The free lunch never dies

We’re all children now, and it happened faster than anyone imagined. With the debate over expansion of the State Children’s Health Insurance program (SCHIP) still ongoing, the advocates of single-payer government health insurance now have turned their attention to early retirees aged 55 to 64.

The current proposal now emerging among the usual Beltway suspects is a massive program of corporate welfare: Let us relieve businesses of much of their healthcare costs by allowing firms and unions to buy into Medicare for early retirees. This supposedly will improve the positions of U.S. firms competing with foreign companies that enjoy the blessings of insurance provided by their respective governments.

What about the massive Medicare deficit already looming large? Not to worry, say the proponents: A Medicare buy-in for early retirees would not burden taxpayers because companies would pick up most of the cost. Really? If the firms are to pay for the new Medicare coverage, but still would enjoy reduced costs and improved competitiveness, then it must be the case that Medicare offers spending efficiencies unique to government single-payer systems. Even in principle only three such efficiencies are possible: reduced administrative costs, reduced payments to doctors and hospitals, and limits on the healthcare services made available to patients.

New research from the Manhattan Institute debunks the efficiencies in administrative costs supposedly attendant upon expansion of single-payer health insurance. Administrative costs for private insurers, defined broadly, are around 12 percent of total premiums. Administrative costs reported directly in the Medicare budget are 3 percent of Medicare outlays, and a proportional allocation of other federal administrative functions not shown in the budgets of individual programs yields an increase to 6 percent of outlays. Most important, Medicare is financed largely through a federal tax system that reduces GDP by distorting economic activity; the lowest barely plausible estimate of that effect is 20 percent of federal spending. Accordingly, the true economic non-benefit (including administrative) costs for Medicare are about 25 percent of (tax-financed) outlays, or double the proportion for private health insurance.

Policymakers face powerful pressures created by interest-group competition over budget dollars. And so incentives are strong to put the squeeze on doctors and hospitals so as to cut the growth in healthcare spending, a reality illustrated by the fact that Medicare payments often cover only 60 percent of the cost of treating a patient, and are not indexed for inflation. Medicare reimbursements to doctors are scheduled to be cut 10 percent next year, a classic manifestation of Beltway myopia that will exacerbate the difficulty faced by patients in terms of finding physicians willing to provide care.

Accordingly, such cuts in reimbursement rates are not “efficiencies.” They are instead a way to shift costs off the reported budgets and onto the providers, so that the true economic costs of healthcare services are hidden.

Policymakers and bureaucracies do not have customers or patients; instead, they have interest groups. Accordingly, incentives to satisfy the healthcare preferences of Medicare beneficiaries inevitably are weakened. And so patients too will be squeezed as government health insurance and resulting budget pressures expand. The result will be implicit and explicit limits on the range of services offered: increasing difficulty finding willing providers, waiting lists, rationing, formal or informal ineligibility of certain groups (for example, the elderly) for some services, underinvestment in advanced technologies, delays in the availability of advanced treatments, and the like. Such government responses to the demands created by “inexpensive” single-payer insurance have one common characteristic: They reduce budget outlays, but cannot be classified even remotely as “efficiencies” because they ignore the value of the services denied patients.

If the efficiencies are so large and so straightforward, why is this proposal limited to retirees aged 55 to 64? Why not everyone? The obvious answer is that “Medicare for all” begins to look a good deal less appealing when ordinary voters are confronted with the reality that government cannot give without taking, and Beltway sales pitches are far more forthright on the identity of the winners than that of those who will wind up with the short end of the stick. And that is why the “improved competitiveness” argument for corporate welfare in the form of government health insurance is a canard: The losers over time will have to be compensated politically, which is why government health insurance inexorably leads toward more programs and entitlements that somehow must be financed, and thus to the sorry economic performance characterizing welfare states. Enhanced competition will be observed only in the Herculean struggle over shares of the federal pie.

Zycher is a senior fellow at the Manhattan Institute for Policy Research.

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