K) or IRA, or give it to charity. These might all be good things, but federal revenue-raisers they are most definitely not.

Another significant - and significantly dubious revenue raiser is Warren’s wealth tax.

Warren proposes to place a 2% wealth tax for net worth above $50 million, and a total of 6% wealth tax on net worth above $1 billion. She says it will raise $3 trillion.

Wealth taxes are one of those ideas that appear good on the surface but don’t actually work as revenue raisers. First, they are notoriously difficult to enforce. Just like the police aren’t going to knock on every door to enforce a potential assault weapon buyback, even if the buyback were mandatory, it is impossible for the IRS to keep track of the net worth of every taxpayer.

Net worth is also highly variable - Jeff Bezos gains and loses the “World’s Richest Man” title on almost a daily basis. The prices of equities vary, property assessments and values vary every year, and the value of privately owned corporations, especially start-ups? Don’t even try.

12 European countries used to have a wealth tax, but with France’s repeal of its wealth tax last year, just three remain. With the French repeal, no EU country has a wealth tax. The very countries Warren praises for having achieved universal health care are abandoning their wealth taxes because it turned out to be a dud of a revenue-maker. Warren’s assumption that wealth tax will bring in about 1% of GDP annually is highly suspect given the experiences of other developed economies.

The truth is we have no idea how - and especially whether - a wealth tax will work in the United States. To stake a wholesale overhaul of a fifth of the US economy on an untried tax device is irresponsible, at the very least.

Warren significantly inflates how much money can be raised by better tax enforcement.

Warren estimates that she would raise another $2.3 trillion by simply collecting more of the taxes that are already owed.

To say that this is a generous estimate would be an absurd understatement. The campaign seems to assume a constant rate of return of $6 for every $1 increase in enforcement budget for the IRS, which is absolutely bonkers.

Here’s what we do know: The Congressional Budget Office finds that it would take a $20 billion increase in the IRS enforcement budget to raise revenue by $55 billion. That means Warren would have to increase the IRS budget by at least $836 billion over 10 years to achieve $2.3 trillion in additional revenue.

For reference, the current budget of the IRS is about $11.5 billion a year. Total. So Warren would have to roughly septuple to octuple the IRS budget.

Another way of looking at the cost is how much of what is known as the tax gap Warren claims will be closed. Currently, the IRS collects about 15% less in revenues than the treasury is owed. Warren claims that her plan will close a third, or five percentage points, of that gap. Even if she were able to do so, it wouldn’t bring in the money she estimates.

The IRS estimates that a one percentage point increase in voluntary compliance would raise an additional $30 billion a year (no additional enforcement cost). In order to raise an additional $200 billion a year, voluntary compliance would have to go up by almost 7 points. A 5-point increase in nonvoluntary compliance is woefully shy of the target.

Another $800 billion for the Warren plan comes from eliminating the Pentagon’s Overseas Contingency Operations fund, which, as an ‘emergency’ fund, is exempt from mandatory caps on discretionary spending. But there is nothing keeping Congress from simply creating another ‘emergency’ fund and spending the money there. Warren does not actually lay out how she would eliminate what the fund is there to finance, which is overseas military operations. Are we pulling a Trump here and bringing everybody home from everywhere, no matter who it hurts?

Lastly, Immigration reform will add $400 billion to the federal coffers, Warren says. Sure, but nowhere in Warren’s health plan is immigration reform a necessary precondition. So either Warren is being disingenuous about how to pay for her health care plan, or she is willing to hold health care legislation hostage to immigration reform. She should clarify which it is.

Conclusion

We already knew that Elizabeth Warren’s single-payer financing plan was many, many, days late. Now we know it’s also quite a few dollars short.