Tuesday, October 6, 2009

The Economic Case for Single-Payer Health Care Reform

The Center for Budget and Policy Priorities (CBPP) has provided compelling justification for comprehensive health care reform – not the insurance reform that is likely to emerge from the House and Senate, but true health care reform. In their report “Updated Long-Term Fiscal Deficit and Debt Projections,” the CBPP used data from the Congressional Budget Office to estimate long term debt, deficit, and spending trends for the federal budget – the findings show that 1) the U.S. is on an unsustainable spending path and 2) it all comes down to the rising cost of health care.

“The main driver of the long-term fiscal imbalance is the rising per-person cost of health care, which will increase spending and reduce revenues…”

How will it reduce revenues?

“…as health care costs rise, workers are likely to receive more of their compensation in the form of tax-exempt health care benefits and less in the form of taxable wages, so total revenues decline.”

This assumption is confirmed by the fact that employee health care costs have increased by 130% in the past 10 years even as our wages have barely kept pace with inflation. As our wages shrink, so does our taxable income and therefore federal tax revenue.

But it gets worse, because we all buy health care from the same market of providers and facilities the forces driving up private health care costs are also driving up the cost of Medicare and Medicaid. The CBPP estimates that those two programs will grow from their current 5.1% of GDP to 12.8% of GDP by 2050 (Figure 2) – put another way, these programs will more than double in expense in relation to total economic output. Currently, spending on Medicare and Medicaid is equal to 32.7% of all federal revenue ($0.33 of every dollar the government raises via taxes is spent on those two programs), by 2050 that will rise to 67.7% of all federal revenue – meaning that every other federal obligation, including Social Security and national defense, will be fighting for the remaining 32.3% or we’ll have to engage in heavy borrowing or drastic tax increases.

In short, if we are to enjoy a sustainable and healthy economic future, we need to bring down the cost of health care and control its meteoric annual cost increases.

Neither the House, the Senate, nor the President have proposed any such reform.  Rather they have focused on ways to expand coverage while shifting costs around to create the illusion of a decreased federal burden. But the problem with cost shifting is that it does nothing to control costs, nor does it change the ultimate trajectory of rising costs system wide. System wide change is what is needed.

Consider this – in 2007 Canada spent an average of $3,173 per capita on health care, the United Kingdom spent $2,560, and Germany $3,171. The U.S. spent $6,096 – starting to get a sense of the problem? Between 2003 and 2007, US health care spending grew at a rate 22% faster than Germany and Canada and twice as fast as in the UK. As a percent of overall economic output in 2007, health expenditures accounted for 10.1% of GDP in Canada, 10.4% in Germany, and 8.4% in the UK. In the U.S. the figure was 16%.

Finding a New American Way
The U.S. needs to find a way to effectively control costs and reduce per capita health expenditures; our economic health depends upon it.

Canada, the UK, and Germany have all established their own unique approach to health care organization, delivery, and cost containment – but there are many similarities.

Canada employs what is commonly referred to as a single-payer system. Universal health care is funded via taxes paid to the federal and provincial governments. Providers and health care facilities are private, but the government, operating as a monopsony, sets prices. Every province establishes an annual budget for health care; if a provider or hospital exceeds the allotted budget then no additional money is provided. This approach forces coordination of care and the efficient use of resources to ensure that allocated funds last the year. It also means that sometimes elective surgeries and other non-emergency procedures are delayed until the next budget year.

In the UK one will find what is commonly referred to as socialized medicine. Universal coverage is funded via taxation. Hospitals are owned by the National Health Service, specialists are employed by it, and general practitioners accept a negotiated capitated (pre-payment) salary for caring for patients. Health care organization, delivery, and resource allocation are handled by regional health authorities. There is an annual budget for health care. The system is marked by long wait times, and service delivery is often determined based on strict cost/benefit analysis, but everyone is covered, costs are contained, and the World Health Organization ranks the UK health system as 18th in the world (the U.S. is ranked 37th).

In Germany, universal health care is funded via payroll taxes paid by employers and employees. Insurance is provided via non-profit “sickness funds” or insurers. Coverage for kids is funded via general taxes and retirees and the unemployed pay for insurance via deductions from their respective benefits. Germany uses the power of regulation to maintain costs, sickness funds cannot raise premiums at a rate faster that wage growth, and there are limits set on how much hospitals and providers can bill in a year – essentially an annual health budget. If a doctor were to prescribe medication that exceeds the average in his area he would be required to partially cover the cost.

