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Counting the cost (Revised): HB 392 will NOT pay for itself (and it's worse than I thought)

Revision alert: thanks to work by Jess McVay who caught one major mistake and provided feedback on two other issues (see comments).


1.  Jess you are correct about income tax revenues; I slipped a decimal point.  Revised calculations below this.

2.  I used the lower per capita health care cost intentionally because it was the only one that I found that removed administrative costs, and because it came with other stats calculated to the same benchmark.  I'm going to keep that in place, even though I agree with you that it is highly optimistic.

3.  I read your calculations vis a vis median income and total workers, but again I will keep mine in place for this study because mine produces a fairly optimistic result for funding, and I do not want to be accused of negativity.

So:  to wit:  Delaware income tax returns in 2011 generated $962,000,000, not $9.62 Billion.  Those damn decimals are pesky things.  So let's see, that means the Health Security Income Tax will generate $437,000,000 not $4.37 Billion.

So, taking all the funding, we still find a minimum funding need of $7.81 Billion to pay for Delaware Single-Payer (which does not include qualified out-of-state residents).

We raise the following through Dr. McDowell's funding mechanisms (all sources below in main article):

Health Security Income Tax:  $.437 Billion
Payroll Tax:  $.9 Billion
Medicaid:  $1.29 Billion
Medicare:  $1.5 Billion
Total:  $4.13 Billion

Oh, wait.  We calculated the necessary minimum at $7.81 Billion.  Since I goofed on the other stats, how about this one.  Nope, sorry, it is a low and optimistic stat (see below for source link) from Kaiser that says it already excludes insurance company administration costs.  So it is a simple calculation, really,

877,600 people * $8,480 annual health care cost = $7.44 Billion plus the 5% in increased service usage that Dr. McDowell projected in the bill to bring it to $7.81 Billion.

Hmmm.  With only $413 Billion available, Dr. McDowell must be planning on some hellacious savings.  Let's see $413 Billion/877,6000 people = $4,706 per capita per annum expenditure.

In other words, Jess is right.  Either our friendly legislators have played with the numbers on the taxes they can raise (always an option), or they really believe that Single-Payer health care can take care of everyone for 56% of what we're currently paying now.  So they are claiming that Single-Payer amounts to a 44% reduction in costs.

Allow me to point out the amazing fallacy herein:  The State of Delaware receives $1.5 Billion for 149,192 Medicare patients.  That's an annual per capita rate of $10,054 per person on Medicare.  (It makes sense that these folks are higher in cost than everybody else because they are geriatric, and we know that much of the most expensive spending comes at the end of life.)

So Reps. Kowalko and Jaques will cut that by half while giving Medicare patients free access to treatments that Medicare has not traditionally paid for (acupuncture, chiropracty).

In other words, our dear friends sponsoring HB 392 intend to take the full Medicare funding and spend less on each Medicare patient (shuffling Medicare funds to other patients), while offering them more services?

Here's the thing:  the entire Delaware budget comes in below $4 Billion currently.  In order to fund this program, even beyond the monies raised via the Health Security Income Tax and the Payroll Tax, they will have to raise an extra $3.68 Billion.  Wonder where that's coming from?

OK, back to original post.  I have crossed out the sections where Jess found my errors.

The proponents of HB 392--Representative John Kowalko and Earl Jaques; Delaware Insurance Commissioner candidate Mitch Crane; and Dr. Floyd McDowell have all assured us that the numbers in their funding mechanisms work.  Of course, they have not yet shown us a single number to substantiate that case.  In fact, Representative Jaques challenged me in that regard:
Steve, you claim to be such an expert – the numbers are in the bill – so you work it out. Can you disprove our numbers or not? Waiting to hear from you!!! 
Actually, the numbers are not in the bill.  The funding mechanism is in the bill, but the medical costs per citizen, and the assumptions that they made regarding those costs are not in the bill.

But, hey, let's have some fun and see if we can suss it out, huh, Earl?  I'll do my best from open sources and statistical guesswork, and then you can release the numbers from your studies.  I'm willing to bet they are not far different.  Which numbers, if you don't want to read through several thousand words of statistical analysis and will settle for a plot spoiler, pretty clearly show that the numbers can only be fuded to just barely work if make the unwarranted optimistic assumption that everything is going to cost exactly what you thought it would . . . or less.

Not true:  the revised numbers show it will not work at all.

