by Kip Sullivan

President Obama and Democratic congressional leaders are playing a dangerous game with health care reform. They are raising the public’s expectations sky high before figuring out how to meet those expectations. They are promising to give us the moon – significant cuts in health care costs and universal coverage or something close to it – but even at this late hour they have failed to publish anything resembling a detailed plan to do that. And the hints they have given us about the “reforms” they are likely to endorse indicate they haven’t got a clue how to cut costs.

Obama’s response to a question about single-payer health insurance at a town hall meeting in New Mexico on May 14 illustrates the quandary the Democrats are creating for themselves. The question was, “Why have they taken single-payer off the plate?” The woman posing the question was referring to a statement by Sen. Baucus, who chairs the committee with the most influence over health reform issues in the Senate, that “single payer is off the table.” Obama’s response, essentially, was that single-payer is off the table because the insurance industry is too powerful to beat, and there are other ways to cut health care costs that don’t require implementing a single-payer system. He is wrong on both counts.

Obama began his reply to the woman’s question with a statement about the necessity of cost containment: “If we simply insured everyone under the current system we couldn’t afford it. We’d go broke. We’ve gotta drive down costs.” So far so good. Obama is unquestionably correct about this. America’s per capita health care costs are double those of the rest of the industrialized world. Congress will never find the political will to establish a sustainable universal health insurance program unless it finds a way to cut the high cost of health care.

But then Obama went on to imply that we don’t need a single-payer system to cut costs. “There are ways that we can drive down costs,” he said. He cited three ways: greater use of preventive services, (not by making insurance companies pay for them, but by changing the way doctors are paid); electronic medical records; and a public program to compete with private insurers. The first two ideas are straight out of the insurance industry’s hymnal. The third idea, the proposed public program (which its advocates now refer to as “the public option”) will either quickly morph into a single-payer or it will accomplish little or no cost containment.

Here are excerpts from Obama’s response:

If we emphasize prevention and wellness programs … so that we’re reimbursing doctors, not just for treating people after they get sick but for helping people stay well, if we use medical technology to reduce error rates and ensure electronic medical billing …, these are simple things we can do that will save us money…

But the research does not support Obama’s claims. Even assuming the way to deliver more preventive services is to focus on doctors rather than insurance companies, more preventive services will not reduce costs. Proven preventive services definitely improve patient health, but the vast majority of preventive services cost so much, and have to be given to so many people who would not otherwise have gotten sick, that the cost of the services outweighs the savings from reduced illness.

Flu shots are an example. If you consider only the fact that flu shots cost $30 per person to administer, and that the medical costs of treating an adult with flu come to about $8,500, you might be lulled into thinking flu shots pay for themselves hundreds of times over. But when you realize the $30 flu shot has to be given to hundreds of people who wouldn’t have gotten the flu in any case just to prevent one hospitalization for flu (research indicates flu shots have to be given to 1,000 seniors to prevent one hospitalization for flu), you’re forced to reach a different conclusion. A 2008 review of the literature on preventive medicine concluded, “Although some preventive services do save money, the vast majority reviewed in the health economics literature do not” (Joshua T. Cohen et al., “Does preventive care save money? Health economics and the presidential candidates,” New England Journal of Medicine 2008;358:661-663).

The research reaches the same conclusion about a slightly more complex form of preventive services called “disease management.” Whereas preventive services are defined as those given to people without any detectable sign of disease, disease management refers to services given to people who already have signs of a disease. A typical disease management service is education of patients by a nurse on how to follow their doctor’s instructions. Several reviews of the research on disease management have reported that most forms of disease management do not save money and, in fact, like preventive services, probably raise total costs (Soeren Mattke et al., “Evidence for the effect of disease management: Is $1 billion a year a good investment?” American Journal of Managed Care 2007;13:670-676).

During his campaign, Obama claimed that switching all Americans’ medical records from paper to electronic form would save $77 billion a year. He based this claim on a paper financed by Hewlett Packard and other members of the computer industry. This paper was soundly thrashed by the Congressional Budget Office in a report issued in May 2008. (The CBO is a non-partisan research arm of Congress which analyzes the impact of federal legislation on the federal budget.) The CBO’s analysis and other research has shown that electronic medical records have mixed effects on quality of care and are likely to raise total costs. It is true that computers can reduce some types of errors, but they also facilitate new types of errors. And they are not free. Installing the hardware and software necessary to create electronic medical records for all 300 million Americans will probably raise total spending by about 2 percent.

