Summary: Conservatives’ bold propaganda have made Americans fear the health care systems of our peer nations, systems that produce equivalent care a half the cost (or less) or ours — but cover everybody. America’s march to universal coverage began with Medicare (1965) and Medicaid (1966). Obamacare expanded it, covering more people but at unsustainable cost. Here Ed Dolan looks at the facts and draws the obvious conclusion: single payer insurance will come to America. The longer we wait, the more difficult the transition.
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Single Payer Healthcare is Coming.
Stop Fighting It.
Start Figuring Out How to Make It Work.
Guest post by Ed Dolan.
As everyone knows by now, the United States is alone among advanced economies in not having a single payer healthcare system with universal coverage. It is, however, already much closer to such a system than most people realize, and the current round of Republican healthcare reforms, if enacted according to plan, will bring it even closer. Yet there is no reason to fear the single payer future. Read on.
The true scope of government in our healthcare system.
The federal government already operates three large healthcare systems, Medicare, Medicaid, and the Veterans Administration. Each of the first two is comparable in size to the single payer systems of most European countries. If we categorize healthcare expenditures by the type of primary payer, the three big federal programs accounted for roughly a third of all spending in 2015, according to data from the Centers for Medicare and Medicaid Services:
To get a true picture of the government role in healthcare, though, we need a different perspective. If we categorize expenditures by the source of the funds, instead of the type of payer, the government share of spending is much larger. Partly that is because state and local governments account for 17 percent of all healthcare spending, not fully reflected in the chart above. Also, that chart hides the extent to which federal tax expenditures finance much of our ostensibly private health insurance. According to data from the Tax Policy Center, deductions and exclusions of health insurance premiums and related tax breaks cost the federal government some $250 billion in revenue in 2015 — as big a burden on the federal budget as if Uncle Sam wrote a check for that amount.
Deductibility of employer healthcare expenditures account for about three-fifths of total tax expenditures. The remainder come in the form of exclusions of Medicaid benefits from declared income, deductibility of insurance for self-employed individuals, tax breaks for some kinds of out-of-pocket costs, and other items. If we categorize healthcare expenditures according to the ultimate source of funds rather than the primary payer, we find that government budgets account for over half of all spending, as the next chart shows.
Our faltering private insurance system.
Both the Affordable Care Act (ACA or “Obamacare”) and the current Republican repeal-and-replace law, the American Health Care Act (AHCA), attempt to salvage what is left of private healthcare finance. Unfortunately, the two pillars of private healthcare, employer-sponsored insurance and individual insurance plans, are beyond saving.
The individual insurance market is failing because too large a share of health care risks are inherently uninsurable. Two conditions must hold for a real insurance market to work. First, the risks in question must be fortuitous, that is, predictable statistically but not predictable for any particular individual. Second, premiums must be high enough to cover claims and administrative expenses, yet still affordable to the customer.
Neither condition holds for individual health insurance. The principal reason is that a tiny share of the population accounts for the great bulk of all healthcare spending. The next chart, based on data from the Kaiser Family Foundation, shows that the top 10 percent of households account for two-thirds of all personal healthcare spending, and the top 5 percent for half of all spending. The majority of these high spenders have one or more chronic conditions that keep their spending high year after year.
The skewed pattern of spending poses a dilemma for policymakers: If they allow insurance companies to refuse to issue policies to people with pre-existing conditions, the people most in need of medical care will not be able to buy policies. If they insist on guaranteed issue, then the presence of high spenders in the risk pool pushes up premiums for everyone. As that happens, relatively healthy people drop out of the pool, pushing claims and premiums higher still for those who remain. As losses mount, insurers begin to drop out, too, until the system collapses.
Both the ACA and the ACHA opt for guaranteed issue. That sounds good politically, since everyone knows a neighbor or relative with a pre-existing condition even if they don’t have one themselves. Ultimately, though, guaranteed issue is an unsustainable policy that threatens the whole individual insurance market with a “death spiral.” The ACA is already showing early signs of such a spiral, and, as I explained in this earlier post, the ACHA seems designed to make things worse rather than better.
Meanwhile, employer-sponsored health insurance has problems of its own. First, it works much better for large corporations than for small businesses. Most small firms simply do not have enough employees to constitute an affordably insurable risk pool. Second, economists believe that over time, employees end up bearing the cost of healthcare benefits through lower pay. Rising employer healthcare costs are thus a major contributor to the stagnation of wages. Third, the fear of losing insurance coverage makes people reluctant to give up jobs that are otherwise unsuitable — reluctant to try something new or start a business of their own. This “job lock,” in turn, reduces labor mobility and makes the economy less able to respond to shocks from new technologies and changing patterns of trade.
For these reasons, job-linked health insurance has been gradually dying for some time now. According to another report from the Kaiser Family Foundation, from 1999 to 2014, the share of the nonelderly population covered by employer-sponsored insurance fell from 67 percent to 56 percent. If the ACHA, as planned, repeals the ACA’s employer mandate, the downward trend will pick up speed. The Congressional Budget Office estimates that over ten years, 7 million employees will lose employer-sponsored insurance as a result of the AHCA. Republican plans for sharp reductions in corporate tax rates would produce an unintended blow to employer-sponsored insurance, since the incentive of tax deductibility would suddenly be worth less.
