Comments by Himmelstein and Woolhandler on Hsiao draft report "Achieving Affordable Universal Health Care in Vermont"

By Drs. Steffie Woolhandler and David Himmelstein

Submitted on Mon, Jan 24, 2011

Dear Dr. Hsiao,

1- We are convinced that hospital global budgeting would generate substantial additional administrative savings.   This conviction is based both on strong anecdotal evidence and some systematic studies.  Canadian hospitals do little of the internal cost tracking needed to attribute costs and charges to individual patients.  Anecdotally, this allows a typical Canadian hospital to employ fewer than 5 billing personnel, vs. 50 or more for a U.S. hospital.  Some years ago we learned that Toronto General had about a dozen people in its billing department whose main task was to send bills to Americans who wandered across the border.  At that time, the MGH had 352 FTE billing personnel.  We're told that the current number at the MGH is closer to 1000.  This is reflected in the 10 percentage point difference in administration's proportion of hospital costs between the U.S. and Canada, far larger than the roughly 2% that you estimate could be saved under your options 1 or 3 (  Our studies of the number of administrative personnel employed in U.S., Canadian and German hospitals yield similar estimates of potential savings through global budgeting, and indicate that a unified per-patient billing system (as in Germany) is far less administratively streamlined ( and Himmelstein, D. U., et al., "The Health Care Labor Force: U. S., Canada, and Western Germany," unpublished contractor report prepared for the Office of Technology Assessment, U.S. Congress, Washington, DC, Mar. 19, 1993.).  In the U.K., hospitals also beefed up their administrative staffs when the internal market was promulgated, and the director of the Karolinska Hospital in Stockholm told David that the advent of per-patient payments had caused at least a doubling in that hospital's administrative costs.

2- We're very concerned about your failure to recommend that hospital capital budgets be allocated separately from their operating revenues.  Deriving hospital capital largely from the surpluses they accumulate out of their operating budgets means that profitability determines investment, negating any real possibility for health planning.  Allowing hospitals to divert unspent operating funds to capital investment also provides incentives for hospitals to amplify profitable services such as elective orthopedic and cardiac procedures, and shrink needed but unprofitable ones such as psychiatry and primary care.  We're similarly concerned about the plan to allow ACOs to keep any surplus they don't spend on their patients.  Such incentives will guarantee cherry picking and the neglect of important but unmeasured care.  Regulatory efforts and quality measurement are no match for the cleverness of those who will game the system.

3- Your endorsement of P-4-P is unsupported by any reasonable evidence.  The extensive British experience indicates that you get more of what you pay for, but with substantial undesired side effects on aspects of care that are not incentivized.  Recent studies from the MGH indicate that P-4-P targets are far harder to achieve when caring for low income, minority or mentally ill patients. Moreover, interesting data from behavioral economics suggests that such schemes may well worsen performance of complex tasks (see the video at: for an entertaining introduction to this literature from writer Daniel Pink).

4- Microsimulation models inaccurately predict changes in utilization that result from system-wide changes in the comprehensiveness of coverage because they assume  no supply limit.  Given the shortage of primary care physicians in much of Vermont it is implausible that the more comprehensive benefit package would cause much increase in primary care visits.  Similarly, unless hospital capacity were greatly expanded, dropping financial barriers to hospitalization would not be likely to cause a large increase in inpatient care.  The proof of this lies in data from Canada.  In Quebec, there was virtually no change in aggregate utilization of physician care with the elimination of financial barriers in 1971.  The poor and sick saw doctors more frequently, while the wealthy and healthy waited a bit longer for appointments and saw their doctors a bit less often (  Similarly, Saskatchewan saw little decrease in aggregate physician visits when co-payments for outpatient care were added, and not much increase when they were subsequently dropped (  Bob Evans has noted that physicians almost always work the same number of hours, regardless of the MD/Population ratio, and the Dartmouth data make a convincing case that this is so.  Hence, we'd suggest that your estimates of the cost of comprehensive benefits are too high.

5- While we find much to like in your Model 1 with comprehensive benefits, even that plan cannot be properly labeled "single payer" since it would retain (at least initially) Medicare and Medicaid (and apparently Medigap plans as well).  We'd suggest calling this plan (and Model 3) "Oligopayer" options.  If (as we understand that you advocate) Medicare and Medicaid were folded in at a later date and Medigap eliminated, only at this more advanced stage would the system properly be termed single payer.

6- Finally, we are unaware of evidence to support your claim that contracting out claims payment etc. to a private insurer will produce savings, and would urge you to review the evidence to the contrary.  The initial Saskatchewan experience (reviewed in: Horne JM, Beck RG.   Further Evidence on Public versus Private Administration of Health Insurance.  Journal of Public Health Policy 1981) led the Hall Commission that recommended nationwide adoption of the single payer approach to conclude:  "Hence the decision which Canadians have to make is whether they wish to pay $1,027 million in 1971 for a programme administered by the insurance industry, or $837 million for a programme administered by government agencies."  At present, Canadian public payers average about 1% overhead, far lower than any of the private contracted payers that you cite.  Moreover, it seems likely that after the initial bidding process, barriers to entry for competitors will be steep since the initial winning bidder will have a decisive advantage in having built the payment infrastructure (computer programs, provider rosters etc.).  Moreover, a private firm would have strong incentives to increase the complexity and cost of administration, and hence boost its revenues.

Thanks in advance for your consideration.  We'd be happy to discuss these issues with you further if you wish.