How Single-Payer Supporters Defy Common Sense

The move to enact single-payer health care in the United States always suffered from major math problems. This week, it revived another: Common sense.

On Monday, the Mercatus Center published an analysis of single-payer legislation like that promoted by socialist Sen. Bernie Sanders (I-VT). While conservatives highlighted the estimated $32.6 trillion price tag for the legislation, liberals rejoiced.

Riiiiiigggggggghhhhhhhhhttttt. As the old saying goes, if something sounds too good to be true, it usually is. Given that even single-payer supporters have now admitted that the plan will lead to rationing of health care, the public shouldn’t just walk away from Sanders’ plan—they should run.

National Versus Federal Health Spending

Sanders’ claim arises because of two different terms the Mercatus paper uses. While Mercatus emphasized the way the bill would increase federal health spending, Sanders chose to focus on the study’s estimates about national health spending.

Although it sounds large in absolute terms, the Mercatus paper assumes only a slight drop for health spending in relative terms. It estimates a total of $2.05 trillion in lower national health expenditures over a decade from single-payer. But national health expenditures would total $59.7 trillion over the same time span—meaning that, if Mercatus’ assumptions prove correct, single-payer would reduce national health expenditures by roughly 3.4 percent.

Four Favorable Assumptions Skew the Results

However, to arrive at their estimate that single-payer would reduce overall health spending, the Mercatus paper relies on four highly favorable assumptions. Removing any one of these assumptions could mean that instead of lowering health care spending, single-payer legislation would instead raise it.

First, Mercatus adjusted projected health spending upward, to reflect that single-payer health care would cover all Americans. Because the Sanders plan would also abolish deductibles and co-payments for most procedures, study author Chuck Blahous added an additional factor reflecting induced demand by the currently insured, because patients will see the doctor more when they face no co-payments for doing so.

Second, the Mercatus study assumes that a single-payer plan can successfully use Medicare reimbursement rates. However, the non-partisan Medicare actuary has concluded that those rates already will cause half of hospitals to have overall negative total facility margins by 2040, jeopardizing access to care for seniors.

Expanding these lower payment rates to all patients would jeopardize even more hospitals’ financial solvency. But paying doctors and hospitals market-level reimbursement rates for patients would raise the cost of a single-payer system by $5.4 trillion over ten years—more than wiping away any supposed “savings” from the bill.

Finally, the Mercatus paper “assumes substantial administrative cost savings,” relying on “an aggressive estimate” that replacing private insurance with one single-payer system will lower health spending. Mercatus made such an assumption even though spending on administrative costs increased by nearly $26 billion, or more than 12.3 percent, in 2014, Obamacare’s first year of full implementation.

Likewise, government programs, unlike private insurance, have less incentive to fight fraud, as only the latter face financial ruin from it. The $60 billion problem of fraud in Medicare provides more than enough reason to doubt much administrative savings from a single-payer system.

Apply the Common Sense Test

But put all the technical arguments aside for a moment. As I noted above, whether a single-payer health-care system will reduce overall health expenses rests on a relatively simple question: Will doctors and hospitals agree to provide more care to more patients for the same amount of money?

Whether single-payer will lead to less paperwork for doctors remains an open question. Given the amount of time people spend filing their taxes every year, I have my doubts that a fully government-run system would generate major improvements.

But regardless of whether providers get any paperwork relief from single-payer, the additional patients will come to their doors seeking care, and existing patients will demand more services once government provides them for “free.” Yet doctors and hospitals won’t get paid any more for providing those additional services. The Mercatus study estimates that spending reductions due to the application of Medicare’s price controls to the entire population will all but wipe out the increase in spending from new patient demand.

If Sanders wants to take a “victory lap” for a study arguing that millions of health care workers will receive the same amount of money for doing more work, I have four words for him: Good luck with that.

Health Care Rationing Ahead

I’ll give the last word to, of all things, a “socialist perspective.” One blog post yesterday actually claimed the Mercatus study underestimated the potential savings under single-payer: “[The study] assumes utilization of health services will increase by 11 percent, but aggregate health service utilization is ultimately dependent on the capacity to provide services, meaning utilization could hit a hard limit below the level [it] projects” (emphasis mine).

