Hospital Insurance and Medicare Reform

Finance, Fiscal Responsibility and Economic Growth: The Hospital Insurance Trust Fund and the Future of Medicare Financing, February 2, 2022

The Hospital Trust Fund (Medicare Part A), even though it has no cap, is funded by a payroll tax that leaves non-wage income on the table. Wages have mostly declined, while the top 4% of filers (who take home 33% of Adjusted Gross Income) receive only half of their income from wages. The other half is not touched (and is a product of the labor of the lower 96%). 

It is no wonder that the fund is endemically close to falling below revenue. Raising the HI payroll tax to 5% would balance the fund forever - but it leaves too much of AGI on the table.

Among the elderly and severely disabled, there is a constant battle between nursing homes and hospitals for cost avoidance, with patients in the middle.

There is certainly much more to be said, and I count on the listed witnesses to say it. I am sure that some of them have interesting proposals for reform. I have my own, which I will now detail.

HI cannot be treated as one component without affecting all other components. This is especially the case as some form of single payer system is inevitable. Whether you call the public option Expanded Medicaid or the real thing, the entire system is in need of change. More detailed analysis of single-payer options can be found in the Attachment.

Universal coverage, starting with a public option under the Affordable Care Act, with eventual evolution to some type of single-payer system seems like our best path. A public option will only pass if pre-existing condition reforms are abolished with public option enrollment being automatic upon rejection. 

The public option must be subsidized, replacing Medicaid for the disabled and those not requiring long-term nursing care. Long-term care should be removed from states and replaced with a new federal Medicare Part E.

The profit motive, with the need to constantly increase profits to attract Wall Street investment or keep stock prices growing will lead to an ever increasing number of people who will be considered uninsurable, thus relying on the public option.

Most healthcare systems will provide services to both comprehensive insurance beneficiaries, the retired, the disabled and those with the public option. In other words, Medicare for All is our future, with the only exception being firms abandoning the system and providing their own doctors while making arrangements with local hospitals and specialists - essentially creating local HMOs. 

The major issue here is funding, although more efficiency will reduce prices. Costs are already minimized by the for profit and by governmental medical care (which often uses for profit networks). To repeat, with a shout THE ISSUE IS PRICE, NOT COST!

The problem with the Affordable Care Act is that much of its funding came from taxes on capital gains and income falling on the top third of taxpayers. In other words, the upper and upper-middle classes. IRS data shows that about half of Adjusted Gross Income for these classes is from non-wage income. Membership in these classes is limited to the top 4% of taxpayers.

This is politically unacceptable, as the multiple attempts to repeal the ACA have shown. Broad based taxes are necessary and should be bipartisan. Any political promise to the contrary must be broken. No votes will be lost to either party by doing so. Few members of the middle or working classes will shift their allegiance to the other party because of tax policy changes. 

Members of the current majority party will simply not give up on their political home because their taxes go up. One of the key reasons for party identification among frequent voters is economic policy - not the details but a belief in who should be taxed. Progressives will never join the Republican Party for a campaign promise not kept.

The stupidest myth in American history is the belief that anyone held George H.W. Bush to account for breaking his “no new taxes” pledge. They did not vote for Perot because of it - his voters were sending a message to the entire system and drew from both parties. If anyone believes that any Bush voter shifted to Bill Clinton for violating the NNT pledge, I have a collection of bridges over the Potomac you may be interested in purchasing.

Payroll taxes are regressive, so they should not be used to fund the public option, et al. Indeed, all Medicare taxation should be shifted to a less regressive consumption tax. This tax is less regressive because it takes from profit and wages in equal measure. Taxing only wages or only capital leads to either too much progressivity or too little.

The only question is how to collect these taxes. If it is more important to give exporters (and overseas customers) an economic break, the standard border adjustable goods and services tax is best. 

To preserve the private option - either for comprehensive insurance or employer-provided care - a subtraction (aka net business receipts) value added tax is best. Such a tax should also include distribution of (more generous) child tax credits. 

Paying these taxes through employers, rather than the Internal Revenue Service, corrects the economic failure that simply relying on privately negotiated wages creates while taking away the “stink of welfare” found in the American Recovery Plan Act’s distribution mechanism.

The provisions in the Affordable Care Act creating surtaxes to fund healthcare must be repealed, as should both dividend, interest and capital gains taxation (as well as rent) currently collected through personal income taxes. Instead, tax transactions, rather than people at the same rate now paid for the highest rate for  long-term capital gains. The current rate (including ACA taxes) is just short of 23.8%. The proposed rate is 28.8% (adding proposed surtaxes for high incomes).

Much money is spent on campaign contributions to continue going back and forth between these rates. I have little hope for compromise - although splitting the difference between 26% and 27% seems reasonable.

What would such a tax pay for, if not healthcare? Fund the military - especially overseas deployments which serve our security and economic interests abroad, repayment of the Social Security Trust Fund and begin funding Net Interest rather than rolling it over into new debt. The international economic system can only favor the Dollar and U.S. Debt for so long. Every empire falls. The question is, who will lose the most if American debt becomes worthless? 

Using data from the Federal Reserve Survey of Consumer Finance, the top 10% of households indirectly hold 56% of debt held in Federal Reserve and Bank Assets and Long Term Investments and 77% of mutual fund and direct debt holdings. According to the Pareto Rule, half of each of these fund pools is owned by the top 1% of households. They have the most to lose if the debt crashes. Use an Asset Value Added Tax (on transactions) to decrease what is becoming an unworkable level of debt. 

Attachment: Single Payer

Attachment: Tax Reform