Single-Payer Healthcare Wastes Money and Time – Part I

 

ObamaCare is dying. GOP plans to replace it are floundering. What’s next?

For progressives, the answer is single-payer healthcare. Senator Bernie Sanders has already introduced his bill for single-payer called The Medicare For All Act. Currently there are 16 Democratic senators in support of his bill. A recent Politico poll showed 49% of Americans favoring “a single-payer health care system.”

I have written extensively in the past on this issue from a doctor’s point of view. I have discussed the poor medical outcomes in countries with this system (Canada, Great Britain, Sweden) and the prolonged waiting times for treatment. Now I would like you to hear the opinion of a well-known healthcare economist.

Chris Conover, Duke University healthcare economist, has written a series on reasons to oppose a single-payer healthcare system from an economist’s perspective. He gives us five reasons single-payer is a bad idea. Today we will discus the first of these five reasons.

Deadweight Losses

The number one reason is what economists call “excess burden” of taxes, better known as “deadweight losses.” To understand these terms it is fundamental to understand that “whatever you tax, you get less of.” It is also fundamental to understand that every tax shrinks the economy to some extent resulting in a loss of welfare for consumers and producers. This impact varies with the type of tax.

The graphic above depicts how this tax burden varies with different types of taxes. The marginal excess burden (deadweight loss) is the drain on the economy that results from the type of tax. The burden is highest for income taxes and lowest for payroll taxes. This burden is reflected in lower GDP, which means fewer jobs and lower wages. (This should be of great concern to those who oppose the current Republican proposal to lower income taxes.)

Deadweight losses are typically expressed as a percentage of the revenue raised. So the average excess burden represents the entire amount of such losses as a fraction of the entire amount of tax revenue raised. This excess burden rises with the tax rate.

Conover estimates deadweight losses for the federal tax system overall averages 44 cents for every dollar of revenue raised. Since the entire American healthcare economy is $3.5 Trillion, if we raised that amount through federal taxes, we’d have to accept welfare losses of $1.5 Trillion per year! This is the burden on the GDP imposed by such taxes. This burden means fewer jobs and lower wages.

How large would the deadweight losses be under Medicare For All?

The left-leaning think tank Urban Institute has calculated the plan would add $32 Trillion to federal health spending in the first decade, or $3.2 Trillion per year. To put this in perspective, the total federal tax revenue currently is only $3.6 Trillion annually.

Senator Sanders has offered a variety of options to finance his plan including a payroll tax of 7.5%. This approach would lower the deadweight losses from 44% to 38% – but they would still amount to $1.33 Trillion per year. This loss of GDP would represent loss of jobs and wages that benefit the same working class workers Sanders is supposed to be helping!

Other options include increasing income taxes, but a review of the graphic above shows this would increase deadweight losses the most! (52%!) If the income tax rates were raised on the wealthy, the burden would be even higher (up to 165%!), causing a net negative growth of GDP, greatly impacting jobs and wages on lower income families. So “socking it to the rich”, as liberals favor, would actually be harder on the poor.

The Urban Institute analysis suggests that if the Sanders plan were currently the law of the land, an added $2.5 Trillion in federal revenues would be required to finance it just in 2017. In other words, we’d need an additional increase in federal tax revenues of 72.2%! There would be a hidden cost of $1.1 Trillion in deadweight losses in 2017 alone.

This calculates to an extra burden in taxes of $3400 per citizen or $13,400 per family of four. To put this into perspective, remember that President Obama sold the American public on ObamaCare promising everyone a reduction of their health insurance premium costs for a family of four of $2500 per year. The Sanders plan would effectively be asking the same people to accept an increase in their healthcare costs of $13,400 per year. That’s five times worse than Obama’s promise! How could anyone support such a plan?

This is only the first of five reasons Conover gives us for opposing single-payer healthcare. Next post we’ll discuss his second reason.

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