A Single-Payer System Won't Make Health Care Cheap
A few weeks back, I wrote a story on Vermont's adventures in single-payer health care.
"So this is going to be expensive. So expensive that I doubt Vermont is actually going to go forward with it," I concluded. "This should be instructive for those who hope -- or fear -- that Obamacare has all been an elaborate preliminary to a nationwide single-payer system. It isn't. The politics are impossible, and even if they weren't, the financing would be unthinkable."
I was inundated by complaints from proponents of more government intervention in the health-care system. Permit me to summarize the many individual exchanges I had with these interlocutors.
"Why are you ignoring all the evidence that single-payer works?" they demanded. "If single-payer is so expensive, how come America spends twice as much as civilized nations, for worse outcomes?"
"Good question!" I responded. "I will do a follow-up post to explain why single-payer doesn't magically transport us to the land of cheap health care." This, as you may already have guessed, is that post.
Ah, you will say, but the U.S. is so much richer! We are the biggest rich country and the richest big country. Of course we spend more.
There is indeed a strong, though not perfect, correlation between how rich a country is and how much it spends on health care. But that alone can't explain why we spend so much:
Even if you look at spending as a fraction of national income, the U.S. is an outlier. The figures above are for 2010; we now spend close to 20 percent of our national income on health care. One in every five dollars earned goes to buy health-care services, while no other nation cracks 15 percent.
The implication that many people draw from this is that the U.S. could realize fabulous savings from switching to a government-run health-insurance system. But wait:
The U.S. already has a government health-care system. Actually, it has several: Medicare, Medicaid, Veterans Affairs, military, federal employee benefits, state and local government benefits. And this system already spends more per capita than most other rich-world governments:
The numbers get a little better if you look at them as a percentage of gross domestic product. But not much better. We are spending almost as high a percentage of gross domestic product as every other country, just to cover a fraction of our population. How can that be?
Well, let's think about the general theories of why government makes health care cheaper. The first idea is that you get big discounts for buying in bulk. Because governments cover a lot of people, they can negotiate the best prices, which can't be matched in America's fragmented market.
The problem with this idea is that U.S. health insurers already buy in bulk. They cover more people than many of the countries cited as cost-control models for the U.S.:
A more sophisticated version of this argument says that the power comes from setting prices and controlling administrative costs. This is the idea behind a "public option."
But we already have a public option. As mentioned, we have several. And Medicare doesn't control costs noticeably better than the private sector does:
Medicaid controls costs significantly better. That's because it's a program for poor people who don't vote much, and politicians don't necessarily care if doctors refuse to take it. So states set reimbursement rates that are so low that you could pay more to take your kid to Panera than the government would pay for you to take him to see a general practitioner.
On the other hand, seniors vote, and thus, politicians are very reluctant to tinker with reimbursements. Prices are set the way that other governments set them -- by a centralized committee. But they're set high.
There are two potential outcomes for a "public option" health insurer: It could set rates high, in which case it wouldn't control costs, or it could jam them down to Medicaid levels, in which case no one but the very healthy or the very desperate would buy that insurance because it will be hard to actually use that coverage.
That brings us to the most sophisticated version of the argument: that we can use monopoly power to bring our health-care spending in line with that of other countries. As long as there is private-sector competition, the argument goes, prices will stay high, because doctors can refuse to accept government reimbursement. But if the government is the single provider of health care (or at least, the single price setter), then we can drive down reimbursements and drug prices to something approaching European levels.
This idea has a number of problems, starting with its constitutionality. Here's a big one:
Most of the time, since the 1980s, growth in government spending has been higher than total growth, not lower. This represents coverage expansion, as well as price growth. What it does not represent is significant cost control.
Think that's just because conservative ideologues are preventing the government from doing its job and controlling costs? Well, here's an even bigger problem with the idea that getting government involved is going to bring our costs down:
What's the problem? I hear you cry. Well, the problem is what you don't see in that picture.
What you don't see is any government cutting health spending by any significant amount. Oh, Germany managed, once. Canada kept it level for a while. But no one has cut by anything like 35 to 40 percent -- which is what we'd need to get our spending in line with Canada's.
I've only shown a few countries, to keep the graph easy to read, but these examples aren't cherry picked, except that they're big rich countries like us. When you dig into the Organization for Economic Cooperation and Development data, you don't see any government, anywhere, making sustained cutbacks in the health-care system, except for situations such as in Greece, which cut back substantially in the middle of an economic meltdown and a sustained run on its government debt. Absent the impetus that a whopping financial crisis provides, at best, you see them hold down cost growth.
