Posted on February 2, 2007

How would single payer control costs?


Crossroads/Health Care

Sacramento Bee
January 29, 2007

How would single payer control costs?

From Daniel Weintraub:

In this commentary in the Boston Globe (link below), Marcia Angell says that “Medicare for all” is the only idea that could control the cost of health care. But other than a one-time drop in administrative costs, she doesn’t offer any examples of how a government-run system would control costs. She complains that private insurers are good for nothing but denying care to people who need it. But denying care would seem to be the single best way to control costs. It might even be the only way.

So to those who support the Medicare for all approach, or any other form of single payer, please help us understand: after cutting out the “administrative fat,” marketing and profits that are part of a private system, how would it control the cost of health care? Anyone?

Marcia Angell, “Fix the system with Medicare for all,” Boston Globe, January 29, 2007:


By Don McCanne, MD

A single payer system, such as the proposed Medicare for all, would have the very powerful economic advantage of being a public monopsony: the single purchaser of health care. Although private monopsonies raise havoc in marketplaces, monopsonies owned by the citizens play a much more beneficial role. The mission of a publicly-owned, single payer monopsony would be to obtain the best health care value for all of us. That means not only reducing waste and inefficiency, but it also means providing adequate resources to develop and maintain the necessary health delivery infrastructure and to attract dedicated professionals that provide our care. It means obtaining truly beneficial care at the fairest prices.

This is much more than mere theory. All other industrialized nations have universal programs that function as monopsonies, whether through government ownership, single payer insurance programs, or very tightly regulated non-profit, quasi-public insurance systems. All have been more successful at slowing the rate of health care inflation, spending much less than we do, while providing care for everyone. They all receive greater value for their health care investment.

To control costs we need to understand why our costs are so high. A few reasons will be listed along with potential policy solutions.

The six largest private insurers in the United States spend an average of 80 percent of insurance premiums on health care; that means they keep 20 percent for administration and profit. Physicians and hospitals consume another 12 percent of private insurance premiums on billing and insurance related functions alone. No other nation would tolerate a system that consumes one-third of insurance premiums on insurance functions. A single payer system dramatically reduces this waste and some of the waste on other administrative inefficiencies as well. Although that is a one-time adjustment, it is a benefit that is perpetuated on into the future.

Health care prices are much higher in the United States than in other nations. Using prescription drugs as an example, a single payer system would negotiate prices to cover legitimate costs and provide fair profits. Allowances would no longer be made for the 80 percent of research that is designed simply to restart the patent clock. Rather, generous allowances would be made for innovations that provide hope of new, beneficial products. Marketing which results in misuse of drugs would not be supported. Since the marginal costs of increased production are quite small, the expansion of appropriate prescribing under a universal system would be quite affordable. A single payer monopsony would be more effective in getting prices right, whether with pharmaceuticals or with any other health care products or services.

A strong primary care infrastructure provides higher quality care at lower costs. Our primary care system is rapidly deteriorating. A single payer monopsony would realign incentives to strengthen our primary care base. Our costs would be lower, and everyone would have access to the quality provided by a medical home of their choice.

Because of the maldistribution of our health care resources and because of variations in medical practice patterns, overuse of high-tech, specialized services that provide no health care benefit have characterized much of our system. A single payer monopsony would have much better information resources to help realign incentives to promote more optimal use of the technologically-advanced products and services. Incentives should be provided to be sure that new and better technology does its best to live up to its promise to lower costs by replacing out-dated but more expensive technology.

With a single payer system, budgeting decisions become more rational. Budgets could be adjusted based on demographics, legitimate delivery costs, inflation, beneficial new technology, changing health care needs, fair profits, and any other appropriate factor. Global budgets, such as for hospitals, would be negotiated to be sure that adequate funds would be available to carry out the hospitals’ mission, while the temptation to drive up revenues by over-utilization would be eliminated.

In a new book, “Medicare Prospective Payment and the Shaping of U.S. Health Care,” Rick Mayes and Robert Berenson demonstrate how Medicare has been able to provide health care value-purchasing through oversight and continual refinement of payment systems. They demonstrate that private plans have not been innovators in cost management but have merely followed the government’s lead through measures such as private, managed care price fixing. Medicare’s prospective payment certainly is not perfect and will continue to be a work in progress, as it should be. Since Medicare controls the spending on less than 15 percent of our population, there are limits to its impact on shaping U.S. health care. But imagine the rich information of a universal Medicare program, and how that information could be used to improve health care value for all of us through a Medicare-type single payer monopsony.

What about rationing? The United States has the worst and most cruel form of rationing because we ration care based on ability to pay. Essential acute care is not rationed in any other nation. Some nations have excessive backlogs (queues) for non-urgent or elective services. But, according to the OECD, many other nations do not have excessive queues because they control them by appropriate monitoring of their systems and applying queue management techniques, or minor adjustments in capacity, if necessary. With the funds that we are already devoting to health care, rationing of beneficial services would not be necessary.

One more very important point: health care does not burden our economy; it is a part of our economy. In fact, health care is the fastest growing sector within our economy. It adds to our economic health. And it does so within our domestic economy, keeping dollars and jobs at home. Although we want far better value for our current health care spending, if health advances can provide greater value, we should encourage them. Economic analyses have demonstrated that we could double our health care enterprise without any negative impact on the other sectors of our economy.

So, Daniel, that is how single payer could control costs, if we want it to. But it is also how single payer could provide us with more health care with even greater value, if we want it to.