The reality is:  any decent analysis is going to tell you that the State of Delaware has no business making a long-term commitment to this plan without accepting the fact that within six years--even under the most optimistic scenario--the General Assembly will need another $1 Billion in tax increases just to stay in place.the General Assembly will need another $500,000 million in tax increases even if they are absolute magicians and can cut health care costs by 44%.

That's right--even if these numbers work out precisely as claimed, they show that each of Delaware's 412,000 taxpayers will be forking out at least another $1,213 in additional taxes by the sixth year of this program, just to keep it barely afloat.

And, again I emphasize that's the optimistic projection.

So, Representative Jaques--here are my numbers.  Where the hell are yours?

How do the numbers work out?

(Note:  I have used all open sources, and linked to every source I used.  These numbers are rough.  I have had to make several assumptions to cover gaps, and I have laid them out in their entirety when I have done so.  I may be wrong, but I have shown my work.  If you have better data for any segment, please send it to me and I will incorporate it into the analysis.  If you don't like one of my assumptions, feel free to posit your own, but if you do, work it all the way to the end or I will ignore you.)

The 877,600 citizens of Delaware have a per capita, per annum average healthcare cost of $8,480, according to Kaiser, which compares unfavorably with the US average of $6,815.

This means that the annual cost of healthcare for Delaware citizens is around $7,442 Billion.

Now it is important to note, for the purposes of dealing with the HB 392 number, that only 52% of Delaware's citizens are covered by private insurance.  This is the breakdown [same source]:

52% private insurance
23% Medicaid
17% Medicare
12% uninsured
The claim by Dr. McDowell is that the private insurers are costing us 30% administrative overhead vs the 1.5% he claims for Medicare/Medicaid.

But the Kaiser report notes that insurance administrative costs are NOT counted in the total:

Costs such as insurance program administration, research, and construction expenses are not included in this total. 

Therefore we can assume that the $7.44 Billion is what we need our funding mechanism to raise.

But wait! Dr. Mcdowell also says that we have to raise this cost by 5% to allow for additional utilization of services for which people were not previously qualified, so that brings us up to $7.81 Billion.

OK, so we have to raise $7.81 Billion.

Start with the 2.5% Health Security Income tax.  Roughly, the average Delaware tax rate is about 5.5%.

A 2.5% additional tax would presumably raise about 45.4% of the existing Delaware income tax numbers.

So, let's see, in 2011 the State of Delaware collected $9.62 Billion in income taxes.

So a 2.5% additional tax would presumably (.454 * 9,620,000,000) collect $4.37 Billion, which is about 56% of the revenue necessary.

The payroll tax would have to raise the remainder.

How much would the payroll tax raise?

This one is more difficult from open sources, but let's take a shot:

There are 24,006 small businesses in Delaware that have employees.  There are 44,489 small businesses with no employees, and 32,242 individuals who are self-employed. So we have about 67,000 self-employed or single-employer businesses (16% of total).  These folks will not be paying any payroll tax.

Large-scale employers (750+ employees) account for about 145,000 of these (35% of total).  These folks will all be assessed the 9% payroll tax.

That leaves us about 200,000 employees to account for.  Let's assume an even distribution, which will mean that 50,000 will be assessed at 4%, 50,000 will be assessed at 5%, 50,000 will be assessed at 7%, and 50,000 will be assessed at 9%.

That gives us the following (very) rough figures to work with:

195,000 assessed at 9%
50,000 assessed at 7%
50,000 assessed at 5%
50,000 assessed at 4%
67,000 assessed at 0%

But percentages of what, exactly?

The median family income in Delaware is $53,196.

This gets tricky:  roughly 67% of households are dual income households.  That means there are 5 workers for every three households, or that the median household employee equals about 66% of the median household income, which would leave the median employee income at $35,109.

So for each of our categories we generate:

9% = $616 million
7% = $123 million
5% = $88 million
4% = $70 million
Grant total $907 million (or, $.9 billion)

Added to our previous tax accrual of $4.37 billion, we are now up to $5.27 billion, which is paying for 72% of Dr. McDowell's program.

Delaware expends $1.29 billion on Medicaid, partly funded by State revenues and partly funded by the Federal government.

Add that in:  we are up to $6.56 Billion.

Delaware Medicare spending accounts for another $1.5 Billion.

Add that in, and we reach $8.06 Billion.

As noted above in revision, these taxes only raise $4.13 Billion.

We said we had to raise $7.81 Billion, so Dr. McDowell is right, huh?  Even seems to have a cushion of about $225 million.

