Medicare Prices for All

This article is from a cover package of essays entitled Ten New Ideas for the Democratic Party to Help the Working Class, and Itself. Find the full series here.

According to exit polls, the top reason voters gave for not supporting Kamala Harris was inflation. Yet by the time of the election, official measures showed that inflation had moderated to historical norms. Meanwhile, other conventional economic indicators showed that wages had been rising far faster than prices for the previous two years. So why were so many voters convinced that their standard of living was falling? 

Here’s one factor that has been largely overlooked. Everyone complains about the high price of drugs and hospital stays. But few people are aware of how hidden health care costs that don’t show up in the Consumer Price Index are profoundly eroding their purchasing power. 

To understand how this giant rip-off works and how to fix it, you need some background. Most working- and middle-class Americans receive their health care coverage through employer-sponsored insurance plans. Most of us covered by such plans know full well that we are perpetually being asked to pay higher deductibles and co-pays. Most of us also know when our premiums go up. Individual workers covered by such plans typically pay around 20 percent of the cost of the premium in the form of a paycheck deduction. Workers who insure a spouse and two children under an employer plan typically see about 32 percent of the cost of the premium deducted from their paycheck. 

But here’s what most people miss. They think their employer pays the rest, which is true, but only literally. Your employer does send a check to the insurance company, but it’s a shell game. Any economist will tell you that workers in an employer-sponsored plan pay nearly all the cost of their benefits, and that it’s a very, very big number. This year, according to the Milliman Medical Index, for a typical middle-aged worker who enrolls their spouse and two children in a typical employer-sponsored family plan, the annual cost of their insurance has reached a staggering $32,066. 

The reason workers bear nearly all the cost of such plans is simple. When employers compensate workers with health care benefits, they almost always offset this expenditure by offering that much less in wages. They do this because they can and have no reason not to. All that matters to them is that the total compensation package allows them to recruit or retain the workers they want. For employers, their contributions to the health care plan are thus effectively free so long as they reduce other forms of compensation by the same amount. But for workers, the employers’ contribution to the health care plan usually means less take-home pay and other benefits. 

A corollary to this truth is that when the costs of a health care plan go up, employers compensate by either laying people off or giving lower raises than they otherwise would. For businesses that are losing money or operating at small margins, there often is literally no other choice. And for others, holding down salaries in the face of rising health care costs is the rational choice even if they could afford to do otherwise. 

This poorly understood reality has huge consequences for the finances of ordinary Americans. The employee-benefits expert Syl Schieber has calculated how much rising health care costs have lowered what he calls the “kitchen table” income of workers with employer-sponsored health care plans—that is, the income they have available each month to pay for housing, groceries, gas, and other day-to-day expenditures. He finds that due to the wage suppression caused by the rising cost of their health care plans, lower-income workers with family coverage had $2,500 less kitchen table income in 2019 (adjusted for inflation) than they brought home two decades earlier. In effect, health care inflation gobbled up all of the meager raises they received as they gained seniority, and more.

The hit on lower-income workers is particularly hard because employer-sponsored plans are financed by what is effectively a hidden and regressive head tax. The plan imposes the same flat costs on all employees regardless of how much they make. This means that the janitors on the plan pay a much higher share of their earnings than do the C-suite executives for the same coverage. 

Yet even workers in the top 10 percent of the income distribution are getting hosed. In his book Healthcare USA: American Exceptionalism Run Amok, Schieber shows that between 2000 and 2019, such high-income workers saw more than half of the total increase in their compensation over the period diverted into the cost of their health care plan. Put another way, that’s like finding, as you gain seniority and obtain increasingly valuable job skills, that your purchasing power is going up at only half the rate as the value you’re adding to your employer’s bottom line because (unknown to you) your employer has diverted the other half to covering the mounting cost of health care inflation. 

And that cost keeps rising. Since 2010, health care costs for the average family of four with an employer-sponsored plan have risen by more than $13,000, or over 71 percent. Currently, the cost for individuals covered by such plans is rising by 6.7 percent a year, roughly double the official rate of inflation. No wonder so many Americans, even those “privileged” enough to have employer-sponsored health insurance, feel like the economy is not working for them. 

The Princeton economists Anne Case and Angus Deaton attribute the rising death rates among working-class Americans in part to the economic hardships created by these plans. In their book Deaths of Despair and the Future of Capitalism, they write, “The cost of employer-provided health insurance, largely invisible to employees, not only holds down wages but also destroys jobs, especially for less skilled workers, and replaces good jobs with worse jobs.”

What can be done? Abolishing our employer-based health care finance system and replacing it with something like a government-financed, “Medicare for All” program might be a good idea. But it hardly needs saying that it is a political nonstarter at the moment.

Fortunately, there’s another way. 

It turns out that in addition to all their other faults, employer-sponsored plans are terrible at negotiating with health care providers for lower prices. That’s supposed to be one of their key functions. They are supposed to go to hospitals, doctors, and drug companies and say, “If you want to be part of our network of preferred providers, you have to give us discounts.” Yet it turns out that on average, when people on these plans go to the hospital to have a specific procedure done, the hospital charges an average 254 percent more than they do when they perform the same operation on a Medicare patient. Hospitals also charge commercial plans more than 100 percent more for any drugs they administer, according to a massive ongoing survey conducted by the RAND Corporation. 

This disparity is not entirely the fault of the plans. Thanks to rampant hospital mergers and the roll-up of independent doctors and other providers, many health care markets these days are dominated by a single mega health care provider with so much market power that it can simply dictate prices even to the largest purchasers of health care. In other places, insurers and providers have merged into a single, self-dealing conglomerate. Either way, in the face of so much monopoly power, most employer-sponsored plans are not providing any real value to their members when it comes to negotiating for fair prices.

When employers compensate workers with health care benefits, they almost always offset this expenditure by offering that much less in wages and other benefits. They do this because they can and have no reason not to.

So here’s the solution. Just mandate, going forward, that all employer-sponsored plans pay providers the same, or close to the same, prices Medicare does. And further mandate that employers share the enormous resulting savings with their workers. 

Will hospitals object? Of course. But their case is weak. Abundant evidence shows that the U.S. hospital system could easily sustain itself with prices that are much closer to Medicare reimbursement rates. This should come as no surprise, since Medicare sets these rates by calculating what a well-run hospital needs in revenue in order to cover its costs and earn a respectable profit. (“See Don’t Blame Medicare for Rising Medical Bills,” June 19, 2023.) Most hospitals are classified as nonprofit, charitable institutions for tax purposes. It’s time they operated as such, rather than behaving as profit maximizers. And it’s time American workers stopped seeing so much of their well-deserved earnings siphoned off by medical monopolies charging predatory prices. 

In 2018, the Washington Monthly published an article that worked through the details of how such a plan could be implemented and how much it would save workers. In 2020, we reported on how a similar plan had been successfully implemented by Montana on behalf of its state employees. 

Maybe now, as Democrats look for ways to improve the real and perceived economic security of working- and middle-class voters, it’s time to consider implementing “Medicare Prices for All.” It’s a plan that doesn’t require raising taxes or forcing anyone to give up their private insurance. But it offers a way to squeeze the monopoly rents out of the health care system and return them to the American people.  

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