#FeelingTheHeartBern: The Good, the Bad, and the Messy of ‘Medicare for All’

This essay was written during the 2016 Democratic Primary and published originally on my website, Parsons’ Pulpit, on June 29th, 2016.

According to Bernie Sanders’s healthcare plan, the Affordable Care Act (ACA) took a nice first step, but to fulfill the aspirations and legacy of such “great Democrats” as Franklin D. Roosevelt, Harry Truman, Lyndon B. Johnson, and others, more needs accomplished to deliver healthcare to all Americans. The ACA has aided more than 17 million Americans in securing health insurance. However, many millions still remain either uninsured or underinsured. Since “the U.S. spends more on healthcare per person, and as a percentage of gross domestic product,” the Sanders plan purports America must embrace a single-payer healthcare scheme and thus join “other major industrialized nation[s]” in providing healthcare to its people.

Sanders’s proposal asserts health insurance for all is both “the morally principled and financially responsible decision.” On the financial front, the Sanders healthcare plan wishes to “build on the strength of the 50 years of success of the Medicare program,” and by doing so, “significantly reduc[e] overhead, administrative costs[,] and complexity.” Since this essay is an economic critique, little attention will be given to moral dimensions of healthcare for all citizens. Yet, to underline an intersection of the moral and financial, the Sanders plan presumes — divisively, it might be added — the current American healthcare system works “just for millionaires and billionaires.” From this commencement point, much can be both missed about the present healthcare system and gleaned about Sanders’s detached worldview and arguments.

The Good: Costs and Financial Distress

The Sanders plan sells itself as a panacea for all our societal ills, be them class inequality, economic stagnation, or whatnot. It is not clear from Sanders’s proposal, if Sanders (and/or the staffer who wrote it) truly understands the function of health insurance. Yet, for all the oversell, the Sanders plan does squarely focus on the financial distress many Americans experience.

Even though no increase in measured physical health outcomes occurred, the 1998 Oregon Medicaid Expansion exhibited significantly reduced financial strain. The researchers clarify something too often missed in this healthcare debate: “Health insurance is a financial product that is aimed at providing financial security by protecting people from catastrophic healthcare expenses….” Likewise, Amy Finkelstein and Robin McKnight underscore the same, writing, “Public health insurance offers two potential benefits: direct risk reduction benefits and indirect health benefits.” It would behoove many, including the authors of the Sanders plan, to grapple with this understanding and not falsely hype any health insurance proposal that does not disentangle the direct and the indirect effects.

Sanders’s plan projects that “[m]illions of people will no longer have to choose between healthcare and other necessities….” Sitting aside how individuals choose to allocate their funds, it can be reasonably expected under Sanders’s plan that these individuals will have more funds to allocate elsewhere. For example, when evaluating the impact of Medicare on out-of-pocket spending, Finkelstein and McKnight find that within the first five years, a forty percent decline in out-of-pocket spending materialized for the top quartile of the out-of-pocket medical expenditure distribution. Finkelstein shows that this decline in out-of-pocket spending was also set against the backdrop of a thirty-seven percent increase in real hospital expenditures.

Due to the nature of insurance as a financial product, the 2006 Massachusetts Health Care Reform unsurprisingly had effects resonating beyond just healthcare sector. Through investigating credit report data, Bhashkar Mazumder and Sarah Miller illustrate “that the reform significantly improved credit scores, reduced the total amount past due, reduced the fraction of debt past due, and reduced the probability of personal bankruptcy.” Also, those who were already financially besieged experienced the greatest gains in financial security.

In short, regardless whether Sanders’s plan may succor employers by freeing up “countless hours figuring out how to provide health insurance to their employees,” it will reprieve many American workers from “bargaining for higher wages or better health insurance.” Since Americans will no longer individually brook paying for healthcare services and products, the Sanders plan will assuredly reduce the financial strain suffered by many individuals and households. The lower out-of-pocket costs and the fact no single catastrophic health event will leave someone financially reeling for years prove to be a strong benefit, if not to evince the virtuousness, of such a health insurance program.

The Bad: Happiness and Health

The Sanders proposal strikes upfront, and half-insightfully, on one advantageous policy position. The plan would enhance the “freedom and security that comes with finally separating health insurance from employment.” Freeing up the American labor market even more by divorcing health insurance from employment allows improved labor market allocation. However, it remains unfounded to aver that expanding health insurance coverage will enable Americans to “live happier, healthier[,] and more fulfilling lives.” Given empirical research examining the 1998 Oregon Medicaid Expansion, RAND Health Insurance Experiment, and even initial impact following Medicare’s introduction, scant evidence justifies such a claim that increased health insurance coverage makes people happier, healthier, or live longer.

When Oregon expanded its Medicaid health coverage for low-income adults in 1998, the state utilized a lottery to select from a waiting list of 90,000 persons, roughly a third was drawn for the expansion. The lottery’s randomized structure aided researchers in the ability to effectively probe the data. Following up approximately two years after the expansion with data obtained on 6387 selected adults and 5842 non-selected adults, the researchers discovered “that Medicaid coverage generated no significant improvements in measured physical health outcomes….” As well, the newly-insured reported no change in their level of happiness.

The RAND Health Insurance Experiment in the 1970s found similar results, even when looking at the health status outcomes for additional services, such as, vision and dental. The researchers explain that “[f]or the person with mean characteristics, we can rule out clinically significant benefits from the additional services in the free fee-for-service plan relative to either the cost-sharing plans or the HMO experimental group.” Basically, the average person across the several health insurance plans showed no significant change in health outcomes, even for additional services. For the bottom twenty percent of adults, some improvements in myopia, dental, and high-blood pressure were significant. The researchers, though, point out more cost-effective means exist to arrest these health concerns than free-for-all services.

