Does Single Payer Pay for Itself?
by ProGrowthLiberal (originally published at Econospeak)
Does Single Payer Pay for Itself?
Was this the message of the title of the latest from Dean Baker:
The economies of a single system can be viewed as analogous to the Social Security system, which has administrative costs that are less than 1/20th as much as privatized systems in places like Chile and the United Kingdom. The analogous institution in the health-care sector is of course Medicare, which has administrative costs of less than 2 percent of benefits in the traditional fee-for-service portion of the program, roughly a tenth the cost for private insurers.
I will agree that the 20% gross margins received by the health insurance companies are obscene. This margin breaks down into a 14% operating expense to premium revenue ratio and a 6% operating margin. I would imagine competition could cut the former in half and the latter by a factor of two-thirds. I’m suggesting a 2% operating margin is reasonable as the reserve to premium revenue ratio is close to 25% for health insurance and an 8% cost of capital is more than reasonable. But Dean is arguing that we can live on a 1% gross margin, which seems to be very ambitious. OK- governments might be able to lower the cost of capital but nearly eliminating administrative costs sounds incredible. But what do I know – so I did a Google search and came across this interesting discussion:
The correct way to estimate administrative savings is to use actual data from real world experience with single-payer systems such as that in Canada or Scotland, rather than using projections of costs in Vermont’s non-single-payer plan. In our study published in the New England Journal of Medicine we found that the administrative costs of insurers and providers accounted for 16.7 percent of total health care expenditures in Canada, versus. 31.0 percent in the U.S. – a difference of 14.3 percent. In subsequent studies, we have found that U.S. hospital administrative costs have continued to rise, while Canada’s have not. Moreover, hospital administrative costs in Scotland’s single-payer system were virtually identical those in Canada.
Their study is worth the read as it does show we can reduce administrative costs even if Dean’s claim still strikes me as an exaggeration. But the point of this discussion is to question the latest from Kenneth Thorpe:
Professor Kenneth Thorpe recently issued an analysis of Senator Bernie Sanders’ single-payer national health insurance proposal. Thorpe, an Emory University professor who served in the Clinton administration, claims the single-payer plan would break the bank. Thorpe’s analysis rests on several incorrect, and occasionally outlandish, assumptions. Moreover, it is at odds with analyses of the costs of single-payer programs that he produced in the past, which projected large savings from such reform
Back in 2005, Professor Thorpe was the darling of progressives as his analysis back then was used to promote Vermont’s proposal to go for single payer. Let me return to Dean’s discussion for a moment:
Per-person health-care costs in Canada are 47 percent of the costs in the United States. The per-person cost for the single-payer system in the United Kingdom, where health care is provided directly by the government, is 42 percent of the U.S. system.
That is accurate whereas promising administrative costs that are only 10% of what we currently see is not. I guess we are about to have a battle of the experts. My only plea is for the experts to inform us rather than push some particular agenda. Let me also note the portions of Dean’s latest that the proponents of this single payer should pay close attention to:
While a single-payer system is probably the most efficient way to provide universal coverage, it is not the only way. Most wealthy countries do not provide coverage to their population through single-payer systems. Many countries, including Germany, France, and the Netherlands, provide coverage through heavily regulated non-profit insurers. This is important to keep in mind, since it means we can have universal health-care coverage without single payer. It’s not clear that it is a good thing for progressives to gain power if they are committed to a program that really is unworkable policy… University of Massachusetts economist Gerald Friedman bravely picked up this job for the Sanders campaign, as he tried to design a plan to pay for the single-payer proposal Sanders put forward in his campaign. I think it’s fair to say the plan comes up somewhat short. Even with generous assumptions about potential revenue and savings, there would still be a substantial gap between the additional spending and the new revenue.
This discussion from Dean is an excellent one even as I picked on some of what he wrote on the alleged reductions in administrative costs. Yes – reducing administrative costs is a good thing but let’s be clear that single payer by itself does not pay for itself. Nor is it the only step we can take to reduce the per capita coverage of health care in the U.S. Going after the doctor’s cartel by letting more foreign trained doctors move here and reigning in the insane pharmaceutical patent system are likely even more important. And yes – Dean Baker has pushed both of these ideas quite admirably.
These are not the same things.
One is talking about administration of insurance (including the claims process) and one is talking about the administration of service (which includes some costs of processing claims but I don’t know that it is reasonable to say that it is going to be lower with single-payer medicare than it is currently).
The way that service costs are reduced is through the power of a single payer to determine prices and standardize services.
I doubt we will see the levels from other countries though, we have gone a long way down the centralization path and our CEOs make far more than in other countries. Upper level cost hospitals like Mass General are still able to maintain high prices even in the face of a lot of publicly available evidence that outcomes are no better.
Standardize prices/costs. Regulate fees for services and the number(s) of services supplied. Ezra Klein had a neat article; “What Liberals Get Wrong about Single Payer.” I have the link at home and will attach it later. The last thing I would point out is commercial insurance does the bulk of investigation of fraud over and above what Medicare does. This also drives up overhead costs. Here is what Maggie Mahar had to say about Administrative Costs when I asked her about it.