After telling his audience that cost containment is absolutely essential if we’re going to get to universal coverage, and then telling them prevention and electronic medical records will save money when they won’t, Obama took up the question about why Baucus was refusing to take testimony on single-payer. Obama, being the good teacher he is, first defined the term:

For those of you who don’t know, a single-payer system is, Medicare is sort of like a single-payer system. The way it works is, the idea is you don’t have insurance companies as middle-men. The government goes directly and pays doctors or nurses.

There is more one could say about how single-payer systems save money, but Obama’s description captured their most important feature: They save large sums of money by reducing the administrative waste generated by the health insurance industry. Obama was correct to hold up the traditional Medicare program as an example of a single-payer. That program does not funnel tax dollars through insurance companies so they can scrape 20 percent off the top and send the remaining 80 percent to doctors and hospitals with strings attached about how to practice medicine. By bypassing the insurance industry and paying doctors, hospitals and other providers directly, the classic Medicare program (in which 80 percent of Medicare recipients are enrolled now) avoids paying for the wasteful insurance industry overhead costs (including marketing, “managing” doctors, underwriting, lobbyists, and profit). Compared with the insurance industry overhead of 20 percent of expenditures, Medicare’s overhead is 2 percent.

Single-payer or Medicare-for-all-style systems also lower system-wide administrative costs because providers incur lower billing costs when they have to deal with only one cooperative public insurer (or payer) rather hundreds or thousands of obstinate private-sector insurers. The administrative savings alone from switching from a multiple- to a single-payer system will be in the range of 10 to 15 percent. Another 10 percent is easily achievable through a reduction in prices, especially for specialist services and drugs, that single-payers achieve.

Having properly defined a single-payer system, Obama continued:

If I were starting a system from scratch, then I think that the idea of moving toward a single-payer system could very well make sense…. The only problem is that we’re not starting from scratch. We have … a tradition of employer-based health care. …We don’t want a huge disruption as we go into health care reform where suddenly we’re trying to completely reinvent one-sixth of the economy.

Note how cautiously Obama talked about “disruption.” He didn’t say who would be bothered by “disruption.” Under a single-payer or Medicare-for-all system, patients would notice no change in their clinics or hospitals, and all Americans and all employers would be relieved of the immense hassle of buying insurance, paying for it, and playing “captain may I” with the insurance industry when people get sick. The “disruption” Obama is concerned about is the disruption a single-payer system will cause for the insurance industry when it gets knocked off its perch at the top of the health care food chain. Obama’s statement about “disruption,” then, may be translated as, “I don’t want to make the insurance industry mad.”

Having told his audience that cost containment is absolutely essential, and having misled them about the ability of prevention and computers to cut costs, and having asserted that we dare not “disrupt” the insurance industry, he turned to what he would probably call the central plank in his cost-containment platform – a public program that will sell health insurance to the non-elderly in competition with the existing insurance companies:

So what I’ve said is, let’s set up a system where if you already have health care through your employer and you’re happy with it, you don’t have to change doctors and you don’t have to change plans, nothin’ changes. If you don’t have health care or you’re highly unsatisfied with your health care, let’s give you choices … including a public plan that you could … sign up for. That’s been my proposal.

Note that Obama did not claim that setting up a government-run insurance program to sell insurance to the non-elderly in competition with the insurance industry will save money. But other advocates of this idea, which over the last few months has come to be called “the public option,” are making precisely that claim. Their argument starts out on a sound footing, and then veers into the ditch. They assert that Medicare has proven to be more efficient than any insurance company ever will be. That is true. I have already indicated that Medicare spends a much lower proportion of its expenditures on administration than private insurers do. Medicare’s large size also permits it to pay clinics and hospitals roughly 20 percent less than smaller private insurers pay. (However, Medicare’s lower reimbursement rates are offset by its cooperativeness with providers, which results in lower overhead costs for providers.)

