Medicare-for-All
Originally sent to VIXCONTANGO subscribers on March 8th, 2019
Last week House Rep Pramila Jayapal from Seattle entered her own Medicare-for-All bill in the House and I feel that it is high time to address this topic. Medicare-for-all has been endorsed by all Democratic Party front-runners including Kamala Harris, Cory Booker, Kirsten Gillibrand and obviously the bill’s sponsor – Bernie Sanders. Medicare-for-all is going to be a key election message for Democrats in 2020 and you need to be aware of what it entails. It will have enormous impact on the US economy and you simply can’t have a blind spot about it as an investor. If Democrats sweep to one party government in 2020 (a highly likely scenario), Medicare-for-all will go from nonsense to many GOP observers to present tense.
I am not going to go into deep detail and compare Jayapal’s bill vs Bernie’s bill, but suffice it to say Jayapal’s bill is more comprehensive and includes more benefits. I will focus this discussion on Bernie’s bill which is the more well-known bill, the bill that has been scored for 2 years now and whose numbers people are more familiar with. Let’s start by throwing some numbers on the board.
Total health care spending in the US in 2017 was $2.9 trillion after increasing yet again by about 4%. Per capita spending was about $10,739 per person. Health care spending is now 18% of US GDP vs less than 6% in the early 1990s. Health care is now an industry as big and as important as housing.
Health care spending can be broken as follows:
- 38% hospital care ($1.1 trillion)
- 24% doctor services ($700 billion)
- 12% prescription drugs (350 billion)
- 6% mental health care (180 billion)
- 6% nursing and long term care (165 billion)
- 4% dental (130 billion)
- 4% retail medical devices (glasses, hearing aids) (125 billion)
- 3% residential health care (100 billion)
- 3% chiropractors (100 billion)
Sources of health care spending can be broken as follows:
- 40% Private Health Insurance (employer sponsored or Obamacare) ($1.2 trillion)
- 25% Medicare (government for old people) ($700 billion)
- 20% Medicaid (government for poor people) ($580 billion)
- 15% Out of pocket ($365 billion)
The first and most important point about Medicare-for-All is this: it eliminates the private health insurance industry. It is a government takeover of the private health insurance industry. Medicare-for-all basically takes the 40% of private health care insurance, 25% current Medicare, 20% Medicaid and 15% out of pocket spending and rolls them into one comprehensive plan. Medicare-for-all is NOT a government option that exists alongside private health insurance plan. HillaryCare was a government option that existed alongside the private health insurance industry. Medicare-for-all gets rid of private health insurance industry all together and rolls up the other government medical plans. So when people on Fox News throw out the big price tag such as Medicare-for-all will cost 32 trillion over 10 years (or about 3.2 trillion per year) that has to be compared to current health care spending which was already over 3 trillion per year in 2017 and by 2019 will be about 3.25 trillion. The price of Medicare-for-all is the same current health care spending. It is by no means an additional spending. It is basically the same spending but instead of part of it being private, it will go through the government. This is very important to understand because Fox News and the GOP misrepresent the plan as something that is an additional deficit financed spending, which it most definitely it is not. The private health insurance premiums that people pay today is what funds Medicare-for-All.
How is Bernie Sanders planning to pay for Medicare-for-all? The way you currently pay for your own Social Security and Medicare. Through a payroll tax. Let’s look at a sample paycheck. You have your income and then you have federal income tax deducted, state income tax. Then you have the government services – social security tax and medicare tax (for when you get old). Then you have the employer provided services such as health and dental insurance and retirement (401(k)) contributions. Basically Bernie Sanders will roll up the Medicare, Health and Dental parts of the paycheck into one comprehensive “Medicare tax” line.
Here is the more specific breakout on how revenue will be raised by Bernie’s plan:
7.5% payroll tax to be paid by employers. $4 trillion in revenue over 10 years. In 2016, employers paid on average $12,865 in health insurance premiums for a worker with a family of 4 making $50,000. Notice that is a hefty 25% benefit on top of salary. The 7.5% payroll tax would equate to $3,750 – a savings of more than $9,000 per employee. You ask where this $9,000 goes to today? That $9,000 is pure profit for the health insurance industry. Just look at United Health Care stock. The reason why the stock chart looks like a hockey stick is this $9,000 per employee collected under a government granted monopoly. The greatest scam in history of scams! Al Capone is jealous.
Rant
It is really important to understand that one of the biggest taxes on US consumers today is the presence of the health insurance industry itself. There are 3 types of activities in the world: for profit activities, not-for-profit activities and government-subsidized activities. The US is the only country in the world where health insurance is a for-profit activity. I don’t think it should be a government-subsidized activity but it most definitely should not be a for-profit activity that is protected by a government monopoly! That is how you make cost of living 25% higher for both workers and employers without adding any value whatsoever.
4% payroll tax to be paid by households. 3.5 trillion in revenue over 10 years. In 2016, typical working family paid $5,277 in health care premiums. Under this tax an average family (4 person family with 50K income) would pay only $844 per year. Because of standard deduction, families making less than 30K would not even pay that.
Remove health care tax breaks. 4.2 trillion in revenue over 10 years. Currently there are many tax breaks to incentivize private health care industry. Under a government plan those would no longer be needed. For example, currently employers can deduct their health care insurance premiums from payroll and income taxes. That obviously won’t be necessary if employers no longer are forced to provide health care directly.