We can do this.
What lies ahead?
Despite the best of intentions, the ACA has been unable to save private-sector health insurance in either its individual or employer-sponsored form, and the AHCA, if enacted, will only accelerate the decline. That leaves two possibilities. Either the share of the population without effective access to the healthcare system will begin to rise again, or the government share of the national healthcare budget will continue to grow.
In the short run, Republicans may opt for reduced coverage, but I doubt if that will prove politically acceptable, once it actually starts to hit home. Looking at CBO projection of decreased coverage is one thing; waking up in the morning to find that Aunt Sally can’t get her chemo or Uncle John can’t get his bypass surgery is another thing altogether. At that point, some kind of single payer system will be the only option left.
And really, it is not such a bad alternative. A revealing report from the Commonwealth Fund ranks US healthcare eleventh out of eleven against those of ten ten high-income countries, all with single payer systems. US healthcare is at the top in terms of cost, and at the bottom in terms of efficiency and equity. And no, contrary to the scare stories, other countries do not use death panels or endless waiting periods to ration care. The United States ranks in the middle of the pack on measures of timeliness of care, although it is the worst of the eleven in terms of cost-related limitations on access.
So get used to it. We, too, could free up a good chunk of our national income on healthcare, reduce medical insecurity, and cut the high administrative costs of our fragmented and overlapping healthcare systems. Single payer healthcare is coming. Stop fighting it and start figuring out how to make it work here, as it does elsewhere.
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About the author
Edwin G. Dolan holds a PhD in economics from Yale. He has taught in the United States at Dartmouth, the University of Chicago, George Mason University and Gettysburg College. From 1990 to 2001, he taught in Moscow, Russia, where he and his wife founded the American Institute of Business and Economics (AIBEc), an independent, not-for-profit MBA program. After 2001, he taught economics in several European countries, including Central European University in Budapest, the University of Economics in Prague, and 15 years of annual courses at the Stockholm School of Economics in Riga.
He is currently a Senior Fellow at the Niskanen Center and lives in Northwest Lower Michigan.
For more about his views, see his book TANSTAAFL: A Libertarian Perspective on Environmental Policy
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If the pols really wanted a free market healthcare system, they would eliminate the insurance company monopolies, which are about as far from free enterprise as you get by instituting single payer and then eliminate all obstacles to competition on the provider side. These include restrictions on drug importation that make some drugs 100 times as expensive in the U. S. as overseas. They’s also encourage immigration by highly qualified and well trained doctors, nurses and other specialists from around the world. They would eliminate antitrust protections for big provider organizations and federal rules that hurt independent practitioners (read doctors) while subsidizing the large hospital groups. They would also make the drug development process far less expensive, but require complete visibility as to outcomes data for use of specific drugs for specific conditions and for quality of care data for practitioners. Then they would start on the thousands of rules adopted at all levels of governments aimed at protecting providers from competition or forcing outmoded reported requirements on providers. No Virginia, these guys are not free market advocates and they certainly aren’t Santa Claus.
John,
Health care is one of the best understood aspects of public policy — with a score or so of nations experimenting with different systems since WWII. Your suggestions would not remotely make a major difference in extending care, because the insurance model does not work well for insurance.
“They’s also encourage immigration by highly qualified and well trained doctors, nurses and other specialists from around the world.”
I assume you’re kidding. Already a quarter of US doctors are foreign-born. How parasitic do you want the US to be on second- and third-world medical systems?
JOHN SLATER: Yes, you are right, obstacles to entry and competition matter. You forgot restrictions on places/admissions to medical schools in your list. For more on how to improve competition and reduce prices, see this post: https://niskanencenter.org/blog/healthcare-prices/
Ed,
The relevant question to this post: would the usual list of “free market reforms” provide universal health care, as conservatives have claimed for several decades? That they “matter” doesn’t tell us much.
I’m confused Fabius. I indicated I agreed with getting rid of the insurance company model and replacing it with single payer. Interesting that you focus on a devil’s in the details argument. That’s what leads to regulation. For you its protecting developing country national health systems, which I have read is a problem in some countries. For someone else it’s protecting licensed U.S. providers from competition from H1B nurses and PTs. Pretty soon you’re back to 20,000 pages of regulations as every special interest group lobbies for its special protective break. At the end of the day the purpose of regulation and bureaucracy becomes protection of vested interests and blocking of competition.
John,
“That’s what leads to regulation.”
Yes, effective regulation is what makes developed nations work. Third world nations and failed states lack it.
“For you its protecting developing country national health systems”
Yes, building US health care as a parasite on developing nations is IMO a bad idea. Already one-quarter of US doctors are foreign-born. What fraction would you like? How much would it save, as a fraction of total health care? I doubt it would save much.
“At the end of the day the purpose of regulation and bureaucracy becomes protection of vested interests and blocking of competition.”