Holding down growth rates is feasible -- give people a smaller bump in what they were expecting. Cutting spending is absurdly difficult, because it means cutting people's incomes. Incomes that they counted on to help make their mortgages and car payments. Maybe you don't feel so bad for expensive surgeons who have to sell the Bimmer, and I don't, either. But America's cost inflation is not just fancy surgeons. It's everything: surgeons, general practitioners, nurses, respiratory technicians, private hospital rooms, MRIs, CT scanners -- and I haven't even gotten to drug prices:
It's theoretically possible that we could demand that all those folks take a pay cut. But so far, as the Official Blog Spouse chronicles, the U.S. political system hasn't even been able to get doctors to take a cut in their Medicare reimbursements, much less their whole incomes. Here's the basic electoral math: If you try to cut the incomes of doctors, nurses, radiology techs, phlebotomists, etc., voters may be glad of the price break, but I'd be surprised if 1 percent would go to the polls and vote for you because you're the guy who cut doctor reimbursements by 17 percent. On the other hand, 100 percent of the doctors, nurses, radiology techs and phlebotomists will storm the voting places and make sure that they cast their vote against the jerk who wants to cut their incomes and, oh, by the way, destroy American health care.
Here's the advanced electoral math:
Americans like and trust their health-care providers far more than they do their politicians or journalists, or, for that matter, practically anybody. So when you try to cut the reimbursements that fund their salaries, and all the providers band together to run ads claiming that cost-cutting, health-hating American politicians are trying to kill you in order to save a few measly dollars, guess who wins that showdown?
We might be able to hold down future costs, but there is no evidence that we can cut the costs we already have back down to the level of those European nations that single-payer advocates like to cite. In fact, I'd say there's quite a bit of evidence to the contrary.
Well, that's something, isn't it? Let's get a government system in there, get our cost growth down to the level of other OECD countries instead of the insane rates that our inefficient private system produces. Eventually, as the economy grows, health care will shrink relatively, if not absolutely, and the proportion of national income that Americans spend on health care will come to resemble that of the rest of the world.
Here's the problem with that idea:
America doesn't have a cost-growth problem. The rate of cost growth in our "insane," "inefficient," "free market" system isn't particularly high by OECD standards. It's the level that's so high. We're growing at a normal rate, but off a much higher starting expenditure -- an expenditure that we've so far proven unable to cut by even a bit.
We are not a nation that has a cost-growth problem; we're a nation that used to have a cost-growth problem, in the 1970s and 1980s:
Once we pulled away from the other countries, even an average growth rate meant that the gap between our spending as a percentage of GDP, and theirs, would continue to widen -- especially if their GDP grew faster than ours for any length of time.
That is why we cannot count on financing single-payer with the fabulous cost savings to be gained by making our system more like Europe's. Europe didn't gain fabulous cost savings by making their systems more like Europe's: Its nations started from a lower base, and held down cost growth, but they did not actually use single-payer systems to cut what they were spending.
Once spending is in the system, it's hard to get rid of. I've already covered the political difficulties with using government power to take income away. But those aren't the only problems. For example, in the middle of the last century, the U.S. decided that private or at most two-person rooms were best, because they made it easier to control infection and to let patients rest. For decades, we built hospitals to this standard; when my mother was in the hospital for a complicated appendectomy, there weren't even any semi-private rooms on the surgical ward.
Private rooms drive up costs in a lot of ways: They take up more space, you have to duplicate equipment, and because the nurses can't see the patients, you need more monitors and/or staff circulating to make sure no one has stopped breathing. Basic hospital rooms in many other countries look spartan and overcrowded compared with what most Americans are used to, because they have more people and fewer beeping machines.
But even if we got a single-payer system tomorrow, we would not be able to do what those other countries have done, which is not build expensive single hospital rooms in the first place. Those hospitals were built over time, as funds became available and as the old buildings wore out. Trying to replace them all at once with semi-private rooms or wards would cost more than just sucking up the extra expense of the hospitals we have.
Of course there are ways in which single-payer might be better. Whether the strengths outweigh the weaknesses is an argument best left for another day.
Today I'll just finish by reiterating the point I made at the outset: The financing is impossible, in part because the politics is impossible. And the politics is impossible in part because the financial hit would be too big. Single-payer would have to be paid for at the extremely high prices that Americans pay, not the lower European prices that we'd rather have. And when you look at the taxes needed to finance a government takeover, you quickly realize that most people just aren't willing to pay the price:
Corrects reference to costs in sixth graphic; adds definition of "per-capita government spending" in sixth paragraph.
A lot of people seem to think that "per-capita government spending" means "spending per person covered by government insurance." That's understandable, but wrong. "Per-capita government spending" means "government spending on health care per U.S. citizen." In other words, we spend as much to cover a fraction of our population as other governments spend to cover everyone. So pointing out that Medicare beneficiaries cost more on average than younger people is true but irrelevant. We spend more covering old people, poor people and veterans than many other governments spend to cover all those people, plus the rest of the population.
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Megan McArdle at firstname.lastname@example.org
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