By Stephanie Woolhandler, M.D., M.P.H.; David Himmelstein, M.D.; and Adam Gaffney, M.D., M.P.H.
University of Massachusetts Amherst, Political Economy Research Institute (PERI), November 30, 2018
The Economic Analysis of Medicare for All by the Political Economy Research Institute (PERI) team provides a robust and well-documented projection of the economic effects of a properly structured single payer health care reform. Its estimate that such reform would provide universal and comprehensive coverage without any increase in overall health expenditures is sound, and in keeping with older estimates from authoritative sources, such as the Government Accountability Office and the Congressional Budget Office, as well as evidence on the costs of care in nations that have implemented single payer reforms. Indeed, even an estimate by the Koch brothers-funded Mercatus Institute concluded that a single payer reform would realize savings of $2 trillion over ten years.
The PERI group’s projections that the utilization of medical care would rise by about 12% after a single payer reform, labelled a “high-end” estimate,” may well overstate the utilization increase likely to occur. Experience in Canada, as well as in the U.S. with the implementation of Medicare, suggests that the finite supply of hospital beds and physician time dampens increases in the society-wide use of care. Indeed, in those past cases, the increases in utilization by previously uninsured groups were offset by small decreases in utilization among those who had been covered prior to the reforms, resulting in no overall increase in the number of hospitalizations or physician visits.
The analysis’ projections of administrative savings under single-payer also incorporate conservative assumption, and hence may underestimate potential savings. Our research, along with colleagues in Canada and several European nations, suggests that hospital administrative costs could fall from the present level of 25% to 12% of total hospital expenditures, a 13% decrease. In contrast, the PERI group estimates that Medicare for All would reduce hospital administration costs by only 8.5%.
While their estimate of the administrative savings is conservative, they may be too optimistic about how quickly such savings could be achieved. Insurance overhead would, as they project, drop precipitously in the first year of the program’s full implementation. However, savings on providers’ administrative costs are likely to take somewhat longer to be fully realized. Much of the redundant documentation required by the current payment systems that drives up administrative costs is ingrained in electronic health records systems whose software will need to be revised. This revision cannot go live prior to the full implementation of the single payer system, and it will take some time for users to adapt. Similarly, many personnel, such as office receptionists, and hospital ward clerks and administrators perform both billing-related and clinical tasks. Much of the redesign of work flows and staffing patterns, and the elimination of redundant personnel cannot occur before the single payer reform is fully in place.
In some other areas the PERI researchers’ projections also appear optimistic. Their estimate that substantial savings (1.5% of total health spending) on fraud and the overuse of medical services would be realized in the first year of the program’s operation may overstate the likely short term savings. Both fraud and overuse are certainly widespread, and a single payer reform would provide a framework for their detection and mitigation. However, the failure of multiple past efforts to root our fraud in the Medicare and Medicaid programs, and to change the medical culture that encourages overuse, mandates caution about a quick fix for these sources of waste.
One could also quibble with the PERI analysts’ assumption that the single payer program would cover virtually 100% of health expenditures. It seems unlikely that such a program would cover items like cosmetic surgery or non-prescription drugs and supplies like. Excluding such items from coverage would not affect the PERI group’s projections of overall healthcare spending, but would slightly reduce their estimate of the new taxes needed to fund the system.
Overall, the PERI estimate incorporates some assumptions likely to overstate new costs associated with the implementation of a single payer program, and others likely to understate these costs. Given this caveat, we believe it prudent to anticipate that health care expenditures (as a share of GDP) in the first year of a single payer reform would remain at roughly the same level as in the year prior to the reform – still a substantial saving as compared to current, relentlessly rising trends. In the medium term we expect that health care’s share of GDP would gradually fall.
It should also be pointed out that the PERI group’s projections are based on a reform that emulates Canada’s simple payment system, such as that envisioned in the current version of the House single payer bill – H.R. 676. That approach would abandon per-patient hospital billing in favor of global budget payment, and would fund hospital capital investments through direct government grants rather than from hospitals’ operating surpluses, or debt financing that is ultimately paid back from operating surpluses. Retaining Medicare’s current payment strategy – as in the current version of the Senate single payer bill – S. 1804 – would sacrifice some of the savings on hospital administration, and leave in place significant incentives for overuse, as well as financial gaming.
In sum, the PERI team is to be congratulated for producing a highly credible economic analysis of the likely result of implementing a Canadian-style single payer reform in the U.S.
Supplemental Slides by Dr. Ed Weisbart: