April 30, 2019
Craig Holke, Investment Strategy Analyst
Higher Taxes After Tax Cuts?
Several Democrats are proposing “Medicare for All”—a move to a single-payer, federal health care plan that may eliminate private health insurance. Providing increased coverage, in terms of both people and benefits, likely would require significant tax increases.
- Although the bill is unlikely to pass while Republicans maintain control of the Senate, adding a Medicare for All system would be negative for the Health Care sector, in our opinion. With increased talk of implementing a federal health care program, this sector had been the worst year-to-date performer (through mid-April). The elimination of private health care insurance would drive providers out of business, and the pharmaceutical industry could be negatively affected by lower, negotiated prescription drug prices from a single payer.
- Higher federal taxes eventually may result in less household and business income to drive U.S. economic growth. Broad equity markets could suffer as revenue prospects decline, with sectors such as Consumer Discretionary and Industrials potentially being most adversely affected.
- It is doubtful that a Medicare for All plan could be paid for entirely by higher taxes. An increase in federal borrowing may lead to higher U.S. deficits and debt levels, and also limit congressional ability to respond to unforeseen future circumstances (e.g., recessions or conflicts overseas).
What would “Medicare for All” really cost?
Senator Bernie Sanders proposed expanding Medicare to all U.S. citizens during the 2016 presidential campaign. While he was unsuccessful in achieving the Democratic nomination, he has been very successful in bringing progressive views to the forefront of the Democratic Party. He is again running for president, and he has sponsored the Medicare for All Act of 2019. As a gauge of support within the Democratic Party, there are 14 Senate cosponsors. Four of these cosponsors also are running for the Democratic nomination for president—Senators Cory Booker (NJ), Kirsten Gillibrand (NY), Kamala Harris (CA), and Elizabeth Warren (MA).
The bill would expand Medicare to become the sole provider of health insurance for U.S. citizens. This would, in essence, have the federal government eliminate the private health care insurance industry in the U.S. Key provisions include:
- Covering all medical care costs, including prescriptions, dental care, and vision care
- Offering mental health and substance abuse treatments
- Allowing patients to see any doctor of their choice, with no deductibles or copays.
Increased coverage may be viewed as a desirable goal, but as this analyst’s eighth-grade social studies teacher used to say: TINSTAAFL—There Is No Such Thing as a Free Lunch. What is the potential cost for providing health care for all Americans? Estimates from the 2016 plan from Senator Sanders ranged from $2.5 trillion to $3.5 trillion annually over the next 10 years.1 Those amounts are in trillions—significantly more than the $1.1 trillion spent on Medicare and Medicaid in 2018 and roughly 4 to 6 times the annual, $622 billion, Department of Defense budget for 2018. Savings in negotiated prescription drug costs and centralized administration likely would be offset by an increase in the number of individuals covered (Senator Sanders estimates this increase at 34 million uninsured individuals), along with expanded individual benefits. That is assuming hospitals and doctors would accept the nearly 40% less that Medicare currently receives for existing services. If this act were to pass, there could be hospital closures, due to revenue shortages—and fewer individuals entering the medical field due to lower income potential.
Although Asia is quickly catching up, the U.S. still provides the majority of health care research and development that benefits the world. It is difficult to estimate the potential decline in research that would result from the implementation of a single-payer, federal health care plan.
To help pay for the Medicare for All plan, Senator Sanders has proposed additional, and increased, taxes. Table 1 highlights some of these proposed taxes and the potential implications.
According to a recent survey, 56% of the public favors a national health plan.2 While this is not the highest level of support ever recorded (59% in March 2018), it remains higher than historical averages. However, when told that increased taxes would be required to pay for the plan, 60% opposed implementing a national Medicare for All plan. More respondents (74%) favored an optional plan administered by the federal government through which individuals may purchase coverage—but which would not eliminate private health insurance.