This number comes up over and over again in the discussion around Medicare-for-all. It supposedly represents how much larger current Medicare payments (what the government pays health-care providers) are from private insurance payments to doctors, according to a widely cited paper written by Charles Blahous of the libertarian Mercatus Center — and thus how much health-care spending would have to be cut under Medicare-for-all.
This is misleading nonsense.
In early August, Blahous published his paper. The text carefully says the 40 percent figure applies only to private insurance payments, but in his articles written for a popular audience, he repeatedly implied or stated outright that the cut would apply to all provider payments. For instance, in the Mercatus blog post providing a summary of his paper, he said Medicare-for-all would cut "payments to providers by more than 40 percent." (When reached for comment, Blahous admitted the mistake and updated the article.) In other articles, he repeatedly fudged the distinction between private insurance payments and payments in general, implying the same thing.
This is an alarming claim. Doctor pay is going to be cut by nearly half, instantly? It is also, unsurprisingly, wildly inaccurate.
But many writers were successfully snookered. Glenn Kessler, the Washington Post fact checker, published the wrong 40 percent cut figure, corrected it, then did it again and bizarrely refused to fix it. Brian Riedl published it in the New York Post. Charlie Katebi published it in The Hill. Robert Graboyes published it in Real Clear Policy. Philip Klein published it in the Washington Examiner — though unlike Kessler, Klein did fix it after I pointed the mistake out on Twitter.
To explain why this 40 percent figure is wrong, we have to get a bit wonky. Stay with me here.
In the abstract of his paper, Blahous writes that "health-care providers operating under M4A will be reimbursed at rates more than 40 percent lower than those currently paid by private health insurance." Later in the text, he qualifies this claim somewhat, instead saying that reimbursement rates for Medicare "are projected to be roughly 40 percent lower than those paid by private insurers during the first 10 years of M4A’s proposed implementation" — in other words, 40 percent lower over a 10-year period starting in 2022, not "currently."
The footnote on the 10-year average cites this estimate from the Centers for Medicare and Medicaid Services. Open that estimate, scroll down a bit, and we find this chart:
This chart measures Medicare payment rates as a percentage of private insurance rates under current law. The heavy black horizontal line (Medicare) does land at 60 percent today, and from 2022-31, it seems like it is indeed about 40 percent less than private insurance payments.
Hang on, though. If you squint, the chart title says it applies to "inpatient hospital services" — that is, hospital treatments requiring at least one overnight stay. Surely that doesn't include all medical services, right?
It does not! Scroll down a bit further, and we find this chart:
This one covers "physician services," and it is markedly different from the first chart. For starters, it shows that Medicare rates "were about 75 percent of private health insurance payment rates" — or only 25 percent less! Forty percent over the 2022-2031 period is probably closer to reality, but that would depend on the averaging.
These two categories (which were "illustrative" examples, according to the estimate) also leave out lots of other medical services, like home health, rehabilitation, hospice, ambulances, and so on. When reached for comment, Blahous argued that "while different providers have different payment schedules, hospitals and physicians are especially large parts of the calculations," and should be generally representative. Nevertheless, to really drill down into the actual cost comparison, one would need a weighted average across all service categories, which this source was not even meant to provide.
Systematic estimates of such comparisons are all over the place, which gets into the real problem with Blahous' reasoning here. The above charts make it appear as though Medicare payment rates are projected to decline over time, but in reality, they simply increase somewhat more slowly than private reimbursement rates, which are projected to zoom off into the ionosphere.
Indeed, private insurance payment rates are so complicated and differ so much that it's extremely difficult to nail down what the real prices even are. As this Congressional Budget Office study demonstrates, private insurance payments have extremely high average prices to a large degree because they have such a long tail of extremely expensive procedures — a small fraction of procedures costing 3-6 times as much as Medicare, or even more.
Medicare-for-all would no doubt be a pretty sharp cut in payment rates compared to private insurance, whatever the number is. But much of that savings could come from wrenching down this minority of outrageous rip-off procedures. Under the Sanders Medicare-for-all bill, overall payments to providers would go down by about 10 percent, according to Blahous. If we got a lot more aggressive with cost control, that might be 15 or 20 or 25 percent — but it wouldn't be because the government wasn't reimbursing doctors for routine and preventative services. It would be largely because the government would crack down on egregiously expensive and unnecessary spending.
Blahous wants us to think that Medicare-for-all would mean doctors and nurses will be wandering the streets, rendered penniless by the mean old government. In reality, as I carefully explain here, we could cut $800 billion out of our health-care sector — about half in drugs and administrative waste, and half in service price cuts — and still have the most expensive system in the world by a considerable margin. Doctors might take a moderate hit on average, but the only real losers would be the price gougers and the outright predatory hospitals.
Ultimately, it simply must be possible to finance a decent, sensible health-care system with quite a lot more than any other country per person. Don't believe these faux-sophisticates arguing otherwise.