Not so fast.

First off, Representatives Kowalko and Jaques claim that the amount of money raised by this funding mechanism will pay the health care costs for 1,000,000 people, not 877,600.

So we have a little more cyphering still to do.

The per capita cost of the plan is $8,899/person.  Thus, the cost necessary to fund 1,000,000 people is not $7.81 Billion, but $8.9 Billion.

So we really have a shortfall, based on their claims of about $1.11 Billion.

But this is just carping, isn't it?  I mean, we showed that the amount raised would be sufficient to pay for the insurance needs of the current population with $225 million left over, didn't we?

Not quite.

Well, you see, the McDowell bill would extend coverage to out-of-state residents working in Delaware.

So we have to account for them as well.  We've already taken their money via the funding mechanism, but we didn't count them in the totals for the population, because entities like Kaiser count them in their state-of-residence, not their state of work.

How many of them are there?  Again, difficult.

But based on the current number of unemployed, compared to the number of employed Delawareans and total number of jobs there appear to be in Delaware right now, a best-guess is that about 35,000 employees work in Delaware but live elsewhere.  Dr. McDowell's bill only covers these workers, however, and not their families.  So if we take those 35,000 people and add them to the pot, we come up with a need for an additional $311 million, for a total necessary to break even of $8.12 Billion.

Ooops.  Now we are short by about $60 Billion before we ever begin.

So we have a $3.68 Billion shortfall unless they can cut current healtcare costs by 44%.

But it gets worse.

We have not accounted for about 35,000 people who are not Delaware residents but work in the State and qualify for coverage under this bill.

We have not accounted for the bill's promise to retrain former insurance company personnel to do medical administrative jobs, up to 5% of such positions in Delaware.

We have not accounted for the bill's promise to supplement capital funds for the physial expansion of medical facilities in Delaware.

We have not accounted for the bill's promise to at least partially underwrite the continuing training of medical professionals in Delaware.

We have not accounted for the fact that Dr. McDowell's funding mechanism depends on receiving nearly 20% of its money from Medicare and 16% from Medicaid, two programs which President Obama has pledged to cut by over $320 Billion in the next ten years, and Mitt Romney promises he would cut even more.

Even if the numbers had worked, it is sheer insanity to base over one-third of the funding for a Delaware Single-payer program on Federal funds that the State does not control, and which are on a glide-path to decline over the next ten years no matter who wins the White House.

There is a final thought on the notion of financing here:  let's assume that Dr. McDowell is correct, and the plan is more efficient than the current melange of public-private funding of healthcare.

Costs will still go up under a single-payer healthcare plan.

Even Medicare is projected to see costs rise 2.5% per year over the next decade.

That's better than the 4.5% rise projected for private insurance, but it still means that, even if the population holds steady (its not), and the economy is stable (good luck), that we are looking at the following increases over the first six years of this program, just to stay in place:

Year 1:  $8.12  4.13 Billion
Year 2:  $8.32  4.23 Billion
Year 3:  $8.53  4.33 Billion
Year 4:  $8.74  4.43 Billion
Year 5:  $8.96  4.54 Billion
Year 6:  $9.18  4.65 Billion

By Year 6, the State of Delaware will have to raise $0.5 Billion more per annum just to keep the plan in place, even if the sponsors' estimates are totally correct..  But since we will have eliminated the alternatives, the only option will be raise an addition $0.5 Billion dollars in taxes to pay for the program.  That's an additional $500,000,000 in state taxes.

This is what that means:  the fifteen-person Health Security Board will be presiding, without oversight from the General Assembly or the Governor, over a budget that is LARGER than all the rest of the State Budget (roads, education, police, universities, environment) COMBINED.

Let's be clear:  the assumptions I have used in generating these numbers are optimistic assumptions.  If more Delawareans than I am guessing work for smaller companies than I think, my revenue projections will be too high.  If unemployment goes up, or wages decline, my revenue projections will be too high.

I have no doubt that these numbers can be massaged by an optimist into what appears to be a break-even proposition, but you can only do that if you assume that everything is going to go your way, and that there will be no unanticipated expenses.

Remember Cheop's Law:  Nothing ever gets built on time or under budget.

Name for yourself a single large government program that has ever stayed within the initial optimistic assumptions of its budgetary planners.