All of these systems share similarities – they all provide universal coverage, they all rely on one system to provide care (unlike the U.S. where we have Medicare, Medicaid, SCHIP, Employer Sponsored Insurance, Large Group, Small Group… need I go on), and they all rely on the government – either as payer or regulator – to handle the distribution of resources. Because each of these nations establish variations of an annual health budget patients are viewed differently as well. In the U.S. every patients and every procedure provided is a source of revenue (provide more services, get more money) – in Canada, the UK, and Germany every service provided represents a depletion of limited funds. This forces hospitals and physicians to prioritize and coordinate care. Do they ration? Certainly, but its rationing based on assessed individual need relative to overall needs and available resources.

We ration in America as well, but it has nothing to do with need. Rather we ration based on an individual’s ability to pay. Forty million lack insurance and millions more have limited access to care due to high deductibles and other out of pocket expenses. There is another important point about these countries; because there is a single source of payment there is no opportunity for cost shifting. In the U.S. if the government cuts Medicare reimbursement hospitals or providers will try to shift the cost onto the privately insured. If an insurer raises prices, an employer will negotiate lower prices by cost shifting to employees in the form of higher co-pays and deductibles. The end result of all of this shifting means that no money is actually saved system wide, it’s just shifted from one payer to another – this cannot happen when you have one payer and a set budget.

The fragmentation of our system and the fact that we spend more than any other nation might be tolerable if we were benefiting in some way. Are we healthier? Do we get extra benefits for all the extra spending? The simple and clear answer is “No.” A recent study by the McKinsey Global Institute (MGI) found that the U.S. spends about 31% more per year on health than would be expected based or our wealth, cost of living, and health. In a $2.5 trillion health care economy that translates into $775 billion in excess spending.  Why do we over spend? We have higher administrative costs owing to the fragmentation in our system, but mostly the problem is the manner in which we pay for services. Since every patient and procedure is a source of revenue providers over-provide. Because our insurance frequently has no limit on the utilization of services, we over-consume. According to the MGI report:

“The higher utilization of care may be attributable to a number of factors such as greater patient convenience and a reduction in risks associated with less-invasive surgery. It also appears likely that this increased usage relates to the fee-for-service nature of outpatient care reimbursement, which creates incentives to providers to render more care... From a supply perspective, outpatient care, particularly for specialist care and diagnostic procedures, is very profitable.”

Why Single-Payer?
What approach should we take? Canadian style single-payer is the only real option as it would preserve our private system of care delivery (hospitals and physicians).  The German model seems appealing at first, but in the end it would be easier to eliminate the health insurance industry than it would be to turn insurers into heavily regulated non-profit entities. So single-payer, like Canada, and like Medicare. Reducing health care costs by 30% would have a dramatic impact on our economic security. Health expenditures would shrink to $4,267 per capita and 11.4% of GDP, we would save over $700 billion in a single year (roughly the size of the American Recovery and Reinvestment Act of 2009). By setting an annual budget we could better control the annual growth in federal health care spending and alter our current unsustainable path. Though we would still be saddled with a need to pay interest on our accumulated debt, we would no long accrue new debt to fund Medicare and Medicaid. States would benefit as well. Medicaid consumes approximately $0.25 of every tax dollar raised by a state.

Replacing Medicaid with a new universal federal program would eliminate that funding need and immediately solve nearly every state budget shortfall. Although we would still need to fund the new program via taxes, we would no longer be paying health insurance premiums and neither would our employers so our wages would rise and no longer be depressed by the rising cost of health care. At the state level, there would no longer be taxes to support Medicaid. At the federal level, there would be no taxes to support Medicare. Instead, a new tax would fund a health care system that costs approximately 30% less than the current system – and everyone would be covered. Sound too good to be true? Tell that to Canada, the UK, or Germany.

So how do we do it? The only way that we can bring health care spending under control, and therefore be able to provide coverage to everyone, is if we move beyond our aversion to government intervention. Only government can effectively allocate our health care resources in a manner the responds to need rather than wealth. Only government can establish an annual health care budget and ensure that facilities and providers abide by the annual limits. Only government can affect our change from a system driven by the perverse incentive to deliver care as a means to generate revenue to a system based on the proper management of care in order to conserve resources. The logical approach would be to restructure Medicare and make it universal. And it must be universal. The only way to get the public on board, and to accept the change, is to have us all in the same system, all guaranteed the same level of care, all sharing the same resources, and the costs. This is what other nations do, and what we must do.


  1. Good post.

    As I discussed here:


    The single-payer health care system is the best system to spread the risk, hence controlling costs.


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