Universal Health Care: Universal Health Care: How to Pay for ItHow to Pay for It

John B. ShovenJohn B. Shoven

Charles R. Schwab ProfessorCharles R. Schwab Professor

Director, Stanford Institute for Economic Policy Director, Stanford Institute for Economic Policy ResearchResearch

Capstone Conference - Fresh Thinking on Health Care Reform

May 14, 2009

Talk Based on Joint Work with Victor Fuchs

““Long-Run Fiscal Policy is a Long-Run Fiscal Policy is a Health Policy Problem”Health Policy Problem”

National Health Expenditures are National Health Expenditures are more than 16% of GDPmore than 16% of GDP

NHE grew 2.79%/year faster than NHE grew 2.79%/year faster than everything else combined from 1975-everything else combined from 1975-20052005

NHE will reach 30% of GDP by 2035 if NHE will reach 30% of GDP by 2035 if trends continuetrends continue

47 million Americans uninsured47 million Americans uninsured

Two Essential Elements for Two Essential Elements for Universal CoverageUniversal Coverage

SubsidizationSubsidizationCompulsionCompulsion

Who Are the Uninsured?Who Are the Uninsured?

The The poorpoor. 25% below poverty, another . 25% below poverty, another 28% between 1X and 2X poverty28% between 1X and 2X poverty

The The sick and disabledsick and disabled The The difficult to reach difficult to reach (e.g. self employed, (e.g. self employed,

unattached to work force)unattached to work force) The The low userslow users The The gamblersgamblers The The free ridersfree riders More than half are young (18-34)More than half are young (18-34)

Myth of “Shared Myth of “Shared Responsibility”Responsibility”

Typical claim by political sponsors of Typical claim by political sponsors of health reform proposals – health reform proposals – “Responsibility for the cost of care “Responsibility for the cost of care will be shared by employers, the will be shared by employers, the Federal government, state Federal government, state governments, and individuals.”governments, and individuals.”

Fails basic Fails basic incidenceincidence analysis analysisCosts may be shared across groups Costs may be shared across groups

of individuals, but there is “nobody of individuals, but there is “nobody here but individuals.”here but individuals.”

Myth of “Government Assistance Myth of “Government Assistance for the Middle Class”for the Middle Class”

To paraphrase Willie Sutton, the To paraphrase Willie Sutton, the middle class is where the money is.middle class is where the money is.

The rich may be asked to subsidize The rich may be asked to subsidize the poor, but there aren’t enough of the poor, but there aren’t enough of them to subsidize the middle class.them to subsidize the middle class.

Current Funding of Medicare and Current Funding of Medicare and MedicaidMedicaid

Medicare Part A – largely funded with Medicare Part A – largely funded with 2.9% dedicated payroll tax2.9% dedicated payroll tax

Medicare Parts B and D – 3/4ths of Medicare Parts B and D – 3/4ths of costs funded by claim on general costs funded by claim on general revenues, 1/4revenues, 1/4thth by premiums and co- by premiums and co-paymentspayments

Medicaid – federal share funded by Medicaid – federal share funded by claim on general revenuesclaim on general revenues

Examples of the Disadvantages Examples of the Disadvantages of General Revenue Financingof General Revenue Financing

Financial problems of entitlement Financial problems of entitlement programs often concentrate on Social programs often concentrate on Social Security and Medicare Part A (HI). Security and Medicare Part A (HI). Why? Because of the open-ended Why? Because of the open-ended claim of the rest of federal health claim of the rest of federal health expenditures on general revenuesexpenditures on general revenues

The introduction of Part D. It The introduction of Part D. It appeared to be free in that no tax appeared to be free in that no tax was increased.was increased.

The flipside – the advantages of The flipside – the advantages of tax dedicationtax dedication

Potential improvements of federal health Potential improvements of federal health programs would have a price – higher taxesprograms would have a price – higher taxes

Debate about whether the improvements are Debate about whether the improvements are worth higher taxes is the benefit-cost worth higher taxes is the benefit-cost calculationcalculation

Imposes budget discipline on health spendingImposes budget discipline on health spending Replaces the current standard (provide all Replaces the current standard (provide all

treatments that might be helpful) with a new treatments that might be helpful) with a new standard (provide health system standard (provide health system that we are that we are willing and able to pay forwilling and able to pay for))

Choices for a Dedicated TaxChoices for a Dedicated Tax

Need for a lot of revenue limits Need for a lot of revenue limits choices to taxes with a broad basechoices to taxes with a broad base

Candidates: personal income, Candidates: personal income, consumption, payroll, and corporate consumption, payroll, and corporate incomeincome

Roundabout taxes: tax expenditures, Roundabout taxes: tax expenditures, income related user charges, income related user charges, mandatesmandates

Consumption vs. Income Consumption vs. Income TaxesTaxes

Consumption taxes cause less Consumption taxes cause less distortions, particularly regarding distortions, particularly regarding savingsaving

Income taxes are the primary source Income taxes are the primary source of general revenues…therefore not of general revenues…therefore not available as a dedicated taxavailable as a dedicated tax