Anonymous said…
Hube said…
Steve Newton for state rep, dammit!
Jesse McVay said…
Just finished reading your article for the first time. Amazing work. I'm about to read it again because a) I DO want to check your work, and b) I want to learn to do what you just did. But before I re read the article, I'm posting it all over my email and social network. Thanks Steve.
Anonymous said…
Fantastic work.
Will McVay said…
You're clearly inbred and dyslexic because you can do math and show your work, and I can't.
-John Kowalko
Jesse McVay said…
I just started my scrutiny of your numbers, and I've already found a flaw...sort of. It appears you're being too easy on Reps. Kowalko and Jacques. You are correct that the Kaiser site shows a per capita expenditure for healthcare in Delaware of $8480, but if you call up the graph of that annual cost over time, you get this. I'm not sure why they show $8480 as their number. In 2009 the number was already $10,349 with a fairly consistent upward slope of about $500 per year. If that's true, the 2011 number is already on the order of $11,300. That represents a 25% INCREASE in the estimated COST of their program. If their numbers didn't work before, they sure as hell don't work now.
Tyler Nixon said…
I stopped trying to make sense of it after "The General Assembly finds and declares that enacting a single payer, non-government run Delaware Health Security Act will guarantee"...

Yes the government always makes sense when it "declares" by legislation a "non-government run" anything, which it then proceeds to "run".

Does this also mean the "non-government run" whatever-it-is will be hiring attorneys to represent fetuses against abortion-seeking womb-holders bearing said fetuses, since "from conception" clearly has to mean the person who has been conceived, not the pregnant mother...

I gather such attorneys wouldn't consider their fetal clients' being terminated as "health care".

Floyd McDowell is a kind person and a good soul, but this type of totalitarian statist invasion into human life is a shining example of how handing the state enough power to achieve the even the noblest humanitarian dreams invariably means waking up to an authoritarian nightmare.
Jesse McVay said…
Sorry, me again. Found another whopping flaw in your numbers. But once again, you were being way too easy on the Single Payers. You said that Delawareans paid 9.62 Billion in income tax last year. That's clearly an error as Delaware's entire budget last year was $3.5 Billion. Your link makes it clear that you moved the decimal point one place in their favor. We actually paid $962 Million in income taxes. So an additional 45% of that number is a mere $433 Million in revenue that their bill brings in. I'll excuse your simple math error. I won't excuse theirs. Double standard, I know, but that's what these guys get paid the big bucks for. To be fair, your analysis also leaves out the additional surtax of 2.5% on incomes over $250,000, but if the original 2.5% amounts to a pittance relative to the cost of their program, I can't see how banging a thousand or so 1%ers for an additional 2.5% is going to make up the difference.
Jesse McVay said…
Yeah, sorry. Me again. I was trying to follow your estimates for revenue from the payroll taxes, but found it too difficult and dependent on assumptions. I tried a different approach. Yours might actually be better, but mine eliminates some assumptions. I used the data for median Delaware household income and the number of Delaware households. It's here: Multiply $57,599 times 331,639 households and you get Total Delaware income of about $19 Billion. Even if everyone paid at the 9% rate, that would generate only $1.7 Billion. As you've already pointed out, only about 35% will likely pay that amount. But even at $1.7 Billion against your estimate of $.9 Billion, the additional $.8 Billion of revenue brought in by my impossible estimate, can't make up the roughly $4 Billion of reduced income between your estimate of Income Tax revenue and mine as shown above. Final conclusion: You are right. The math is a bit challenging, but their numbers don't add up.
delacrat said…

So we'd just have to adjust the tax upwards so that HB 392 will pay for itself.

Also, I don't see that you've compared how much current private insurance premiums compare with the estimated revenues from the health tax.
tom said…
Jesse, you are confusing median and mean. N * mean will produce the correct total. N * median doesn't unless you are dealing with a Normal Distribution (which Income isn't)
So we'd just have to adjust the tax upwards so that HB 392 will pay for itself. So we'd just have to adjust the tax upwards so that HB 392 will pay for itself.

And how far is too far in your opinion? The entire Delaware budget is currently about $3.68 Billion.

Do you realize you are talking about DOUBLING all taxes in Delaware?

Also, I don't see that you've compared how much current private insurance premiums compare with the estimated revenues from the health tax.

Didn't intend to; I was only trying to see what the cost was, and if the funding mechanism would support that cost. It won't.

A rough answer to your question is that the per capita per annum average cost rises to about $11,000 when you add administrative costs. How much of that is actually premiums as opposed to co-pays and out-of-pocket expenses i don't currently know, but I will see if I can find it for you.

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