Jane the Actuary Retirement

Forbes post, “Expand Medicare In The American Families Act? Not So Fast”

Originally published at Forbes.com on April 30, 2021.  While the legislation never passed, I think the background/context for “Medicare expansion” is still relevant.  

 

The American Families Act — Biden’s new spending proposal covering paid leave, child benefits, childcare subsidies, tuition-free community college, and more, but lacks one component progressives had been calling for: an expansion of Medicare, in terms of benefits provided and age eligibilities.

Here’s an excerpt from yesterday’s Washington Post:

“Congressional Democrats are planning to pursue a massive expansion of Medicare as part of President Biden’s new $1.8 trillion economic relief package, defying the White House after it opted against including a major health overhaul as part of its plan. . . .

“They specifically aim to lower the eligibility age for Medicare to either 55 or 60, expand the range of health services the entitlement covers and grant the government new powers to negotiate prescription drug prices. . . .

“Roughly 100 House and Senate Democrats led by Rep. Pramila Jayapal (Wash.) and Sen. Bernie Sanders (I-Vt.) publicly had encouraged Biden in recent days to include the overhaul as part of his latest package, known as the ‘American Families Plan,’ which proposes major investments in the country’s safety net programs. . . .

“Sanders said Wednesday he would ‘absolutely’ pursue a Medicare expansion as lawmakers begin to translate Biden’s economic vision into legislation. Sen. Ron Wyden (D-Ore.), the chairman of the tax-focused Finance Committee, similarly pledged that he would ‘look at every possible vehicle’ to lower drug costs.

“And Sen. Richard J. Durbin (Ill.), the Democrats’ vote-counter in the chamber, said he planned to push for Medicare reforms he saw as a ‘game changer.’”

Democrats and, to a lesser degree, Republicans have been on a quest to reduce prescription drug costs for years, and even in the waning months of the Trump administration, there had been efforts to implement a “most favored nation” pricing model, in which Medicare would pay drug prices equivalent to those paid by other developed countries; an executive order mandating this for Part B drugs was issued in September, published as a rule in November, and halted via injunction from a lawsuit in January. Proposals to expand this concept to Part D drugs are still pending, but have bipartisan approval; more extreme proposals such as the promise to seize patents and produce drugs via compulsory licensing, of course, do not.

But what exactly is the plan, when it comes to demands to expand Medicare eligibility? There have been two versions floated about: the first offers a “buy in” to otherwise-uninsured near-seniors, and the other simply offers the benefit under the same terms as for those already age 65. The letters from Sen. Sanders and Senate Democrats and from House Democrats do not spell out precisely their intention when they call for eligibility expansion alongside benefits expansion. Can it be inferred from their claim that Medicare would save $500 billion over 10 years with prescription drug price-control and the money could be used to “expand and improve Medicare,” that they intend for their pre-65 Medicare to be exactly as “free” as 65+ Medicare? Politico reports that merely to add dental, vision, and hearing benefits would cost $350 billion, but that Sanders, when asked, declined to discuss the costs of his proposals:

“He said he doesn’t want to just pick a target; he wants to check off as much as can be done to help people across the country and then figure out just how much that would cost.”

What is the actual cost of Medicare expansion? Even in a moderate form down to age 60, one estimate is between $40 billion to $100 billion per year, which, at the higher end, or with a further eligible drop down to age 55, would be far, far more than the projected savings from drug price controls, even without the addition of the benefit enhancements.

As to the various buy-in proposals, Kaiser evaluated several of the proposals being floated as of 2018. These proposals keep the Medicare benefit design, with its Part A, B, and D benefits, calculate the cost of benefits plus administrative expenses, and use the ACA structure to provide premium subsidies. The proposals would also require that all existing Medicare providers accept new patients at the same, low, Medicare reimbursement rates as for existing over-65s, and it is this low-reimbursement mandate, not superior management or reduced administrative costs, which would reduce the cost of this coverage to recipients. And for any iteration of “buy-in,” or any of the “Medicare for All” proposals from the various Democratic candidates, the ultimate impact of including far more medical care into the “Medicare rates” is something that generates a lot of worry, without much of a sense, even from experts, as to what would happen when providers are squeezed and cannot cost-shift from Medicare to private-insurance patients.

One analysis from 2019 attempted to model the effects of some sort of Medicare expansion, based on a hypothetical non-profit hospital system, in which private-sector insurance rates are double those of Medicare. This hypothetical did not include doctors’ practices, only hospitals. It found that its current 2.3% profit margin would drop to a 1.6% margin, in the case of a voluntary buy in for those age 50 and above, where employers could not shift coverage to Medicare; if employers did have the ability to move their older employees to Medicare, the hospitals would have a 5.3% loss; for a public option for all ages, that hospital system would have an 8.4% loss. (I was unable to find a similar analysis of doctors’ revenues.)

It stands to reason, then, that, however much the United States may be overpaying when it comes to drug costs, there is no such simple answer when it comes to costs for healthcare, in general, where expanding the number of recipients of care at Medicare rates (or, even more extreme, the Medicaid rates), would open up a can of worms. Proposals exist to reduce the cost of medical care, far more broadly speaking than simply forcing down reimbursement rates or expanding the number of people eligible for the lowest rates, but this is a far greater challenge than sloganeering, or simply declaring a new form of government benefit.