In other words, spending will fall because so many will demand “free” health care that government will have to ration it. To socialists who yearningly long to exercise such power over their fellow citizens, such rationing sounds like their utopian dream. But therein lies their logic problem, for any American with common sense would disagree.

This post was originally published at The Federalist.

What’s Going on with Spending on Health Insurance Overhead?

Even as federal regulators take steps to constrain administrative spending by private health insurers, government overhead on health coverage has soared.

In a Health Affairs blog post published Wednesday, David Himmelstein and Steffie Woolhandler use actuarial estimates from the Centers for Medicare and Medicaid Services to project that between 2014 and 2022, national spending on private insurance overhead and government administration will rise by $273.6 billion related to the health-care overhaul.

The authors both favor single-payer health insurance; Mr. Himmelstein co-founded Physicians for a National Health Program, an advocacy organization directed to that end. They close their piece by saying that “In health care, public insurance gives much more bang for each buck.”

Yet overhead in the public sector is growing much faster than in the private sector.

Mr. Himmelstein and Ms. Woolhandler combine two categories of spending—government administration and the net cost of private insurance (i.e., overhead)—to reach their estimates of administrative costs. Combining the two categories masks significant differences. While private insurance overhead is projected to rise at an average annual rate of 8.2% between 2014 and 2022, government administration is projected to rise at a 22.7% annual rate—nearly three times as fast. That’s consistent with my 2012 analysis, which noted that federal actuaries projected double-digit increases in spending on government administration for three of the first four years of Obamacare implementation (2011, 2012, and 2014).

This week federal regulators proposed extending medical-loss ratio requirements—a price control on overhead spending—to Medicaid managed-care plans. Meanwhile, several state-run insurance exchanges face financial difficulties, with structural challenges to their ability to attain self-sufficiency while limiting their charges on consumers to only a small share of premiums. The growing spending on bureaucracy reported in Health Affairs suggests that regulators should perhaps focus first on increasing efficiency and reducing government’s own costs before issuing more requirements on the private sector—such as the 653-page regulations issued Wednesday—that attempt to pass them on to consumers.

This post was originally published at the Wall Street Journal Think Tank blog.

Is Medicare Spending Increasing?

The Department of Health and Human Services released a report this month highlighting the slowdown in Medicare spending growth in recent years. The administration says that Obamacare has led to slower growth in overall health spending, which in turn has made Medicare more sustainable. Another government document suggests that Medicare spending may be accelerating—but even if it isn’t, demographic trends will create pressure on the program in the coming years.

The HHS report compared Medicare growth rates from 2000 to 2008 with rates from 2009 to 2013, and found that $316 billion was saved over the latter period. The calculation includes Medicare savings for the year before Obamacare was enacted, which indicates that the law cannot be fully responsible for the slowdown. Some reports have suggested that much of the slower growth in health spending has stemmed from lingering economic weakness, though studies and experts differ on this point.

But in the week before this report was published, HHS undercut its message by acknowledging that Medicare spending has accelerated in recent months. The Centers for Medicare and Medicaid Services initially proposed a payment decrease for Medicare Advantage plans in 2016, but its final call letter proposed a payment increase, which it attributed to recent spikes in Medicare fee-for-service (FFS) spending:

The 2.5 percentage point increase from the Advance Notice to the Final Notice comprises 1.9 percentage points of additional FFS spending through 2015, an underlying additional FFS trend rate of 0.6 percent for 2016, and 0.1 percent for the assumption that Congress will enact the pending [“doc fix”] legislation….Initial information from Medicare actuaries suggests that contributing factors behind the change from the preliminary growth rate include higher than expected spending on impatient hospitalizations and some intermediary services such as therapy, rural health clinics and federally qualified health centers.

In other words, Medicare Advantage plans did not cut payments for the upcoming year because Medicare’s actuaries have observed an uptick in spending for traditional Medicare. It’s possible, then, that the trend of slower spending growth highlighted in the HHS report may have ended.