Medicare, by covering some 53.8 million individuals, operates one of the largest universal health insurance schemes in the world. Research by Finkelstein and McKnight on health benefits and spending under Medicare stands alongside much of the literature on health insurance. Succinctly, for the non-infant population, little-to-no evidence is unearthed to show more than very modest health benefits to possessing health insurance. And Medicare is no different. Finkelstein and McKnight write, “Using several different empirical approaches, we find no evidence that the introduction of nearly universal health insurance for the elderly had an impact on overall elderly mortality in its first 10 years.” In short, Medicare, at least, in the decade subsequent to its implementation, failed to increase the number of years the elderly lived.

Upon reviewing these studies (and more of the related literature), the promised benefits of a healthier and happier life that underlie Sanders’s health insurance plan are shown to be empirically groundless. Likely, the usage of these unsupportive claims and misleading expectations may be rooted in the political or the ideological or both. The one thing they surely are not is backed by economic research.

The Messy: Innovation and Markets

Preemptively, the Sanders plan confronts worries of weaken innovative forces under a more centralized health system. Mainly, through severing the tie between employment and health insurance, Sanders’s plan suggests it will “promote innovation and entrepreneurship in every sector of the economy.” This focus on innovation from solely a labor market assessment misses much about the nature of innovation. In general, innovation is engendered via the symbiotic relationship between supply and demand.

As seen for example in aftermath of the passage (2003) and implementation (2006) of Medicare Part D, newfound market demand propelled the inducement of supply-side research and development (R&D) in senior-related pharmaceuticals. Expanding the market by 28 million consumers (as of 2010) generated “significant increases in pharmaceutical R&D for therapeutic classes with higher Medicare market share.” Margaret E. Blume-Kohout and Neeraj Sood measure this innovation in terms of the number of clinical drug trials, while controlling for therapeutic class and for the year. Prior to 2006, no significant impact on clinical trials occurred. That is, the sheer passage of Medicare Part D and the expectation therein embodied did not alone induce any noticeable increase in clinical drug trials. After full implementation, however, “[f]or the average drug class, we see an 18% increase versus expectation in drugs entering all stages of clinical testing in 2006–2007 (pb.05), and a 38% increase in 2008–2010 (pb.01).”

Policies, such as, the 1983 Orphan Drug Act (ODA), have also effectively induced innovation, yet from the supply-side of market directly. The ODA offered an income tax credit (equal to 50 percent of clinical trial expenses) to those firms willing to invest R&D in rare-disease drugs. The definition of a rare disease was stipulated in 1984, as any disease inflicting less than 200,000 Americans. On average, Wesley Yin finds ODA facilitated a 69 percent increase in annual flow of new drug trials for long-established rare diseases.

With studies like these highlighting such massive gains in innovation, particularly pharmaceutical, one would think the Sanders plan advantageous to innovation, yet if only the proposal stopped there. Sanders’s plan proffers that under Medicare for all, “the government will finally have the ability to stand up to drug companies and negotiate fair prices for the American people collectively.” Tabling the notion of “fair prices,” the government does not exactly negotiate prices, as much as dictates them or relies on quasi-market information. A bigger problem exists since there is a tight linkage between a pharmaceutical firm’s revenues and its R&D expenditure (See Scherer, Henderson and Cockburn, OECD, and Simanjuntak and Tjandrawinata). If under the Sanders plan drug prices are arbitrarily forced too low relative to the increased market demand, the U.S. pharmaceutical market could actually contract. Given Sanders’s stated desire for U.S. drug prices to mirror those in Europe, the gross effect of these two policy impacts leaves much unclear regarding the state of future innovation in the healthcare sector.

The Sanders plan speaks of innovation quite generally, perhaps to obscure the uncertain gross effects on innovation within the healthcare sector. The proposal, however, emphasizes none of the effects of market size or market incentives examined above, but rather the influence on labor market more broadly. Furthermore, the increase in labor mobility coupled with the decrease in cost of insuring a firm’s workforce exhibits the same uncertainty in gross effect as witnessed in pharmaceutical innovation. As input costs decrease as firms no longer need to provide health insurance, it can be expected that more resources will be freed up to innovate. Yet, as labor market friction lessen, more competition for higher wages will consume some faction of those freed-up resources. Thus, uncertainty respecting these resources being potentially allocated to innovative means will emerge. The gross effects on economy-wide innovation, which the Sanders plan suggests, may prove more redistributive than creatively destructive, at least, in the Schumpeterian sense.

In close, as much as a “Medicare for All” health system has appeal, the Sanders plan — like so much in this debate — conflates health insurance reform with healthcare reform. Simply enlarging the number of those insured will not garner more than marginal health outcomes. The challenge for a single-payer system is developing real cost containment measures, and on this point, Sanders’s plan remains moot.

The Sanders plan will not make Americans happier and healthier, but will provide greater financial security to many Americans who are currently struggling. Additionally, the Sanders plan fails to expound on its one likely innovation mechanism: the expanded demand-side pressures to induce increased R&D — all footed by the government via higher taxation on those earning more than $250,000 per year.

The tone running throughout the Sanders policy brief, moreover, is expected campaign pie-in-the-sky chatter and particularly in this case a populist pie. For better or for worse, for right or for wrong, soaking the rich is a patent cornerstone beneath this purposed program. So, it should be clear Sanders’s plan serves two masters, and in doing so, it falls a slave to its vast ambition.