Improve Obamacare: Single-Payer (VAT) & Multiple Providers

In 2005, The New England Journal of Medicine published an article titled “Healthcare Vouchers, A Proposal for Universal Coverage” by Ezekiel Emanuel, MD, PhD and Victor Fuchs, PhD.  At the time, Dr. Emanuel was Chief of the Department of Bioethics at National Institutes of Health, and Dr. Fuchs was Professor of Economics and of Health Research and Policy at Stanford University.

(This proposal was updated and presented in detail in 2008 in a book: “Universal Healthcare, Guaranteed, A Simple Secure Solution for America,” Ezekiel J. Emanuel, Public Affairs, Jackson, TN.)

The Universal Healthcare, Guaranteed plan called for eliminating – for corporations – the direct burden of healthcare insurance, and providing healthcare vouchers to be used in a health insurance exchange that could also include Medicare.  The vouchers were to be funded by a dedicated Value Added Tax.  This method of funding the vouchers would have broad economic benefits.

The Value Added Tax is monetarily equivalent to a sales tax.  It differs in that VAT is added at each stage of production and distribution rather than only at the retail level.  Credits are taken for taxes paid at each stage, so the tax does not cascade (no taxes on taxes).  Unlike a retail sales tax, however, VAT is recognized under GATT rules (General Agreement on Tariffs and Trade) as a border-adjustable tax, i.e., subtracted from exports and added to imports.  This feature eliminates the burden of government expenditures from the price/value competition of goods and services crossing international borders.  Both domestically produced goods and imports are taxed the same.

The U.S. does not employ a VAT, which results in a competitive disadvantage in trade.  All our trading partners have a significant portion of taxes paid by VAT’s, so goods exported from those countries are coming in cheaper by the percentage VAT.  How much cheaper?  Cars from Germany, 17% cheaper.  Goods from China, 19% cheaper.  The Emanuel/Fuchs plan for healthcare vouchers would require a VAT of around 12% to cover everyone under 65 (with Medicare still covering those older). At 12%, the healthcare VAT percentage would be about the average percent of our trading partners’ VAT’s.  Imports would be equally burdened by the cost of U.S. healthcare, and our exports would no longer carry the cost of healthcare in their prices.  We could expect domestic production to be more competitive at home and abroad, fueling economic and job growth.  

The VAT would replace healthcare insurance provided by companies and individual insurance premiums.  Many corporations currently pay around 15% of wages for healthcare insurance premiums.  Ford Motor Company, for example, spends more for healthcare premiums than it does for the steel in its cars.  Again, companies would be freed of this direct insurance cost. 

But would the burden of the VAT be fairly distributed?  Some companies would increase wages to assist employees, and competition suggests those who did not would not attract the best workers.  Health insurance by companies became a method of competition in the marketplace for employees when wages were frozen during World War II, and companies added to this benefit to remain competitive.  Government, too, could assist with VAT payments through the EITC (subsidy to the poor and lower wage earners).

Emanuel and Fuchs addressed that question: “Some people reflexively reject a value-added tax as regressive. However, the distributional impact of the voucher proposal requires looking at the benefits as well as the tax burden. All things considered, the program is progressive, since it implicitly subsidizes the poor. It is not an accident that countries such as Norway and Sweden, which provide universal health coverage, make substantial use of value added taxes to fund social programs.” 

There is resentment in some quarters about the expensive cost of free services in hospital emergency rooms and obstetrics units.  But, with a VAT paying for healthcare benefits, everyone would be contributing towards these benefits.  And, since wealthier consumers purchase more goods and services, they would be paying for a greater proportion of the VAT receipts, adding to progressivity.  Furthermore, because the VAT would be dedicated to healthcare vouchers, the public would have a visual check on the cost of demanding more medical services, and, perhaps, be somewhat self-limiting.

So, why didn’t Congress embrace the Emanuel/Fuchs plan?  Republicans have been wary of introducing another tax base that would be used as a money machine for bigger government. Some Democrats fear VAT would be too regressive.  Larry Summers put it this way: “The reason the U.S. doesn’t have a VAT is because liberals think it’s regressive and conservatives think it’s a money machine. We’ll get a VAT when they reverse their positions.” 

The Affordable Care Act will educate the public on the use of healthcare exchanges.  A smart Congress would do well to explore a dedicated Value Added Tax to fund healthcare vouchers used in the insurance exchanges.

(See the 9-minute video to learn how VAT would grow the economy and jobs – including a clear explanation by Bill Clinton)

Peter Orszag Interview (with Jeff Madrick at Hamptons Institute, East Hampton, NY), 04/16/11

Notes taken by SA,, at interview on subject, “America’s Fiscal Fitness: Where do we go from here?”

This interview was to have been conducted by Steve Kroft, who was replaced by Jeff Madrick.  The interview lasted about 40 minutes and was then opened to questions from the audience.  The questioning began with regard to the pending issue of the debt ceiling.

Following were Mr. Orszag’s major comments.

Not binding the debt ceiling would be “catastrophic,” and, therefore, he expects it to happen.  However, there is no chance that there will be an agreement until emergency measures are pressured by the financial markets.  Explaining his point, he emphasized it was “unfortunate that we didn’t go over a cliff on the budget agreement”; he expects that the deadline for the budget ceiling will not be met, and that by July a temporary disturbance can be expected in financial markets.  There is a real risk that a shift in the financial markets could come quickly, but it will take a crisis for Congress to act.