So the premise that Medicare is unusually efficient is correct. But then “public option” advocates take a wrong turn. They claim that if a program “like Medicare,” but separate from Medicare, were authorized to start selling health insurance to the non-elderly, it would automatically enjoy Medicare’s advantages (low overhead, low provider rates, and large size) and would, therefore, be able to set its premiums below those of the private insurance industry and seize a very large portion of the non-elderly “market” for health insurance. (Don’t ask me why “public option” advocates want the new program to be separate from Medicare. I would bet it’s because they understand the new program is going to suffer from “adverse selection,” that is, from disproportionate enrollment by the sick, and that this would raise Medicare’s costs dramatically and annoy the elderly.)

But why should we assume that a public program for the non-elderly will enjoy Medicare’s advantages? Medicare enjoys those advantages precisely because it is a single-payer. How can a “Medicare-like” program for the non-elderly be expected to function with Medicare’s efficiency when it won’t be a single-payer – when it will be merely one of more than 1,000 insurers scrambling to make a sale? Won’t the “Medicare-like” program have to open offices around the country and hire a sales force and advertise? Won’t it have to hire bureaucrats to “manage care” like Aetna and Cigna? If it doesn’t, won’t it develop a reputation for being kinder and gentler to sicker patients and attract a disproportionate number of the sick, and won’t that drive up the new program’s premiums?

It is impossible to know what Obama and the vast majority of “public option” advocates think about these issues because there is no “public option” proposal or bill to discuss. There is only the naked claim that a “public option” will “make the insurance companies compete” and that competition always leads to lower costs.

Jacob Hacker is one of the very few people who has actually written in some detail about the public program he envisions competing with the insurance industry. Hacker has recommended that anyone who buys a policy from the “Medicare-like” program receive subsidies from the federal government that people who buy policies from private insurers would not receive. Obviously, this policy would give the new program an advantage over private insurers. But the insurance industry’s lobbyists are no dummies. They understood this might be a feature of “public option” legislation and they have already persuaded key Democrats in the Senate, including Sen. Chuck Schumer (NY), to ensure that the new program enjoys no such advantages.

If the “Medicare-like” program really does turn out to possess some or all of Medicare’s advantages, or if the law Congress passes actually does subsidize purchase of the public program’s policies but not those of the private insurers, then the “public option” idea should permit the public program to undersell the insurance industry and drive the insurance industry off the market. In that event, we will have achieved a single-payer system by a process of “creeping capitalism.” But in view of how eagerly Democrats like Sen. Schumer and people like Hacker are reassuring the insurance industry and their Republican allies that the “public option” will not lead to a single-payer system, it is reasonable to predict that the “public option” will, if it is established, have little or no effect on premium levels across the country and will not bring us closer to a single-payer system.

In fact, if the Democrats, in their zeal to mollify the insurance industry, strip the public program of all advantages and subsidies and the public program suffers adverse selection, the public program might well be bankrupted by the insurance industry. In that event, the industry and its right-wing allies will chortle about how single-payer and “public option” advocates were naïve to think that publicly run health insurance programs could be more efficient than private insurance companies. The single-payer movement, and the entire universal coverage movement, will have suffered a serious setback.

Here is Obama’s final comment in his reply to the woman who asked him why single-payer was “off the plate”:

….I’m confident that both the House and Senate are gonna produce a bill before the August recess. And it may not have everything I want in there or everything you want in there, but it will be a vast improvement over what we currently have. …. I’m confident we’re going to get health care reform this year ….

I voted for Obama. I fervently wish him well. But I’m confident we won’t get anything resembling “health care reform” this year, or even in Obama’s first term or second term, if Obama persists in thinking prevention and computers will save money, and if Obama backs a form of “the public option” that does not possess Medicare’s advantages.

Obama’s Organizing for America project has asked Obama supporters to attend house meetings across the country on June 6 (this coming Saturday). People who care about Obama, universal health insurance or both should attend one of these meetings and warn people that Obama and Congressional Democrats are leading us into an ambush. They are promising universal or near-universal health insurance when they know or should know their proposed methods of cutting costs are not going to cut costs, much less cut costs sufficiently to pay for the $1 to 1.5 trillion it will cost to cover all uninsured Americans over the next decade. The Democrats should tone down their happy talk now or, better yet, put single-payer legislation (HR 676/S703) “on the table.”

Kip Sullivan belongs to the steering committee of the Minnesota chapter of Physicians for a National Health Program.