Here is Ezra Klein: “What liberals get wrong about single payer . . . ” The link is there to read the rest of the article.
As a political matter, it’s not just the overall costs of the system but also who it is that bears the financial burden. If Sanders bill were to be enacted, for example, it would be entirely supported by taxation. Who would pay those taxes then becomes a major issue. The costs to particular taxpayers would be compared to their existing costs for premiums, co-pays and deductibles. Additionally, the legislation expands coverage in many ways over what is currently available and that needs to be factored in.
In short, I don’t think generalized “meta” analyses tell us much about the political likelihood of adoption. Instead it’s the particulars for groups and individuals. No-one likes to “get into the weeds”, but here I think it is necessary. Remember what happened to Obama when he asserted that if you want to keep your doctor, you can?
I do not believe it has to be taxation paying for all of the cost. Why not cost reduction too? Much like a manufacturing facility, one could lower the cost by how we plan the product, how the product flows through the process, and what operations are done to the product. Large degree of overkill in the healthcare system today. The coding of things done to patients is atrocious also and it screams for simplification. They actually send people to school to learn how to code what a doctor has done. Part of the problem is people are willing to accept healthcare as it is done today without attacking the processes, the procedures, what frequency they are done to a patient, the results of the application of the care, and what care had the best results. Doing it the same old same old does not change cost. Reduce and bend the cost curve to lessen cost and taxation. A little redundant in that last sentence.
One wee correction. Peter Dorman is not responsible for this Econospeak post. All blame should be dumped on yours truly.
dammit, I did that. Sorry. I thought Dan made a mistake. My fault. Fixed.
“One is talking about administration of insurance (including the claims process) and one is talking about the administration of service (which includes some costs of processing claims but I don’t know that it is reasonable to say that it is going to be lower with single-payer medicare than it is currently).” Good point JG.
JackD – well said!
Not all administrative cost is administration of insurance on either the insurer or provider end. Somebody is making sure enough rubber glover orderers are being employed, etc.
I think a roughly 50% reduction in total administrative cost is consistent with a dramatic reduction in administration for the billing process. I don’t think there is a reason to think that US provider non-billing admin is dramatically overgrown compared to the rest of the wealthy world. It is in billing where our system is a complete outlier.
I read something once about the support staff at US vs European doctors offices. Regular primary care providers. European offices were dramatically leaner, and the difference was administrative staff and the additional work the US administrative staff was doing was billing and dealing with insurers. My vague recollection is that a US doctors office employed nearly twice as many people, there were something like two additional individuals who essentially just did billing. And the doctor spent time on it as well. So did all the patients. And then the insurance company had people doing the same. Insurer administrative overhead is probably less than half of the story of excessive administrative cost related to our insane billing system.
I also suspect that our systems huge focus on shifting the costs for every procedure off onto someone else is making us significantly worse at reducing costs. Our insurance companies are distracted from reducing unnecessary cost because they can instead try to just get someone else to pay the cost. That seems to be much less of an option in other wealthy nations.
run, my comment was simply about what the bill provides. Perhaps cost reductions will make the tax burdens more palatable but that is speculative at this point. As I said, the bill expands coverage for various services, such as dental care, and eliminates copays and deductibles. Hard to say where it all ends up and of course nothing has been scored or attempted to be scored yet. Others have suggested that rationing of modalities of care may also be involved. Lots of weeds to be explored and identified.
I am speaking in general about healthcare and not Sander’s boondoggle.
I defy anyone to tell me the government’s administrative costs for Obamacare. Nobody knows because (1) no requirement exists in law to track them; and (2) latent costs are widespread.
Examples of one of several material latent costs include central-service agency costs allocable to Obamacare. Office of Personnel Management has worker post retirement and HR costs. Department of Justice has legal. Office of Management and Budget has budget formulation costs. General Services Administration has HHS/CMS/OCCIIO rent subsidies. Department of Commerce has procurement and contracting subsidies. Treasury has cash management and banking subsidies. Etc, etc. and so forth.
It’s folly to compare public vs. private administrative costs without an honest cost accounting study, to include assessment of economies of scale and comparability of public versus private regulatory environments. It is counter-intuitive to think the government can perform any function better and at lower cost than the private sector.
First: Welcome to Angry Bear. First comments always go to moderation to weed out spammers and advertisers.
Second: Go read the Ezra Klein Link in my comment. There is truth to what you say.
Third: The big costs are in the components used in healthcare and how healthcare is provided.
You stated ” It is counter-intuitive to think the government can perform any function better and at lower cost than the private sector.”
Gee, that’s a new one… what universe do you hail from and when did you arrive on planet Earth in our Solar system? You must be a new entrant (immigrant( to our planet, huh?
Barney, Is that you? I do not believe that was his sole point.
Chartlie’s statement goes to his credibility and/or self serving interests.
Who’s Barnie, btw?
Barney Frank . . .
Oh… now I understand.