Can Warren Actually Avoid Taxing the Middle Class?

The biggest question surrounding Elizabeth Warren’s new Medicare for All plan isn’t whether she has produced a plausible pathway to raising $20.5 trillion over the next decade to fund it.

Rather, the biggest question is whether $20.5 trillion is actually a plausible estimate of how much her plan would cost.

Warren’s estimate is considerably lower than most projections for a single-payer system, as her team acknowledged in its own analysis of the plan. Even at a flat $20 trillion, such a plan would cost more than the federal government now spends on Social Security alone or on Medicare and Medicaid combined. Estimates from the nonpartisan Rand Corporation, the conservative-leaning Mercatus Center at George Mason University, and the center-left Urban Institute have each placed the 10-year cost of a single-payer plan at $31 trillion to $34 trillion.

That gap matters so much because it probably determines whether a single-payer plan can be financed without raising taxes on the middle class, as Warren has pledged. The financing proposals she outlined Friday did not directly hit middle-class taxpayers, but those provisions wouldn’t come close to covering the full cost of her plan if the actual price tag is closer to those other studies’ estimates.

“The gap between what she says it will cost and what it will really cost is in the trillions of dollars, and the middle class will be on the hook to fill that gap,” says Jim Kessler, the executive vice president for policy at Third Way, a centrist Democratic group that has been critical of single-payer proposals. “My guess is that with accurate numbers, she’s somewhere between $5 trillion and $10 trillion short. [Her plan taps] the rich and corporations as much as possible. Who’s left? The middle class.”

In estimating the plan’s price tag, the Warren campaign used as its baseline a recent Urban Institute study that projected a 10-year federal cost of $34 trillion. The campaign released a 28-page white paper, with copious footnotes and appendixes, explaining how it reached its lower estimate. It was written by Donald Berwick, the former director of the Centers for Medicare and Medicaid Services under Barack Obama, and Simon Johnson, the former chief economist of the International Monetary Fund.

The bottom line is that across all sectors of the medical industry, the Warren campaign assumes that her single-payer plan will squeeze much greater savings relative to the current system than the Urban Institute believes is possible—or, in some cases, even desirable. “We thought we were being pretty aggressive in the assumptions we are making in terms of lowering the cost of the program over time,” Linda Blumberg, a co-author of the Urban Institute study, told me. “They were clearly more aggressive.”

At the broadest level, Berwick and Johnson forecast that the plan could provide universal coverage with expanded benefits at roughly the same amount of total national health-care spending—from the federal government, employers, and individuals—that the Urban Institute projects under current law.

Warren’s plan “reduces” total health spending “while covering more people and providing more generous benefits because it uses the leverage of a single, integrated payment system to address the root causes of our high health spending and to help reduce waste across the system,” Berwick and Johnson write.

The Urban Institute study, by contrast, estimated that a single-payer plan would spike total spending by $7 trillion over a decade, even with offsetting savings. That’s in part because the system would insure more people, but also because people would use more services, since the plan would cover them at no cost.

Larry Levitt, the executive vice president for health policy at the nonpartisan Kaiser Family Foundation, agrees that patients’ use would rise under a single-payer plan, which leaves the proposals dependent on a bet that government can substantially reduce payments across the medical system.

“The only way to make that math add up is to pay doctors and hospitals and drug companies a lot less, as Warren has proposed,” he told me. “The fundamental question here is: Can you lower health-care prices enough to offset the increased costs from universal coverage and very comprehensive benefits?”

Indeed, forecasting substantially reduced payments to hospitals, doctors, and drug companies is central to Warren’s conclusion that her plan will cost much less than the Urban Institute and other analysts estimate.

For instance, the Warren plan projects that single-payer will save $1.7 trillion more in drug costs than the Urban Institute forecasts. The organization estimated that single-payer could save 25 to 30 percent on drug costs relative to what Medicare now pays; Warren assumes that the federal government, through a variety of policy mechanisms, could drive down those costs much further, paying 30 percent less than Medicare now does for generic drugs and 70 percent less for name-brand.

Read: The eye-popping cost of Medicare for All

Drug companies might have no choice but to accept those payment rates if they were to become law, because they would be reluctant to abandon the huge U.S. market, Levitt noted. But cutting payments to drug companies that much wouldn’t be possible, he predicted, without some consequences, such as less investment by firms in developing new drugs. “The trade-off with drugs is, lower prices would inevitably lead to fewer drugs coming to market,” he said.