Even if the growth in Medicare spending stops, demographic trends in the coming decades will still force a re-examination of the program. The onslaught of retiring baby boomers—an average of 10,000 per day for two decades—will define our fiscal future for the next generation. Whether or not growth in Medicare spending remains slow for years to come—and some trends suggest that it won’t—federal policy makers still have good reason to prioritize right-sizing of entitlement programs.

This post was originally published at the Wall Street Journal Think Tank blog.

Brookings v. Dartmouth on Health Costs

The Brookings Institution released a study last week that could turn the debate over health spending on its head. While many health analysts—including several key advisers to the administration during the debate over Obamacare—believe that variations in physician practice patterns could represent the key to unlocking a more efficient health system, the Brookings paper questions the degree to which such variations even exist.

At its core, the debate boils down to a difference in two econometric models, both of which attempt to explain geographic variations in spending— for instance, why Medicare spends so much more per patient in Miami than in Minneapolis. Researchers affiliated with the Dartmouth Atlas of Health Care previously found what they consider large, unexplained variations in health spending. Their research—which examines data from individual Medicare beneficiaries, controlled for health status—led them to conclude that differences in physician behavior may account for much of the unexplained spending variations.

The Brookings study, however, uses a different model, one that examines spending data from the state level, and controls those state data using average health attributes in that state, rather than using data from individual Medicare beneficiaries. This state-based model explains much more of the previously unexplained geographic variation in spending, arguing that states with similar demographics have similar spending levels. As a result, the Brookings paper concludes—contra­ Dartmouth—that “geographic variation in health spending does not provide a useful way to examine the inefficiencies of our health system.”

It’s unclear who has the more accurate model, and why. While Brookings’ state-level model incorporates data from both Medicare and non-Medicare beneficiaries, the Dartmouth research focuses just on Medicare patients—and may therefore be skewed by traits particular to the Medicare program, or Medicare beneficiaries, that do not apply to the population as a whole.

The debate over spending variations has profound policy implications. Former Obama administration official Peter Orszag, who has cited Dartmouth research in his writings, believes that variations in physician practice patterns—doctors performing too many tests, for instance—lie at the root of the unexplained variations in spending.  Mr. Orszag and others used this theory to inform many policy choices related to Obamacare, which included a variety of carrots and sticks that attempted to change physician behavior and reduce spending variations.

The Brookings study undermines the basis of the Dartmouth thesis, and one of the reasons why Obamacare’s adherents believe the law will ultimately reduce health costs. Despite its arcane details, the debate between Dartmouth and Brookings will have profound real-world consequences for our health system in the coming years.

This post was originally published at the Wall Street Journal Think Tank blog.

How Politics and Policy Could Accelerate Health Spending

Medicare actuaries’ annual projections of health expenditures for the next decade emphasized that health spending will rise modestly in the coming years. However, decisions by the administration and Congress to undo future spending reductions could change that picture.

The Wednesday release showed that national health spending will grow at a 5.6% rate this year, due in large part to coverage expansions under the Affordable Care Act, or Obamacare. In 2015, the actuaries estimate that health spending will rise at a slightly lower 4.9% pace, due to “significant decelerations in Medicare and Medicaid spending.” But policy makers may yet reverse the policies behind those projected slowdowns.

With respect to Medicaid, the actuaries noted that in 2015, a “temporary increase in payments in primary care providers is scheduled to expire,” leading to slower spending growth. But spending growth would accelerate if lobbying by numerous medical groups is successful in extending — and broadening — the payment provision.

Likewise, the actuaries note that in 2015, Medicare spending will grow at a much slower rate, “mainly as a result of reduced payments to Medicare Advantage plans.” However, the Medicare Advantage payment reductions included in Obamacare have become a political albatross. In 2011, fearing seniors’ wrath at the polls in 2012, the Obama administration announced a temporary—and legally dubious—Medicare Advantage demonstration program that mitigated much of the effects of Obamacare’s payment cuts.

The administration also scaled back other rounds of Medicare Advantage cuts in 2013 and 2014. If past performance is indicative of future results, some or all of these cuts could be reversed administratively, leading Medicare spending growth to rise instead of fall in 2015.

