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Could Universal Healthcare Bankrupt America?

By Todd Campbell – Aug 5, 2018 at 6:31AM

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A new study shows how expensive Medicare-for-all could be, but it also sheds light on its potential savings.

The healthcare debate reignited this past week following the release of a new study from the Mercatus Center, a George Mason University research center. After Mercatus crunched the numbers associated with transitioning the U.S. healthcare system to one wherein everyone is covered under Medicare, it determined that federal spending would swell by $33 trillion (yes, with a "t") by 2031.

The eye-catching figure sparked a flurry of back-and-forth between universal healthcare proponents and detractors. Is universal healthcare a bad deal for America? Or could it be the magic bullet that finally stops runaway healthcare costs in their tracks? Let's take a closer look.

A woman shrugs her shoulders in front of a chalkboard covered with question marks.

Image source: Getty Images.

What's the story?

Last September, former presidential candidate Bernie Sanders unveiled the Medicare for All Act, or M4A, a program that would replace copays, coinsurance, and insurance premiums with a Medicare-like system. The new system would cover every dollar spent by Americans on healthcare, including dental and vision care.

Initially, the new program would lower the age to qualify for Medicare to 55 from 65. It would also immediately enroll everyone who is currently covered by Medicare and children under age 18. Americans who are between 18 to 55 would join the program gradually over three years, giving healthcare providers and taxpayers time to adjust to the new scheme.

One decade costs $32.6 trillion

If enacted in 2018, the M4A program would be fully up and running in 2022. And, according to the Mercatus Center, M4A would increase federal spending by $2.5 trillion that year. In the first 10 years, Mercatus estimates that the federal spending increase resulting from M4A would total $32.6 trillion.

For perspective, the proposed total federal budget is $4.4 trillion, and the government's total haul from taxes and other sources of revenue will be $3.42 trillion in fiscal 2019, including $1.6 trillion from income taxes. The U.S. budget deficit is already approaching $1 trillion, and the prospect of a surge in healthcare spending due to M4A, without a corresponding spike in tax revenue, could cause that deficit to skyrocket.

Is it worth it?

The study estimates that Americans' total personal healthcare spending under current policy will be $3.9 trillion in 2022. If M4A is enacted, then the addition of those who are currently uninsured and the elimination of copays and coinsurance would increase that amount by $435 billion.

However, the study also found that the $435 billion increase could be more than offset by $384 billion in savings from lower payments to healthcare providers and $61 billion in savings from lower prescription drug prices. After the put-and-take, Americans would spend $10 billion less on healthcare in 2022, and through 2031, M4A could reduce Americans' total healthcare spending by $2.1 trillion. 

In short, while the federal share of healthcare spending soars under M4A, total spending on healthcare shrinks if cost savings due to increased buying power materialize.

Why it matters

The Centers for Medicare and Medicaid Services' most recent National Health Expenditure report shows insurance premiums totaled $1.1 trillion, or 34% of total national health expenditures, and out-of-pocket healthcare spending totaled $352 billion in 2016. In both cases, the 5.1% increase in health insurance spending and 3.9% increase in out-of-pocket spending grew faster than wages, which increased at less than a 3% annual clip in 2016, 2017, and (so far) 2018.

If healthcare costs continue climbing faster than wages, Americans are going to have an even harder time saving for retirement, and retirees could see their savings evaporate more quickly than planned. Skyrocketing healthcare costs have already significantly reduced seniors' purchasing power, and given Social Security's uncertain future, retirees could be in for a reckoning.

Baby boomers' median savings are just $164,000, and since life expectancy is increasing, that's unlikely to be enough. At the recommended 4% annual withdrawal rate, a nest egg of that size will only provide an extra $6,560 per year in income. Given that cancer drugs alone can cost thousands of dollars per month and Medicare only picks up the tab for some of that spending, there's a pressing need to reform healthcare to reduce the risk of seniors going broke.

Instituting M4A, or a similar program, could reduce the risk of average Americans going bankrupt. But absent tax increases, given the deficit already, it could bust the federal budget instead.

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