Originally sent to VIXCONTANGO subscribers on December 6th, 2019
Now that Democratic primary season is upon us and the top 4 candidates are crystal clear (Biden, Sanders, Warren, Buttigieg), I want to provide you with a guide to the most important issue of the 2020 election which is Health Care. I have already sent a mailer about Bernie Sanders’ Medicare-for-All plan earlier in the year and if you haven’t read it, you can read it again here. Bernie’s plan is the most unlikely to pass through Congress since I doubt Americans are ready to jump from fully private health care to 100% government health care overnight. Even if Bernie Sanders base in the 2020 Democratic Party is solid, it is barely 10% of the US population and there is no way 10% of the US population will dictate what the other 90% will do, particularly when a good portion of the population is Republican. So I am not going to revisit Bernie’s Medicare-for-All here, instead I will focus on the Medicare-for-All vision of the other 3 candidates.
To put the discussion below in context, I would like to share with you my wife’s company health insurance plans and also how much they cost for a variety of people and situations. There are 2 types of plans in the US health care system – Silver and Gold. The Silver plans have a higher deductible (out of pocket expense) in exchange for slightly lower health insurance premium. The Gold plans have a lower deductible in exchange for higher premiums. People that are young and healthy tend to pick Silver plans, people with families tend to pick Gold plans. The combined premium that a company and an employee pay to the health insurance company tends to be around $500 per month for Silver plans and about $800 for Gold plans for single people. For families, the premium depends on the number of dependents (kids) but generally speaking a Family of 4 pays $2,050 per month for a Silver Plan and $2,150 per month for a Gold Plan. However, as you see in the chart above somebody with a big family may be paying up to $4,000 per month (the person with 6 teenagers/young adults). Also notice the massive increases in 2020 in both premiums and deductibles. Premiums are up about 6.5% while deductibles are up 14% for Silver plans (from $3500 to $4000). That means Americans will have to spend potentially 20% more on health care in 2020. For a Family of 4 on Silver Plan the total annual deductible increase is $2,000 (4 * 500), while premiums are up another $2,000 (150 *12), for a total of $4,000 potential new out-of-pocket expense on top of current rate. Pretty hefty. People have to plan for that and that is hurting the US economy right now. This hit is at least double the paycheck relief people may have experienced last year due to the Trump payroll tax cut. I have summarized the rough financial below. As the table below shows, Single singles will most likely choose the Silver plan while families will go for the Gold plan because those options result in lower total potential liability (health care spending).
The Biden Plan
The Biden Plan is a big expansion of Obamacare and provides a much desired public option. But the public option is not Medicare. It is a plan with benefits that are less than Medicare currently provides. The main points of the plan are as follows:
- Increase the value of health insurance tax credits. Under Obamacare families that make up to 400% of federal poverty level may receive a tax credit to cover the health insurance premiums. The amount is calculated as % of income for a Silver Plan. Biden will remove the 400% eligibility cap and lower the limit from 9.85% to 8.5% of income. Also the size of tax credits will be based on Gold Plans instead of Silver Plan (there is a substantial difference in benefits).
What does that mean practically? A Family of 4 making $100,000 will pay $8,500 per year for a Gold Plan. Currently, a Family of 4 pays $25,800 for Gold plan coverage as shown above. This is massive savings of about $17,300 or $1,400 per month. Biden estimates the average family will save $750 per month (that is because the average family makes $50,000 per year). This is going to radically cut the cost of health care for average Americans.
- Force Obamacare Medicaid Expansion to states that opted out. Many Red states didn’t take up the Medicaid expansion leaving about 5 million potentially eligible people without coverage. Biden will allow the federal government to cover those people. This move also has big political implications as it will guarantee that those voters will vote Democrat in the 2020 election.
- Stop surprise billing. Out of network providers tend to hit patients with big bills and Americans often don’t even know the provider is out of network. They only learn later through a big bill. Biden will bar health care providers from charging out of network rates when patient doesn’t have control over the provider he sees.
- Drug Cost Control and allow Medicare to negotiate drug prices. I don’t need to cover this, it is well known Democratic stance. Allow generic imports, limit drug price increase to inflation rate, etc.
The Biden plan is expected to cost $750 billion over the next decade or $75 billion per year. Biden plans to pay for it by reversing some of the Trump tax cuts – primarily lifting the corporate tax rate to 28%. The Biden plan will create a new government health care bureaucracy in Washington DC in addition to the bureaucracy that currently administers Medicare.