 

December 2024 Author’s note: the terms of my affiliation with Forbes enable me to republish materials on other sites, so I am updating my personal website by duplicating a selected portion of my Forbes writing here.

Jane the Actuary General Interest, Retirement

Forbes post, “Why Biden’s American Family Plan’s Family Leave – Reportedly – Gets Social Insurance Completely Wrong”

Originally published at Forbes.com on April 22,2021.  The legislation has failed in the meantime, but the issue of Family Leave has not gone away.

Earlier this week, the Washington Post reported on some initial details on the American Families Plan, the third of the Biden administration’s massive spending bills, expected to be unveiled next week, and following on the American Rescue Plan already passed and the American Jobs Plan of infrastructure and social spending. The proposal is expected to include

  • $225 billion for child-care funding;
  • $225 billion for paid family and medical leave;
  • $200 billion for universal prekindergarten;
  • Hundreds of billions in education funding, including his “free community college” campaign promise; and
  • An extension of the expanded child tax credit/child allowance through 2025.

The plan is intended to be funded by tax increases on “wealthy Americans and investors, in addition to beefing up enforcement at the Internal Revenue Service.”

The Post did not provide details on the time frame over which these costs would be incurred or funded. (Recall that the “jobs plan” spends over 8 years and funds over 15.) But one might assume that his proposal for family and medical leave would be based on his campaign promise, that is,

“Biden will create a national paid family and medical leave program to give all workers up to 12 weeks of paid leave, based on the FAMILY Act. Workers can use this leave to care for newborns or newly adopted or fostered children, for their own or family member’s serious health conditions, or for chosen family; or to care for injured military service members or deal with “qualifying exigencies arising from the deployment” of a family member. During their time away from the job, workers will receive at least two-thirds of their paycheck up to $4,000 so they can better afford to take leave — with low- and middle-wage workers receiving larger shares of their paycheck.”

Now, the FAMILY Act is an existing legislative proposal which would provide 12 weeks of leave at 66% of pay, paid for by 0.2% of pay (employer/employee) contributions. And as it turns out, this proposal has been around since at least 2013, when on another platform I critiqued the bill not just for its egregious acronym (the bill title is the Family and Medical Insurance Leave Act, which ought to be the FAMIL Act, and even then “insurance leave” rather than “leave insurance” doesn’t even make sense, but it’s rearranged to get the acronym) but for the fact that the contribution level appear to have been chosen as a politically palatable tax rate rather than based on any actuarial analysis of the cost of running such a program. In fact, in January 2020, the Social Security Chief Actuary provided an analysis of the bill’s cost, and found that rather than the proposed payroll tax rate of 0.4% would be insufficient and instead 0.62% would be required to fund benefits — and that under a surprisingly low set of assumptions around use of the benefits, that only 35% of new parents would take advantage of the program, that 4% of workers would have medical conditions of their own and 0.4% of workers would need to care for a family member, and that, on average, they would receive benefits for only two rather than three months. Yet nowhere in the legislation is there any means of adjusting the payroll tax to meet actual financing needs, nor adjusting benefits to meet the revenue available.

Financing issues aside, however, this approach is a reasonable form of social insurance provision. Quite simply, this is how social insurance works. We, collectively, want a means of collectively providing funds to people as circumstances require — retirement, disability, unemployment, family leave needs — and the mechanisms of social insurance deliver: universal payroll taxes with rates set as needed to fund these payments.

Consider a few international examples, based on the data available at the International Social Security Association website (and highly simplified):

France provides sickness benefits and maternity/paternity/adoption leave, for up to 10 weeks after birth, funded with a 13.3% payroll tax, plus family allowances funded with a 3.45% payroll tax, which include both cash benefits, childcare subsidies, and benefits for reduced work hours, paid for 2 years, more or less.

Netherlands provides a maternity leave benefit for up to 16 weeks, funded through its unemployment insurance program (2.85% payroll tax).

Sweden’s benefits have a parental benefit-specific payroll tax of 2.6% of pay as well as a 4.35% payroll tax for sick leave.

Germany provides maternity and sick leave with a payroll tax that’s combined with the costs for medical benefits, at 7.3% for each of employees and employers, for up to 8 weeks. Additional benefits, including a child benefit and a one-year 67% parental leave benefit, are funded out of general revenues.

And — as a reminder — when other “western” countries do fund their benefits from general revenues, this means they fund them from income taxes in which there is no special effort to “soak the rich” but instead their top tax bracket applies, generally speaking, to everyone middle-class (or upper-middle-class) and above.

This means that Biden’s proposal to fund family leave through a tax hike on the wealthy is not just ill-conceived but far from the international norm. And it won’t get us where its supporters want us to be. If we define social insurance not as something we all pay for and benefit from, but as government benefits “paid for by other people,” it will create a dead-end that will impact the prospects for social insurance, generally speaking — including reform of Social Security itself.

December 2024 Author’s note: the terms of my affiliation with Forbes enable me to republish materials on other sites, so I am updating my personal website by duplicating a selected portion of my Forbes writing here.