Make tax code more progressive. 2 trillion over 10 years. Here is the Bernie tax schedule
- 40% on income between $250,000 and $500,000.
- 45% on income between $500,000 and $2 million.
- 50% on income between $2 million and $10 million. (In 2014, only 136,000 households, the top 0.1 percent of taxpayers, had income between $2 million and $10 million)
- 52% on income above $10 million. (In 2014, only 16,700 households, just 0.02 percent of taxpayers, had income exceeding $10 million.)
- Taxing capital gains and dividends the same as income from work. Basically remove the special rates for capital gains and preferred dividends.
- Limit deductions to 28% for incomes over $250,000. In other words, if you are in a higher tax bracket, deductions become more and more valuable as the tax rate increases. This will limit the benefit of deduction to 28%.
Wealth tax. 1.3 trillion over 10 years. This is 1% annual federal wealth tax for households with net worth over $21 million. The tax would be on the amount over $21 million. So for example a household with 22 million net worth would pay 1% on that 1 extra million over 21 million. The tax is only $10,000 or 1% * 1,000,000.
One-time tax on offshore profits. 750 billion. This would be one time tax on profits held off shore as declared by companies over the past 10 year. This tax would force companies to pay a one-time tax immediately.
Market Impact
As you can see Medicare-for-All will bring massive changes to the US economy. It reforms about 20% of the US economy and makes significant changes to the tax code. The different steps under the legislation will have very different effects on markets and business.
The Good
Most multinational corporations and other large employers will probably be relieved to drop health insurance coverage as an expense. In other countries such as China or Japan or Europe, employers don’t have to pay for employee’s health care. In Europe, employers may offer some additional health coverage (such as dental or vision) not covered by the state, but by and large, abroad employers are not responsible for health care spending. That makes operating in abroad cheaper and preferable. One of the biggest causes for outsourcing is the fact that medical care is a burden on US employers. If that is removed as an employer burden, the US becomes a more preferable destination to hire employees. This is a huge issue and the outsourcing mania will not subside until the US starts to conform to world standards. Foreign countries at present have a distinct advantage to lure employers.
A side benefit of not tying health care to employment is innovation. This is hard to quantify, but I couldn’t go on my own for many years because of the health coverage issues. Imagine, you are an employee and you have to start a business. I used to pay $150 for family coverage at work. I have a young kid. If I go on my own, I have to start paying $1500 to $2000 per month in an Obamacare plan (for the exact same coverage) immediately just as my income goes from $6,000 per month (let’s say) to zero. Notice that I don’t spend $2,000 per month on health care. I spend only a small fraction of that. This $2000 is pure profit for the health insurance company. I would rather not have insurance and just pay the doctors directly. The health insurance setup in the USA makes it prohibitive for me to start a business. I think the way health care is structured in this country chains many people to their employers and the economy thus loses its dynamism over time.
Overall, I think employers would gladly shift this burden to the government. Not that they will ever admit it in a Fox News or CNBC interview. Average cost of employee health makes up 7.5% of a company’s annual operating budget according to SHRM (Society for Human Resource Management). Medicare-for-all boosts profits of US companies by about 7.5%! Not an insignificant amount. This is a permanent boost just like a tax cut! In terms of impact on corporate profits, Medicare-for-all is a boost equivalent to Trump’s tax bill. Average tax rate for SPX corporations went down -7% from 25% to 18% as a result of TCJA. Medicare-for-all will cut operating expenses by -7.5%!
The Bad
For markets, removing the preferential treatment of unearned income is obviously bearish. So is one time tax on offshore profits. Higher tax rates on wealthy and a wealth tax are also bearish as they are 90% of the investors in the stock market. If these tax code changes are made, stocks will simply have to trade at much lower multiples because the after-tax returns would be significantly lower at least for the first year. But if you look out into the future, the economy will be more dynamic, corporate earnings will see a significant boost, the aggregate amount of earnings will be higher and thus in the longer term asset values will simply trade at a higher level. Medicare-for-all is short term bearish but long term bullish.
If I could summarize Medicare-for-all, it is good for workers, it is good for business, it is good for America, it is good for markets in the long term but it is bad for investors in the short term. There are only two losers in Medicare-for-all and that is investors and health insurance companies. Everybody else is a winner.
One of the common arguments against a single payer system is that quality of health care will suffer. I think many Americans go to Germany for certain types of treatments because they get good quality for a lot less money. I had a friend who had sleep apnea and he went to Germany and got an operation on his throat done for 13K where the same operation would have cost him 130K in the US. It is hard to make the case that German health care is worse the US. Quite the opposite. I don’t know enough to make the judgement that health care quality will decline. All I have to say is that health insurance companies collect about $10,000 per person in profits today and those $10,000 can instead be paid to doctors and hospitals to improve care. Drug costs are out of control and those money can be redirected into the economy instead of being hoarded as profits. At the end of the day efficiency is supposed to make things cheaper and it is hard to make the case that efficiencies introduced by the health insurance industries and various other health care monopolies is making health care cheaper given that health care has grown from 6% of GDP to 20% over the past 30 years. If anything, there is only one word that defines the current health care system in the US: “inefficient”.