A recent commentary in the Wall Street Journal announced, “Obamacare’s meltdown has arrived.” Over the years I’ve heard conspiracy theories that the Affordable Care Act was designed to fail, as a means to nudge a reluctant nation one step closer to a single-payer, Medicare-for-All health care system.
Bernie Sanders famously advocated for single-payer during his campaign. In 2011, the Vermont legislature passed a bill to create a single-payer initiative. Green Mountain Care was abandoned in 2014 by Vermont’s governor — a Democrat — as being too costly. Despite an 11.5 percent payroll and a sliding-scale income tax of up to 9.5 percent, Green Mountain Care was projected to run deficits by 2020.
A similar single-payer initiative is now taking place in Colorado. Amendment 69, known as ColoradoCare, would create a taxpayer-funded health insurer. ColoradoCare would be available to nearly all Colorado residents, including Medicaid enrollees. Federal programs, such as Medicare, TRICARE and the VA would remain in place, however.
ColoradoCare would be funded by a 10 percent payroll tax and a 10 percent tax on nonwage income. The payroll tax could not rise without voter approval and the income subject to the tax would be capped at $350,000 for individuals and $450,000 for couples.
Proponents tout potential savings as a result of lower overhead, no need for profits, little need for marketing and fewer high-salaried for-profit executives. Unfortunately, that is wishful thinking. An analysis by the Colorado Health Institute (CHI) found the program would operate in the red from day 1 and the deficits would grow each year. The CHI analysis also found covering the uninsured and higher utilization of care that is nearly free at the point of service would about equal the savings from lower 0verhead and lower administrative costs.
According to CHI, the program would almost break even in 2019, its first year of operation. In 2019, ColoradoCare would cost about $36 billion, losing only $253 million. By 2028, ColoradoCare would run an $8 billion deficit — more than $100 per member per month. The program would only lower hospital spending by about 7 percent in 2019; a savings of only $800 million. This is a pittance (2.2 percent) of the projected $36 billion in total medical spending.
Why so little savings? Single-payer systems implemented at the state level do not really represent single-payer systems with true monopsony power, like Canadian Medicare or the British National Health Service (NHS). By definition, a single-payer is a monopsony — the only purchaser of a good or service. In theory, if you are the only purchaser in the state, you have significant leverage to dictate the prices you are willing to pay. The negotiation of hospital and physician fees are basically a “take it or leave it” proposition.
The Vermont experiment expected hospitals and doctors to accept fees that were about the same as what Medicare pays. Medicare pays hospitals about 70 percent of what private insurers pay and reimburses doctors about 80 percent of rates paid by private insurers. ColoradoCare would pay fees more generous than Medicare, but presumably less than private insurers. If you remember back in Economics 101, market clearing prices are determined by the intersection of the supply and demand curves, where the quantity supplied equals the quantity demanded. Economic theory suggests a monopsony should set prices where most providers participate, but enough exit to create a slight shortage. In other words, to significantly reduce medical expenditures under a single-payer system, hospital fees would have to be lower than what Medicare pays today. Doctors, medical device makers and drug companies would face a similar squeeze on fees and prices.
All health care systems — including single-payers — have to use rationing techniques. In most markets, prices are the standard form of rationing. In health care markets that don’t use prices, individuals have to be discouraged from getting expensive care in other ways. In Canadian Medicare this is done by controlling access to high-tech equipment. Other forms of non-price rationing include rationing by waiting and exercising monopsony power. Single-payer systems can save money primarily because they can strong-arm providers into accepting lower fees and discourage unnecessary utilization.
Most single-payers also refuse to pay providers piecemeal or fee-for-service. Rather, hospitals are generally allocated a fixed, annual budget. From this budget, hospitals are expected to care for all patients who need care in the area. To avoid paying for volume rather than value, a single-payer system in the United States would also have to allocate a similar (at-risk) global budget based on hospitals’ licensed beds and occupancy. Years ago British and Canadian hospitals were accused of keeping seniors in the hospital to recuperate long after they could have been discharged to a nursing home. Warehousing convalescing seniors was cheaper than admitting new patients, who were sicker. These convalescing patients were called “bed blockers” because they allowed hospitals to treat fewer new admissions. Hospitals would probably need some form of token payments for treating actual patients, since hospital districts would not want to compensate area hospitals for doing nothing.
A single-payer is not some magical entity that rains down savings from Heaven by being unconcerned about profit. Rather, an efficient single-payer operates more like a predatory HMO with no competition. It is currently in vogue for hipsters to matter-of-factly announce the simple solution to health reform is single-payer. Be careful what you wish for; you may end up with Medicaid-for-All.
Devon M. Herrick, Ph.D. is a health economist and senior fellow at the National Center for Policy Analysis.
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Prices for the same service, test or procedure also vary by region and whether the provider is an academic medical center, a community hospital, a hospital affiliated doctor, a non-hospital owned facility or a doctor in private practice independent of any hospital. I’ve said many times that in exchange for everyone having coverage and not having to worry about losing coverage if they lose their job, in practice, a single payer system would create more problems that it solves. And don’t even get me started on fraud. Let Colorado try it first so we can see it fail in the real world while only affecting 5 million people instead of 320 million.
When it comes to the cost of covering a population, while administrative expenses such as executive pay and marketing do matter, they are such a small part of the bill, that they don’t matter much beyond being a convenient whipping boy. It is and always has been about the claims expense, which is comprised of price (fees paid), and use (rate of use of services). We can tamp down fees, but use runs rampant, for all sorts of reasons. A single payor would have to manage the use of services, which becomes tricky, but is totally necessary. And rationing, or denying needed care is short term effective, but long term disastrous.
So we’re back to the need of a mechanism that incents providers to manage their own care in the best way to balance cost, quality and outcome. No one said it would be easy
I agree that the mechanism would be cumbersome. Traditional Medicare also has problems. It’s a near-monopsony for senior health care. Medicare commands a lower price than private insurers. But it suffers fraud and inefficiencies due to the way it pays FFS for services. Medicare also sets more than 7,000 prices. That’s inefficient because it is very difficult to ascertain what the market clearing price should be. Getting it wrong creates either shortages or surpluses. Having thousands of prices (codes) also creates opportunities to game the codes to maximize revenue against reimbursement formulas.
A monopsony is also in serious difficulty if, for any reason, there is a need for it to buy more services (or goods.). E.g. if there were a bad flu epidemic or a new demand from an advance in science or even a new demand generated from a medical fad or from an increase in the number of patients.
When this happens, the monopsony has to pay new providers a higher price….to get them to agree and into the system. Think of a single purchaser who is the sole buyer of grapes. If he has to suddenly buy more grapes he has to pay more for the new grapes than the old grapes. New contracts have to be written, etc. The sellers have been kept out of this market until now. Why would they sell their grapes at the same old price?
But here is the lethal defect in a monopsony: if it has to pay more for additional purchases, it has to pay all the old suppliers more too (otherwise old workers would simply quit and re-sign as new workers.)
Its much better to not have a single purchaser and to have many buyers and many sellers. Then, this cannot happen and there is no dead weight loss to the public when they receive less of a product or service than they otherwise would.
Monopsony is a good way to bring about price reductions but it is not as good as having many buyers-many sellers when one has variable demands from the public. When this happens, the public is paying more than it has to. This is called a dead weight loss.