You can always move to Somalia. Regulation free! Or to your imaginary libertarian paradise in the clouds!
Suggestion: rather than staring at the clouds and imagining ideologically-based solutions, look at the vast literature about ways to improve US health care. Written by people who actually know something about it, and have done real research. The system is a mess, and solutions proven by our peer nations would reduce costs by large amounts without affecting service levels.
Learn.
Switzerland has mandatory private health insurance with guaranteed access. People with chronic conditions have a basic policy with the insurance company acting only as administrator while the federal government picks up the costs. To make it work though, the federal government audits the claims to ensure that the costs of these people are in line with what the general population is incurring in health costs.
dealbert,
Most nations have some form of public-private health care system. The foundation for almost all is some form of government as single-payer. The US (Medicare), Canada and Swiss use insurance companies as administrators — with the government as the payer.
Note that single-payer has become a catch-all term for government-paid universal health care. For example, technically Britain does not have a single-payer system – using a network of financially and legally autonomous trusts — but it is in general discussion used at the most extreme form of single-payer (with a small role for private sector insurance).
To clarify, the government audits to ensure that they are not paying more than what a normally insured person’s insurance would be charged.
It is correct to note that “single payer” is a rather loose term to refer to quite a variety of different systems in other OECD countries, none of which is literally single payer. Some main axes of difference: Doctors may be gov’t employees or independent practitioners; hospitals and clinics may be state owned or privately owned; payments may be made directly from gov’t budget or through insurance companies acting as payment agents (but not true insurers); co-pays and deductibles may or may not be used; optical and dental may or may not be covered; private healthcare outside the dominant government system may be a freely available option, a restricted option, or completely prohibited.
Obviously, this whole spectrum needs a better term than “single payer,” but that is what we usually call this family of systems.
“If we categorize healthcare expenditures according to the ultimate source of funds rather than the primary payer, we find that government budgets account for over half of all spending, as the next chart shows.”
When I stumbled on the Source of Funds as evidenced by the Pie chart awhile back, it was like…..oh, inevitable. As usual those that flail away for an insurance free market are waving at ghosts and want reality well hidden.
Complex but a fine Post.
As seems to often be the case on the Right side of things, “free market” in this case means “a market which benefits me/my friends/my donors.” In other words, a freer market would in this case be one that increased the rake for the interested parties.
While I’m no fan of the Donald, he doesn’t seem to give a toot on a tin whistle for this particular construction and I don’t think most of America does either. I can’t find it at this remove, but I remember seeing that there were overwhelming majorities on left and right both for a national health care system if it was described accurately but without using a couple of key words like “federal” or “socialist”.
I live in Quebec. Medicare in Canada is not federally, but provincially organized and supported. The federal government once promised to support 50% of the costs of Medicare, but they never have. For instance, Paul Martin cut federal support when he was Finance Minister and today PM Trudeau has strong-armed almost all the provinces (Manitoba is still fighting!) into accepting limited additional support. Insurance companies play no part in administering Medicare. In Quebec, it is funded by a payroll tax paid by employers with additional taxes on pension and other income paid individually when filing Quebec income tax (which is generally more than the federal income tax!).
Quebec is the only province with a prescription drug plan. Individuals can only opt out of that plan if they are covered by an equivalent private, usually employer-funded plan. Premiums are income-based and paid when filing Quebec income tax. (Quebec is the only province collecting its own income tax; the territories and other provinces have Revenue Canada collect on their behalf via a separate schedule.)
All insurance benefits paid by an employer or private pension-funded plan for drugs or supplemental coverage (physiotherapy, dental, private bed when hospitalized, etc.) are added to employee or pensioner income for Quebec, not federal, income tax calculations.
Dealbert,
You raise an important point: other than some communist nations, nobody has a pure “single payer” health care system. In Canada, the govt system pays for roughly 70% of health care costs — slightly below the OECD average. Insurance and individuals pay for the rest. Britain’s NHS is a complex system of local trusts, and is now breaking down. Most developed nations have mixed private-public systems.
In practice today “single payer” means “universal coverage”. Almost all of our peer nations provide this — most with equivalent service levels to that of the US, at half or less of the cost.
I am a RN in a for profit hospital and only 4 of my 24 patients had private insurance. The others were Medicaid, Medicare and 1 VA. Only 4 were also employed. The others were disabled, retired or simply not working. This is crazy! We already have single payer we just won’t admit it. We also have to raise taxes on other durable goods excluding food to help pay for it. We cannot just tax incomes and property taxes because we who are left in in the workforce just can’t afford a whole lot more. An increasing smaller amount of Americans are paying for a larger and larger nonworking group.
Ellie,
Every other developed nation — our peers on this planet — prove that you are wrong. Every single day of every year. They provide health care to every one of their citizens. Care of equal quality to ours, provided at 1/3 to 1/2 the cost.
Our health care system shows American exceptionalism. That we are exceptionally stupid, unable to provide an essential public service that our peers figured out decades ago.
“We already have single payer we just won’t admit it.”
Tell that to the millions of Americans either skipping vital health care services – or who have gone bankrupt paying for it.
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