A Single-Payer System Won't Make Health Care Cheap

[Oblundercare]

By Megan McArdle
(Corrects reference to costs in sixth graphic; adds definition
of "per-capita government spending" in sixth paragraph.)

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.

Let’s start with where they are right. The U.S. spends a lot
more on health care than, well, anyone else:1

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:

1 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.

http://www.bloombergview.com/articles/2014-04-30/single-payer-
would-make-health-care-worse

  

[Orval Fairbairn]

Post by Oblundercare
By Megan McArdle
(Corrects reference to costs in sixth graphic; adds definition
of "per-capita government spending" in sixth paragraph.)
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.
Let’s start with where they are right. The U.S. spends a lot
more on health care than, well, anyone else:1
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
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-
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
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
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
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
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
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
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.
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.
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
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
1 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.
http://www.bloombergview.com/articles/2014-04-30/single-payer-
would-make-health-care-worse
  

In 2012, legendary Obama/Democrat apologist Paul Krugman pointed to the
VA as "a shining example of socialized medicine," which is single payer.

Need I say more?