He gave a back-handed compliment to the Ryan plan, in that it is bold and offers some details, but he labeled it  a “huge” political gift to the Democrats.  Repeating CBO’s commentary earlier in the week, the heart of Ryan’s deductions affects Medicare, changing it to a consumer directed plan and raising costs to beneficiaries in 2030 by more than $6,000.  He affirmed that CBO is not a biased arm of government.

The Obama plan presents a stark difference from the Ryan plan, which difference he cited as a “manifestation of polarization.”  The Ryan plan, he says, lacks a basic theory on how to constrain healthcare costs, and the cuts hit the poor.  Cost containment of healthcare benefits must deal with the highest cost cases, which come disproportionately from the end of life years.  “To call the Ryan plan ‘radical’ is not an overstatement.”  Ryan’s plan moves Medicaid to block grants to the states without indexing, and will put a strain on the states.

Fundamentally, we do not have the tolerance for the tax increases needed to pay for the benefits we expect.  Ryan would make the tax code significantly less progressive.

With our bad fiscal situation we should cancel the Bush tax cuts for the middle-class as well as for the top income earners.

Referencing the increasing political polarization of the country, he noted a recent demographic study showing that our population is shifting to Republican or Democrat leaning neighborhoods, not mixed.

Regarding economic outlook, he is of the camp that believes we need more stimulus now and a plan for deficit reduction in two to three years when the fragile economy stabilizes.  He predicts that the spending reductions just passed will result in the cost of 1/4-1/2% GDP.  Our revenue base is inadequate, causing an infrastructure deficit.  We face a permanent unemployment risk, he said, from the loss of skills among the unemployed.

The deficit for 2015 is projected at 5% of GDP, but the margin of error is 5%, so that means it could be in the 0-10% range. Growth, of course, would be important, but dismissing tax cuts as the answer, he said that there is no empirical evidence for the Laffer curve. Bowles-Simpson is laying the groundwork for general construct in deficit reduction.

While the situation is anxious, there are still no other plausible safe havens besides the U.S., which is keeping turbulence at bay.  He expects that a “sharp” depreciation of the dollar is more likely than Fed action to increase interest rates.  He said we are taking a risk with investor confidence without having developed a fiscal path.

Answering questions on healthcare costs, he said that patients should not be able to sue physicians if doctors are following best-practice protocols.  Asked (by SA, VATinfo) why the OMB did not support Dr. Ezekiel Emanuel’s plan − for universal healthcare with a dedicated VAT paying for insurance vouchers to be used in an exchange, he said that a VAT was not politically viable.  But, he acknowledged that the Emanuel plan, like the Ryan plan, was consumer driven and might therefore help to curtail costs.

As to Social Security, he said the fix was not hard, and taking this step would show our ability to deal with a problem, which would be a confidence builder.  He opined that it is not politically plausible that the Ryan plan’s private Social Security accounts could happen. Raising the Social Security tax base by increasing the wage cap has more Congressional support than any other fix.

Mr. Orszag also noted that Social Security is becoming less progressive, as there is a disparity in longevity based upon wealth, and there is a correlation between longevity and medical costs.  But, he is confident that the Obama healthcare bill will deliver efficiencies from learning best practices.  Expressing concern about the growing cost of prescription drugs, he noted that pharmaceutical spending has decreased in Medicare due to the greater use of generic drugs.

Catching up to Mr. Orszag after the interview to ask him about Gov. Daniels’ sweeping tax overhaul vision, SA queried if OMB has vetted the concept, and he responded “no.”

Medicare: Emanuel Healthcare VAT Bridges Ryan & Obama

On the editorial page, today’s NYTimes restates their opposition to potential future cost increases to Medicare recipients in Paul Ryan’s plan (“The Republican Medicare Reshuffle,” 04/15/11).  Paul Krugman, too, decries the notion that unlimited benefits may not be paid for indefinitely without substantial additional contributions by recipients (“Who’s Serious Now?“).  David Brooks in “Ultimate Spoiler Alert” endorses Ryan’s concept of using defined contributions, a de facto voucher system, for Medicare.

Dr. Ezekiel Emanuel, Director Bio-ethics at NIH has long proposed a plan which would bridge the divide.  He has called for healthcare vouchers to be used in an exchange and paid for by a dedicated value added tax.  This exchange should include Medicare as an option alongside private insurance, which would force the insurance companies to compete with the benchmark standard.  Paying for healthcare with the VAT would ensure that healthcare consumers were aware of the costs and would force them to consider what demanding more benefits would mean to their pocketbooks.

The Ryan plan covers everyone over 55, today with the same benefits that retirees now enjoy.  If, as OMB indicates it would cost another $7,000 per recipient in 2022, then the public could consider shouldering the increased burden via an increase in the VAT, which would be somewhat progressive since wealthier Americans consume disproportionately more than the  less advantaged.  And, those in the lowest brackets could be protected with Earned Income Tax Credits.

Corporations and labor should like this concept.  It would remove the direct corporate burden of healthcare costs.  VAT, subtracted from exports under GATT rules would make exports more competitive.  The VAT would assure that imports carried an equal burden as domestic production and make U.S. labor and business more competitive at home.

Isn’t that a plan that both the President and Paul Ryan could support?