The Future of the U.S. Healthcare System – Part 2

Contributor: Roy Goldman, PhD,FSA, MAAA, CERA
To learn more about Roy, click here


image003.jpgThis article is Part 2 of our discussion of the future of the U.S. healthcare system. In Part 1 recommendations were made for stabilizing the individual insurance market while preserving the twin goals of providing access to affordable, robust insurance coverage regardless of health conditions and regardless of income.  While the recommended changes would lower and stabilize premium rates, they will not necessarily slow the growth in the unit costs of healthcare services.  Some have suggested that a single-payer system is necessary to lower costs. In Part 2, Dr. Goldman will discuss the meaning and pros and cons of a universal healthcare system, of which a single-payer system is one example. He will suggest an approach he thinks is necessary to make such a system successful in reducing costs.

Is single payer a solution?
Absent any fix to the ACA, and the likely increase in the uninsured rate, many people are now arguing that it would simply be better to cover “everyone” in a “single-payer system.” But what is meant by “a single-payer system?” What are the pros and cons of such a system, and how could it be made to work in the United States?

What is a single-payer system?
The user of this term usually expects the federal (or state) government to finance health insurance coverage for all residents. The government is both the payer of claims and the insurer (i.e., the risk taker).  Despite the rhetoric, Canada and Taiwan are the only two industrialized countries with this type of system. Is a single-payer system “socialized medicine?” No; neither of these systems are examples of “socialized medicine,” as their governments do not own the hospitals and other facilities, nor do they employ the physicians and other providers. In the UK, the National Health Service, not the government, owns the providers.  In the U.S., the Veterans Health Administration is an example of “socialized medicine.”

Sometimes the speaker, mistakenly, refers to a “single-payer system like Medicare.” It is true that most of the funding of Medicare benefits comes from payroll taxes (Part A) and general taxes (Part B) collected by the government. However, only Traditional Medicare (Parts A and B) can be considered a single-payer system. Over 1/3 of Medicare beneficiaries have Medicare Advantage plans (Part C) through private insurers who provide benefits and take risk in place of Traditional Medicare. In addition, the retail prescription drug component of Medicare (Part D) is insured by private payers, who receive per capita payments along with reinsurance and low-income subsidies from the federal government.  

Often the term “single-payer” is used when what is meant is “universal healthcare.” As defined by the World Health Organization, a Universal Healthcare System (UHC) provides all people with access to needed health services in sufficient quality to be effective, without exposing the user to financial hardship. The key point is the U.S. is the only industrialized country in the world without a UHC. 

A single-payer system is only one type of UHC. Most countries’ systems fall in one of two broad categories:

insurance mandates - all citizens must purchase standard minimum coverage from private insurers (usually not-for-profit) or a public option; often there is no underwriting, and subsidies exist for low-income families. Examples include Switzerland, Germany, Japan, and the Netherlands.

a combination of single payer and private insurance; examples are the UK, France, Singapore, and Sweden. 

What are the pros and cons of a single-payer system or other type of UHC?
As is well known, compared to the other 32 OECD (Organisation for Economic Co-operation and Development) countries, healthcare in the U.S. is the most costly per capita, and we spend a greater percentage (16.9% in 2015) relative to gross domestic product. The cause is not a mystery: the unit cost of healthcare services is greater in the U.S than in other countries.

However, despite spending more, the U.S. ranks quite low compared to other OECD countries on certain quality of life measures, such as life expectancy at birth and infant mortality rate.  On the other hand, the U.S. has some of the best acute care in the world; excelling, for example, in cancer care.  We also rank high in innovation and patient-centered care. Other countries achieve better public health outcomes, but they do so by combining healthcare spending with generous spending for social services. As a result, many countries have higher general tax rates than the U.S. The main disadvantages cited for other countries’ systems are delays in access to routine procedures and fixed budgets that lead to rationing of care. Of course, an argument can be made that in the U.S. we also ration care, as access, quality, and affordability all vary based on income, geography, and race.

