Saturday, September 16, 2017

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.


Jerry Brown said...

This is a very good post and I thank you for writing it. People like me who push for universal health care are supporting it for ethical reasons for the most part. But we like to point out how some savings might be had through a reform of the present system also. And there really is no doubt that there are better ways to do it than our current health care system manages. But occasionally (maybe more than occasionally), these claims of savings become unrealistic and I guess it is better to find that out ahead of time rather than after the fact.

But just so you know, I will be supporting universal health care as a policy goal for my country regardless if it costs more or if it costs less. It is not all an economic argument in other words.

ProGrowthLiberal said...

"I will be supporting universal health care as a policy goal for my country regardless if it costs more or if it costs less."

I will be too. Thanks for the comment Jerry.

Anonymous said...

I note that in Dean Baker's adjusted gov't share number for Single Payer is $3.86 trillion/year on an annual average over 10 years (adjusted from Friedman's numbers). This works out to $11.4k per capita (based on the average population over next 10 years).

Comparing to his baseline after projected reductions is costs growth relative to the 10 year costs his average annual cost is $4.68 trillion/year which works out to $13.9k per capita on the same average population size over 10 years.

So Baker's single payer estimated savings is just $2.4k per capita or just 17.5% savings per capita than the present 10 year average non-Single Payer costs.

This is a far, far cry from the stated savings by using the Canadian Single payer 47% savings relative to current U.S. costs. Where and why is there a 30 point spread in the savings numbers relative to the Canadian single payer savings?.

If you look at the present CMS 2016 per capita cost it's $10.4k per capita, while the 10 year average per capita cost is $11.4k per capita, so in reality what Baker (and Friedman) are projecting is an increase in average annual costs per capita over 10 years of
by converting to a single payer system now, relative to 2016's actual costs.

The public's knowledge of Single Payer is of the major European and Canadian per capital costs which average on the order of 50% or our costs per capita (I use Canada, UK, Germany, & France as my baseline average single payer type costs).

If a U.S. single payer system or even eventual single payer costs in the next 10 years aren't meeting this approximate 50% or at least 33% savings over our existing ACA system costs per capita, then we're not reconciling what our constitutional and/or political limiting reasons are for NOT ACHIEVING this level of savings.

In other words nobody's telling the public why we aren't projecting costs on the order of or slightly more than the other major health care cost systems for wealthy advanced nations.

Anonymous said...


On admin costs under a single payer system, think of it this way.

There's one payer.. US gov't.

There's one standard itemization list for all services provided by a medical provider -- doctor, hospital, pharmacy.

There's one standard price / cost for each service, drug, provided.

A person shows a receptionist their medical card (chip card), it's swiped to the computer system.

A medical provider giving the person their services hits the item on the computer screen for each service they provide to that medical number (person) and each drug they prescribe.

Any pharmacy where the person decides to pick-up or arrange for obtaining their prescribed drug inserts the persons card and issues the drug to that card (person).

The computer sends this information to the single payer (gov't computer system for health care)in real time as each event takes place.

The gov't computer provides the medical providers who gave the service and the pharmacy, etc. a credit for each service at the prices from the standard list. This is transmitted simultaneously to the IRS for "income and costs accounting for taxes" and to the medical providers computer account (for their own records and accounting).

Weekly or at some defined elapsed time from when the service was provided ... minutes, hours, daily , or whatever... the gov't computer issues a credit to the service providers ID account which transmits an electronic payment to the providers professional bank account.

There admin costs consist of a receptionist or secretary (if even that) at the medical provider's office, the amortized costs of computers and computer systems and software, including software maintenance (gov't provided or on contract with Google, or whomever or simply a gov't software system). No paperwork, and nearly zero time (total 1 or 2 minutes?) per person receiving medical care.

There aren't multiple systems of accounting or codes by multiple insurance carriers or multiple software systems to deal with... or sort out, or multiple insurance forms to fill out.

The gov't knows its rate of outlays by provider, by service provided, by brand or model of equipment used, by service rendered, buy drug prescribed and quantities, by drug actually issued, by hospital, by pharmacy, even by an ID of who issued the drug perhaps all in real time.

The provider has the same record in real time as well.

This allows a computer to check in real time and over any time period for any provider and any pharmacy and any medical ID for out of ordinary or statistical outliers to catch potential fraud or mis-use and abuse of the system.

It still requires investigators to follow-up with physical checks and random audits which is the predominant cost for admin anyway.

So total admin costs by gov't and providers is far lower than it is now for Medicare and Medicaid.

There's no reason to project any greater admin cost than 2% and in fact the projected costs (amortized) to implement the computer and software systems required for this simple automated accounting and transaction system would be closer to 1% to 1.5% rather than more.

What's the big deal?

Denis Drew said...

Whatever new medical system we adopt or invent, it will not stop the financialization and crapification of American medicine if we don't build a countervailing force to battle with: that means rebuilding US labor union density back to its former maximum and then some.

Re insane pharmaceutical patent system: I would like to see somebody set up a countdown clock: HEPATITIS C WILL BE WIPED OUT IN THE US IN ONLY EIGHTEEN YEARS AND (X NUMBER OF) DAYS ...

... that is once Gilead's Sovaldi patent wipes out and we can get by with only a few hundred dollars per potentially severely sick patient -- instead of $100,000!

Might be just the publicity eye catcher to push the generic over the top.

Dan said...


May I repost this to Angry Bear?


Anonymous said...

Canadian here. Your article states that "Many countries, including Germany, France, and the Netherlands, provide coverage through heavily regulated non-profit insurers...."

For the United States,the flaw in this approach lies in the load of adjectives at the end of that sentence. Having seen the behaviour of a rentier, business-driven legislators over the last forty years, who would trust such a system to remain "heavily regulated [and] non-profit?" In terms of unavoidable and expensive sectors such as health and education and housing, for instance, the US might best be viewed as a Netherlands sans dikes or windmills, Whereas, single payer would be a monolith much more difficult to erode or dislodge.

Not included in calculations of the US costs of their system are the burdens that system. Endemic anxiety, distortions of the market, distortions of medical data (ailments being misidentified due to need to qualify for coverage, for instance, or unavailable at all due to fragmented or absent treatment,) the burden of family payouts, community ad hoc charity, bankruptcies, and other costs which, though not necessarily paid out to medical or insurance suppliers, are nonetheless the result of that system. How would the GDP be affected if that disposable income were freed up, if Americans could travel freely, change employment freely, save with some assurance that a single broken leg would not wipe out a decade's scrimping?

Defending the current US system reminds me of those parasites which alter their hosts metabolism to their own benefit. The sooner corrected, the sooner the US might leave their tapeworms to fend for themselves in some other, more productive way.

Noni Mausa

ProGrowthLiberal said...

Dan - yes. Please do.