Explainer: The Real Challenge of Funding Single-payer Medicine

“Will you raise middle class taxes?”

How many times have we heard that question, as single-payer health coverage has become a central issue in the 2020 Democratic nomination campaign? Whether you think it’s a good idea or not, you have to be frustrated with the “how will we pay for it” question and the simplistic way that the various campaigns and the media have approached it.

“Middle class taxes” sounds good in a debate, but it is not the important question. The phrasing suggests that we are proposing some brand new government service that we need to match with a new revenue source. Moving to single-payer healthcare model involves something far more complex: capturing a number of enormous existing revenue streams and shifting them into one single stream.

According to a New York Times Upshot column, $3.28 trillion of U.S. healthcare spending can be broken out into the categories shown in the chart.

Each of these needs to be shifted to the central stream, or if that is not practical, replaced with new revenue. Let’s take them in order of easiest to hardest:

Medicare. Medicare is currently funded by a payroll tax, divided evenly between employee and employer, each paying 1.45 percent of wages. Unlike social security, there is no annual maximum. This tax could simply continue as is, with no disruption.

Medicaid. This program for the low income is funded in a partnership between the federal government and state governments. Federal funds come from the general federal budget and state funds come from some combination of general and special revenues (e.g. tobacco taxes). Although governments would love to free up this general revenue, it would be best to leave these streams alone.

Other government healthcare spending. This includes veteran’s care, Indian healthcare and other federal, state and local programs outside Medicare and Medicaid. Like Medicaid these programs are paid for by general sources and could be left alone.

Private health insurance. Now it’s getting tricky. Since employers are required to provide insurance to their employees, and since benefits are usually uniform among all employees, the premiums they pay constitute a weird sort of Marxist head tax: from each according to his abilities and to each according to his needs. The premiums paid on behalf of employees usually have nothing to do with their earnings or their contribution to the productivity of the enterprise. An older employee has higher premium costs than a younger employee, and if the employer covers dependents, employees with large families cost more than those without families.

So, how would single-payer go about capturing the revenue stream currently going from employers to private insurance companies? The most obvious solution would be to simply levy a head tax on employers for the average cost of covering each employee under single-payer. But given the wide variation in plans offered to employees, this tax would hit some employers much harder than others. A big unionized firm or government that offers generous family benefits would not pay too much more, but a small business or non-profit that offers bare bones coverage to employees only would be hit with a much bigger bill.

The transition from premium payments to employer tax would be difficult, but probably necessary. Failing to do so would amount to an unprecedented tax cut for business and revenue increase for governments, and there is no guarantee that any of that revenue would find its way back into the healthcare system.

Out-of-pocket. Sanders and Warren want deductibles, co-insurance and co-pays to go away. This would place nearly $400 billion, or $1,200 per person, onto the single-payer budget with no revenue in sight. Maybe this is where the middle class tax increase comes in: try to capture current out-of-pocket spending in the form of taxes. But across households there is substantial variation in the amounts of this spending. Healthcare costs follow a classic “hockey stick” curve, with most spending going to treatment of chronic conditions of a fraction of the population. A uniform tax that spread this cost around would amount to a large net tax increase for most people. Warren has said that the savings from elimination of out-of-pocket costs will offset any tax increase, but this depends on current coverage and the health history of each household.

Other uncovered spending. This is a large category that covers everything that does not run through a public or private insurance program: cash payments by the uninsured, indigent care, alternative medicine, cosmetic surgery etc. A single-payer program would likely be asked to cover some or most of these costs, and new revenue sources would be needed. For example, hospitals would demand that indigent care be offloaded from them and onto the single payer system. Similarly, those who are uninsured now, and pay cash, would fall under Medicare for all, so new revenues would be needed for the services they need. It would be extremely hard to capture and redirect this revenue stream, so brand new revenues would be needed for much of it.

Each of these revenue sources is embedded in the economy and into the budgets of families, governments and businesses. This discussion should not just be on the narrow question of new revenues, but on the much larger question of shifting a substantial share of GDP in ways that are fair and revenue neutral. And even if fair methods are devised, how will we manage the uncertainties and frictions that will threaten economic stability. Moving trillions of dollars from one pocket to another is not simple.

So wake up, candidates. It’s a lot more than that feared middle class tax increase.