Cost: $750 billion
Deficit Impact: Neutral
The Buttigieg Plan (Medicare for All Who Want It)
The Buttigieg Plan has been ripped off from the Biden plan – it is identical – but it adds a few goodies. Here are the additional goodies:
- Cap out of pocket costs for Medicare beneficiaries (seniors)
- Limit out of network charges by health care providers to twice the Medicare rate
- Create a centralized government Claims Database (central clearinghouse for claims)
- Break up health care mergers
The out-of-pocket cap and the out-of-network charge limit adds up to a lot of money and thus the Buttigieg plan costs about double the Biden plan at $1.5 trillion. But Buttigieg plans to pay for it through a full repeal of the Trump tax cuts (yes, bring back the 35% corporate tax rate) which cost $1.5 trillion. Buttigieg wants his plan to be deficit neutral. My view is that full repeal of the Trump tax cuts is unrealistic. The highest corporate rate I see is 28%. Most likely corporate rate will be rolled back to 25% and the rest has to be financed with higher income tax rates on millionaires. Not impossible.
Cost: $1.5 trillion
Deficit Impact: Neutral
The Warren “Transition” Plan
As you can imagine the Warren transition plan is the most ambitious of all and different from the Biden and Buttigieg plans. It is also simpler to understand in my opinion.
- Lower Medicare eligibility age to 50 (from 65). In addition, children under 18 and people making less than 200% of the federal poverty level will be eligible. This is massive expansion of Medicare eligibility.
- Allow people between 18 and 50 to buy into Medicare with premiums capped at 5% of income. Thus a Family of 4 will spend $5,000 on premiums vs $8,500 under Biden/Buttigieg and $25,800 today.
- Add Dental benefits to Medicare. This is a substantial expansion of benefits.
- Reduce Medicare Advantage fraud
- Expand Medicaid Expansion to states that opted out
- Central clearinghouse for claims, drug cost control, etc
Warren says this plan can pass through reconciliation which means the total deficit hit will be about $1 trillion. Assuming she reverses the Trump’s tax cuts completely without any other revenue raising provisions, her plan would thus cost about $2.5 trillion or a trillion more than the Buttigieg plan. The Warren plan will reuse the current Medicare administration in DC saving the costs of yet another government bureaucracy.
Cost: $2.5 trillion
Deficit Impact: $1 trillion
These 3 plans are far more mainstream than Bernie’s Medicare-for-All proposal which is a total takeover of the health care industry by the government. Americans hunger for a public option and each of these plans provides that. In terms of benefits, eligibility coverage and minimizing costs to families, the Warren plan is the best followed by the Buttigieg plan and then the Biden plan. When it comes to actual policymaking in 2021, the only constraint will be what will pass through Reconciliation in Congress assuming full Democratic control but only a 50 seat advantage in the Senate. Even though Biden and Buttigieg promise to be deficit neutral, I highly doubt they won’t take full advantage of Reconciliation like the Republicans did in 2017. So Biden and Buttigieg will end up passing more than they promise today. But I don’t see them winning anyway. Ultimately, I think the final plan that will pass is a slightly smaller version of the Warren transition plan that costs about $2 trillion with about $1 trillion of the Trump tax cuts reversed to fit it under Reconciliation. This will be a massive improvement in the lives of Americans even if corporate profits will suffer greatly. The passage of any of these plans is very bullish for America and the American economy but unfortunately bearish for stocks (because corporate tax rates go up and after tax earnings decline). I cannot overstate how big a help it will be for American families to start paying $500-$800 per month for family coverage vs $2,000 they are paying now. A $1000-1200 per month in relief for each family is a huge amount of money and huge economic stimulus that will dwarf anything that Trump has done.
One final note I need to make here is the political calculus. All Democratic candidates now have a public option for health care. Cheap health care option is something Republicans don’t have at all. Health care in 2020 is a political weapon that Republicans have no answer for. The forced Medicaid expansion in Red States will bring in about 5 million voters to Democrats which are crucial in beating Trump. But it is not only that group of voters. These proposals will bring a massive amount of people who haven’t voted before who want to get cheaper health care coverage or get any coverage at all – we are talking small businessmen, middle age people, various young communists, anarchists and other knuckleheads. It will be a weird coalition but a very populous coalition that will obliterate the Republican Party at the polls. There are 30 million uninsured today. All of these 30 million people that have been kicked out of the health care system will show up to vote for Warren or whoever wins the Democratic nomination (which I am pretty sure it will be Warren given the Biden slide in Iowa, New Hampshire and California after the Ukraine scandal). I understand if you watch Fox News, you might have massive illusions about what will happen in 2020, but from my perspective this is very simple. People care about their health and they will vote for the people that promise them health care. Democrats promise that. Republicans don’t. Democrats won the House with Medicare-for-All as a headline in 2018, they won a number of local elections in 2019 and they will win with that very simple but effective message in 2020 as well.