Three types of consumption tax – Three types of consumption tax – sales tax, VAT, direct consumption sales tax, VAT, direct consumption tax (income less saving) tax (income less saving)

VAT vs. Sales TaxVAT vs. Sales Tax

Close relatives. VAT is a particular Close relatives. VAT is a particular manner of collecting a sales taxmanner of collecting a sales tax

More than 40 states have sales taxesMore than 40 states have sales taxesVAT is the one unused broad based VAT is the one unused broad based

tax available to the federal tax available to the federal governmentgovernment

VAT financed universal health VAT financed universal health vouchers would be very progressivevouchers would be very progressive

Other alternativesOther alternatives

Payroll tax: Already taken by Social Payroll tax: Already taken by Social SecuritySecurity

Corporate tax: terrible idea. Inefficient, Corporate tax: terrible idea. Inefficient, unknown incidence, hiddenunknown incidence, hidden

Tax expenditures: Lack of salience a Tax expenditures: Lack of salience a drawbackdrawback

Income based user charges: amount to Income based user charges: amount to taxes. Poor already face high marginal taxes. Poor already face high marginal tax ratestax rates

MandatesMandates

Individual mandates, employer Individual mandates, employer mandates, insurance mandatesmandates, insurance mandates

Incidence analysis makes employer Incidence analysis makes employer mandates similar to individual mandates similar to individual mandatesmandates

Insurance mandates: companies can Insurance mandates: companies can leave business entirelyleave business entirely

Mandates provide Mandates provide compulsioncompulsion, but fail , but fail subsidizationsubsidization. If you subsidize the . If you subsidize the poor, then you need taxes again.poor, then you need taxes again.

VAT financed Vouchers – less VAT financed Vouchers – less distortionary than the status quo distortionary than the status quo Employment based insurance with Employment based insurance with

large tax subsidy is very distortionarylarge tax subsidy is very distortionaryThe bundled product – job and The bundled product – job and

insurance – is unnatural. Distorts job insurance – is unnatural. Distorts job choice, job mobility, choice between choice, job mobility, choice between part-time and full-time, and part-time and full-time, and introduces new risks (lose your job, introduces new risks (lose your job, lose your insurance). lose your insurance).

It is a historical accident of WWII.It is a historical accident of WWII.

Incidence of “Employer Incidence of “Employer Provided” InsuranceProvided” Insurance

Workers collectively bear the burden Workers collectively bear the burden of employer provided insurance of employer provided insurance through reductions in other forms of through reductions in other forms of compensationcompensation

Incidence is not widely understoodIncidence is not widely understoodPrecise individual incidence – between Precise individual incidence – between

singles and marrieds, between those singles and marrieds, between those who work 30 hours per week and 50 who work 30 hours per week and 50 hours per week, etc. is unknownhours per week, etc. is unknown

VAT also introduces VAT also introduces distortionsdistortions

Work-leisure. Real wage would be Work-leisure. Real wage would be lower because prices would be higherlower because prices would be higher

Actual VAT would not cover all Actual VAT would not cover all consumption, introducing distortions consumption, introducing distortions between covered and uncovered between covered and uncovered itemsitems

Consider Those Who Currently Consider Those Who Currently Have Work Related InsuranceHave Work Related Insurance

Their take home pay would go up if their Their take home pay would go up if their employer can drop health insuranceemployer can drop health insurance

They would face a new VATThey would face a new VATFor average person, it is close to a washFor average person, it is close to a washThe security of their health insurance is The security of their health insurance is

enhanced leading to increase in welfareenhanced leading to increase in welfareThe incentive to work or work more is The incentive to work or work more is

reduced leading to loss in welfarereduced leading to loss in welfare

Winners from VAT financed Winners from VAT financed Universal VouchersUniversal Vouchers

The poor. Value of insurance would The poor. Value of insurance would exceed extra taxesexceed extra taxes

The difficult to reach (including those The difficult to reach (including those victims of adverse selection)victims of adverse selection)

The sick (those with pre-existing The sick (those with pre-existing conditions who can’t afford coverage conditions who can’t afford coverage today)today)

Similar groups to today’s uninsuredSimilar groups to today’s uninsured

The Big Advantage of Financing The Big Advantage of Financing Health Insurance with Dedicated Health Insurance with Dedicated

TaxesTaxes

Matching the benefits of program Matching the benefits of program improvements with their costimprovements with their cost

Establishing a budget constraint for Establishing a budget constraint for health spendinghealth spending

Putting health spending on a dietPutting health spending on a diet

Final ThoughtsFinal Thoughts

Need for budget disciplineNeed for budget discipline Myth of shared responsibilityMyth of shared responsibility Myth of assisting the middle classMyth of assisting the middle class Advantages of tax dedicationAdvantages of tax dedication Distortions of employment-based health Distortions of employment-based health

insurance with tax subsidizationinsurance with tax subsidization The currently insured trading one distorted The currently insured trading one distorted

situation for another… their welfare situation for another… their welfare change may be small. The uninsured, the change may be small. The uninsured, the poor and the sickly stand to gain poor and the sickly stand to gain considerably from tax financed universal considerably from tax financed universal vouchersvouchers