The analysis above demonstrates the extent to which policy choices made in Washington directly influence national health spending trends. To the extent that reductions in health spending programs become politically unpalatable, and Congress or an administration feels the need to undo them, our health spending growth—to say nothing of our fiscal deficits—will only increase.

This post was originally published at the Wall Street Journal Think Tank blog.

Obamacare Number of the Day: $621,000,000,000

People worried about Obamacare’s impact on the American health care system should remember one key number: $621 billion. That’s the amount that non-partisan actuaries at the Centers for Medicare and Medicaid Services (CMS) said Obamacare would increase national health spending over the next 10 years, in a report released yesterday. So much for the law being the “Affordable Care Act.”

In addition, the report by the CMS actuaries debunked the notion that Obamacare helped cause the recent slowdown in health spending—or that the slowdown is likely to continue:

Annual national health spending growth is projected to remain near 4 percent through 2013, primarily as a result of the recent recession and modest recovery. This projection is consistent with the historical relationship between health spending and economic cycles….

Continued slower health spending growth after the recent economic downturn has raised the question of whether a more fundamental change is occurring in the health sector. However, econometric and actuarial analysis by the CMS Office of the Actuary of the past fifty years of National Health Expenditure Accounts data…suggests that health spending growth is likely to accelerate once economic conditions improve significantly.

Instead, the actuaries conclude, the recession and anemic economic recovery bear the bulk of the “credit” for the current slowdown in health spending growth.

Finally, the actuarial report analyzes the sources of some of the increased health spending due to Obamacare. And, as Exhibit 4 (below) notes, one of the fastest sources of growth in the health sector will be “government administration.” Spending on government administration—which includes salaries for federal, state, and local bureaucrats, as well as computer and other overhead costs for government programs—will more than double, rising from $31.1 billion in 2010 (the year Obamacare passed) to $70.4 billion in 2022.

Exhibit4

So even as Obamacare is raising overall health spending, despite the lingering effects of the economic recession, more of that spending will pay the salaries of government bureaucrats and regulators. That’s not the kind of change Americans can believe in.

This post was originally published at The Daily Signal.

Health Care Spending Growth

Background:  Last month, the Centers for Medicare and Medicaid Services (CMS) released its annual report projecting health care spending over the next decade.  The report concluded that nationwide health expenditures are expected to rise 6.7% annually in the next ten years, causing health care spending to rise to 19.5% of gross domestic product (GDP) by 2017.  These projections are consistent with a November report by the Congressional Budget Office (CBO) highlighting the long-term projections for health care spending, which estimated that health expenditures could comprise just under half (49%) of GDP within 75 years.

Ten Year Projections:  The report by the CMS actuaries, released online by the journal Health Affairs, documents the continued growth in health care spending and hints at upcoming trends associated with the retirement of the Baby Boom generation.  In 2007, health care spending is projected to have grown at a 6.7% rate, reaching $2.2 trillion, or approximately 16.3% of GDP.  The report provides a snapshot of current health expenditures, and also cites several projected spending trends over the next decade:

  • Private health insurance premiums grew at a slower rate (6.0%) than overall health care expenditures in 2007, consistent with trends evident since 2004.
  • Prescription drug spending grew by 6.7% in 2007, a measurable slowdown in spending when compared to the increases for the prior two years (12.0% in 2005 and 8.5% in 2006), due in large part to increased price competition and generic drug usage.
  • Private spending on health care is projected to grow more slowly in the latter part of the projection period (2007-2017), while public spending “is expected to accelerate…as the leading edge of the Baby Boom generation becomes eligible for Medicare.”  While the aging population will have minimal effects on overall health expenditures, its effects on public spending, particularly through Medicare, will be significant.
  • Enrollment in private Medicare Advantage plans is expected to rise to 27.5% by 2017, up from 16.4% in 2006.
  • Just over half of the growth in health care spending comes from increases in medical costs, with about one-quarter of the increase due to utilization (volume and intensity of services), and the remainder due to population growth, demographics, and related factors.

