US needs to cure health care cost disease
By NOAH SMITH | BLOOMBERG NEWS Published: November 11, 2019
By this point, everyone knows that the U.S. health care system is fundamentally broken. But every plan to fix it runs into a fusillade of opposition. This dynamic could be seen in the reaction to the Affordable Care Act, which remained unpopular for years after its passage. The “Obamacare” system substantially reduced the number of Americans who were uninsured, but costs kept growing.
Most recently, Democratic presidential candidate Elizabeth Warren’s plan to pay for national health insurance has drawn criticism from both the right and the left, largely because of its cost. Bernie Sanders, who envisions a similar insurance system, promises that his funding plan will be more progressive than Warren’s. The expense of his proposal will undoubtedly receive even more fire from centrists and conservatives.
Why is it so hard to agree on a health care plan? One obvious possibility: Reform plans feel as intolerable as the status quo while lacking the promise of lowering costs. The U.S.’ uniquely dysfunctional hybrid public-private system has resulted in the country devoting a much higher share of its output to health care than its rich-world peers.
Reducing costs, therefore, is a must. Not only should a reform program stop an inefficient health care system from continuing to devour the U.S. economy, but it must be made palatable to a frightened and confused electorate.
Advocates of single-payer plans tend to assume that switching to national health insurance will reduce costs. This assumption features in both Warren’s and Sanders’ proposals. There is some justification for this. Health care in Canada, which has a single-payer system, costs much less; if the U.S. spent the same percentage of its gross domestic product on health care as its northern neighbor, it would save more than $1.34 trillion a year. And Medicare, the government-run insurance program for the elderly, has done a better job of holding down costs than the rest of the U.S. insurance system.
But how would the savings be achieved? Simply eliminating the profits of private health insurers would do very little; even after a recent surge in profitability, health insurance earnings amounted to only about $21 billion in 2018. That’s a drop in the bucket.
Many single-payer proponents believe that a government insurance system would save money by reducing administrative costs. A single-payer system wouldn’t have to spend a dime on marketing, and it would save providers like hospitals the trouble of dealing with a large number of different insurers. Sanders projects cost savings of $500 billion a year from this alone, while other estimates put it at between $340 billion and $383 billion. That would eliminate perhaps a quarter to a third of the cost gap between the U.S. and Canada.
But there are reasons to be skeptical of those numbers. Medicare’s administrative costs appear low, but some of this can be attributed to cost shifting to private partners. The conservative Heritage Foundation argues that Medicare also shifts much of the administrative responsibilities (and thus costs) to providers.
Meanwhile, there are certainly plenty of cases in which government purchasing leads to huge cost overruns. Building infrastructure, which is mostly paid for by the government, is much more expensive in the U.S. than in other developed countries. It’s quite possible that a U.S. single-payer system would fall victim to the same mysterious American cost disease.
But there’s also reason to believe that government health insurance could reduce costs by negotiating lower prices. Research has shown that U.S. health service prices are anomalously high. Studies have documented that hospitals have substantial monopoly power, allowing them to overcharge. A single-payer health insurer could use its market power as the sole buyer of health care to force down these inflated prices. Medicare’s lower costs may already benefit from its size and importance as a buyer.
A single-payer system isn’t even necessary to do this. Under a system known as all-payer rate setting, providers would have to charge private insurers the same prices that they charge the government. This would allow the government to force prices down without eliminating private insurers. Maryland, which uses this system, has saved substantially in recent years.
Single-payer health insurance is about more than just lowering total costs; it’s also about making coverage universal and eliminating the hassle and burden of deductibles and co-payments. But in order to make the public receptive to the huge price tag of a single-payer system, it might be a good idea to first switch to national all-payer rate setting. Forcing down prices is central to health care reform. Any plan that doesn’t do this will probably be regarded as a failure.
Bloomberg Opinion columnist Noah Smith was an assistant professor of finance at Stony Brook University. He blogs at Noahpinion.