Are there cost savings?
Many believe there would be cost savings from efficiencies in administering a single-payer system. Currently, every insurer negotiates payment rates with healthcare providers, and every provider tries to strike the best deal with insurers.  Every insurer has different procedures even if the claim forms are uniform. Clearly, there would be savings if all providers had to follow one payer’s rules. But who would set the providers’ payment rates and rules? In Traditional Medicare, the government sets a uniform method for determining payment rates, which many providers find to be insufficient.

Some point to Traditional Medicare’s low administrative costs compared to private insurers (as a percentage of claims paid) as an example of savings we could expect in a single-payer system. But this analysis is too simplistic. Medicare’s administrative costs are misleadingly low for several reasons. The most important one being that Medicare’s administrators exercise very little oversight over the quantity or medical necessity of claims submitted for payment. Unlike private insurers, Medicare does not employ nurses, physicians, and social workers who provide services directly to beneficiaries and providers to: coordinate care, especially for those with complex conditions; encourage preventive care; monitor drug utilization; and, in general, reduce unnecessary hospital stays and duplicative tests.   Private insurers do all this, while still achieving quality outcomes. As a result, Medicare Advantage plans can provide Part A and Part B benefits for less than Traditional Medicare in most parts of the country.  The savings (called “rebates”) are used to provide additional benefits, thus sparing insureds the need to purchase a costly Medicare Supplement plan and, often, a separate Part D plan.

The focus on savings must be on the 85-90% of the dollars that go to cover medical expenses. There is plenty of evidence among private insurers that higher administrative costs can produce lower total costs. The history of Traditional Medicare has shown the power to set providers’ rates is not sufficient to control the growth of healthcare costs. There needs to be some control over utilization as well. In a working paper published in August, 2013 by the Congressional Budget Office, one of reasons given for the slower growth in Traditional Medicare is the positive effect Medicare Advantage has had on physicians’ practices. 

To be successful in administering a health insurance program for the entire country, a single insurer would need many of these same resources as private insurers employ today. These include: membership, claims, and customer care professionals; analysts and actuaries; pharmacists, physicians, and nurses: and management personnel. 

Alternative Futures for the U.S. Healthcare System
Taking all these arguments into account, I suggest a possible future single-payer alternative would designate the federal government as the single payer and insurer, but the government would bid out the management of the health system to private companies who would perform the functions that private insurers do now for a fixed fee.  These firms would be responsible for providing administrative services to beneficiaries and providers, coordinating beneficiaries’ care, designing incentive systems for providers to deliver quality care in the most efficient manner, and developing incentive systems for members to take better care of themselves. The winning bidders would have targets for cost and quality and would compete for the business in various geographical areas. If they exceed these targets, bonuses may be payable. This proposal has not been discussed broadly, but it seems to me the only way to have a single-payer system that saves some administrative expenses while retaining control over quality and cost of services.

For those who are looking for universal healthcare that avoids a single payer, one needs a system with a strong mandate for everyone to purchase coverage from competing insurers including, possibly, the federal government. Republicans have proposed something like this as an alternative for Medicare, although Medicare, with Medicare Advantage, is actually doing quite well as it is. They call their idea “Managed Premium Support.” In their scheme, beneficiaries would be given a fixed amount of money. They could choose what coverage and which public or private insurer they want, spending more or less than the amount allotted. This approach raises the question of whether this fixed amount would grow sufficiently over time. However, one could construct a system where the support level is determined by, say, the second-lowest cost standard plan. Sound familiar? Another question is whether the federal government would be a “fair competitor” given the leverage it has with providers. Without the federal government participating, the competition would be similar to private insurers competing under the ACA. Indeed, if the ACA had a stronger mandate along with the other changes recommended in Part 1 of my paper, the ACA could be a model for a UHC in the U.S.  

It is ironic that those who favor Medicare Premium Support generally oppose the ACA, while those who support the ACA are disinclined to favor a similar approach for Medicare. This is an example of the fuzzy thinking that has stalemated any real improvements to our healthcare system.  


Contact Roy at: [email protected]