The same dynamics apply to Warren’s planned reductions in compensation for providers. Warren’s is the first single-payer proposal to specifically identify how much providers would be paid under the new system. It matches the Urban Institute paper in projecting that a single-payer plan would reimburse physicians at the same rate Medicare now does, but assumes lower reimbursements for hospitals. Warren projects the new plan would pay hospitals at a rate 110 percent of what Medicare now covers, compared with 115 percent in the Urban Institute estimate.

Either of those scenarios would represent a substantial income reduction for hospitals, since, on average, private insurers now reimburse hospitals at twice Medicare’s rates, Blumberg noted. Experts say that the experience for physicians would vary by their specialty: Some are now paid, on average, close to Medicare rates, and would not be radically affected by Warren’s proposed prices, while others receive much more and would face greater disruption.

Berwick and Johnson write that the lowered administrative costs they assume under a Medicare for All plan would help hospitals (and physicians) survive the crunch, and that Warren’s proposal allows for higher rates to be paid to hospitals under greater financial pressure, such as rural facilities. But Blumberg said that reimbursement-rate cuts as big as Warren is envisioning would be extremely politically difficult to pass through Congress—and could lead to hospital closures or service cutbacks if they do.

“We are talking about very sizable average decreases across the country in what hospitals are being paid,” she said. “We thought 115 percent [of Medicare] was pretty aggressive and optimistic. I get the desire to lower the cost, I do. It’s just a matter of what you think is realistic, and how that political process is going to play out, and how you want to ensure you are not overly disrupting the system’s ability to deliver care.”

Len Nichols, a health economist at George Mason, also worries that cuts to providers as large as the ones Warren envisions would seriously disrupt the system.

“You can do this mathematically. The question is: Can you do it in real life with real people?” says Nichols, who served as the senior health-policy adviser at the Office of Management and Budget in Bill Clinton’s administration. “When you talk about 110 percent of Medicare for hospitals and the same as Medicare for physicians, there are a lot of practices that would have to close up shop, lay people off.”

Nichols believes that the largest and best-run urban hospitals could eventually adapt to Warren’s payment rates if given a long-enough transition period. But he says such cuts would inevitably force a substantial number of less efficient hospitals, particularly those in small-town and rural markets, to close or transition into outpatient-care centers. “The disruption we are talking about here would be severe,” he told me.

Levitt said that lower reimbursement rates could have the positive effect of pressuring hospitals to more tightly control costs. “Part of the difficulty is, these estimates often treat hospital costs as some law of nature,” he said. “For hospitals to survive, they would have to lower their costs. It’s not like that doesn’t happen in other industries. Companies cut back their workforce, trim costs based on market pressures, and sometimes they survive, sometimes they don’t.”

But like Nichols, Levitt predicted that even with reform, such a constraint on revenues would likely increase the number of hospitals that shut down. And as in the Urban Institute study, he believes that the new system could create greater delays in access to care: More people will be seeking coverage, while the lower reimbursement rates may lead to less investment by hospitals and fewer people seeking careers in medicine. “It would be a byproduct of both paying providers less and patients demanding more services,” he said.

Despite all of these concerns, Levitt noted, the reality remains that most countries around the world have established and maintained quality universal-health-care systems that cost less than even Warren’s proposal. And “with better outcomes,” he said.

The problem, of course, is that Warren and other single-payer advocates are not writing on a clean page, but rather seeking to reconfigure an enormously complex structure that consumes one-sixth of the national economy and employs hundreds of thousands of people. “Other countries created their universal systems from a much blanker slate than is being proposed here,” Levitt said.

That means all of the savings Warren is banking on from taking income from doctors, hospitals, and drug companies will be enormously difficult to pass into law.

Even with a $20.5 trillion price tag, Warren’s single-payer plan would represent an increase of more than one-third in total federal spending over the next decade. But holding down the cost even to that level would require, as Blumberg said, “heroic” assumptions about how much savings could be squeezed from every corner of the health-care system. Warren’s plan, by her own projections, would require the federal government to raise nearly 90 percent as much new revenue as the total projected receipts from the federal income tax over the next decade. Without those “heroic” savings, she’d need to raise even more—and likely move beyond the targets for tax increases that she’s identified so far.