Overall, the report’s conclusions indicate that although all health spending continues to rise, the increase in public health spending has accelerated.  While the competition created by the Medicare prescription drug benefit may have contributed to the considerable slowing in pharmaceutical expenditures, an aging population moving to Medicare will only hasten the growth of public spending.

In fact, the true size of the government’s future obligations for health spending is likely underestimated by the model used in the actuaries’ report, which presumes that existing law adjustments in physician reimbursements under the sustainable growth rate mechanism (SGR) will take effect.  If the SGR’s proposed reductions are instead replaced by a 0% increase—in other words, if physician payments are held steady through 2017—Medicare spending will rise by 8.0% annually over the next decade, instead of the 7.4% projected under the trustees’ current law model.

Historical Examples and Long-Term Projections:  The report produced by the CMS actuaries follows on the heels of a study, conducted by CBO and released in November 2007, which examined both historical trends in health care spending and long-term projections for its growth over the next 75 years.  Most notably, the report documents a historical shift in health care expenditures: a significant reduction in out-of-pocket spending, which declined from 31% to 13% of all health expenditures between 1975 and 2005, and the nearly commensurate increase in third-party payment by insurance carriers, which increased from 25% to 37% of health spending nationwide.  While the growth in new technologies and services has helped drive the growth in health spending which CBO documents, the continued rise of third-party payment—which can insulate patients from the marginal costs associated with additional treatments—may well have had inflationary effects.  This shift away from out-of-pocket spending occurred despite the findings of a landmark RAND Institute study, which concluded that higher cost-sharing helped constrain health care spending at little to no adverse effect on patients’ health.

On a forward-looking basis, CBO projects that overall health care spending will more than double in the next thirty years, rising from 14.9% of GDP in 2005 (and 4.7% in 1975) to 31% in 2035, growing thereafter to nearly half the nation’s economy (49% of GDP) in 2081.  The net federal spending on Medicare and Medicaid is projected to rise at a higher rate than overall health spending, growing from 26% of total spending on health care currently to 30% within thirty years, and 38% of total spending by 2082.

These 75-year projections are materially divergent from the projections made by the Medicare trustees in their annual report.  The trustees project Medicare spending to consume nearly 11% of total GDP by the end of the projection period, while CBO estimates that Medicare will consume more than one in six dollars spent in the United States (17% of GDP).  As the Medicare trustees’ projection notes $36 trillion in unfunded liabilities for the program over the next 75 years, the significantly higher projections made by CBO in its study should provide yet another impetus to enact comprehensive entitlement reform that addresses the unchecked growth in health costs.

Excess Cost Growth:  Both the CMS actuaries’ report and the CBO study projecting long-term health expenditures highlight the issue of excess cost growth in health care.  In this context, “excess cost growth” does not imply a value judgment as to whether or not the spending is necessary or appropriate; rather, the term connotes spending that exceeds economic and productivity growth.  For instance, the CMS actuaries project that health spending will rise by 6.7% over the next ten years, while nominal (i.e. non-inflation-adjusted) GDP will rise by 4.7%, resulting in excess cost growth of 2.0% annually for the decade.

The CBO report projects that the growth of overall health care spending will exceed the rate of economic growth by more than 2% annually for at least the next decade, and will continue to exceed economic growth throughout the entire 75-year projection period.  The report also projects that excess cost growth for Medicare and Medicaid will continue at rates far exceeding cost growth within the private sector,  noting that “that aspect of the projections may appear unrealistic, but it highlights the core problem—the unsustainability of current federal law.”

Over and above the unrealistic nature of the promises made in current federal law, and the need for comprehensive entitlement reform to remedy a looming fiscal crisis for Medicare, the excess cost growth discussed in the CBO report could also have significant macroeconomic implications by displacing other spending.  While CBO projects that per capita economic consumption will increase by $15,000 (in current dollars) from 2005-2035, more than three-quarters of that higher spending will be spent on health care.  Absent external action, health care costs could grow to consume all marginal increases in economic productivity—at which point both consumption and growth of other sectors of the economy could stagnate, and standards of living apart from health care (e.g. clothing, housing, etc.) could fall over time.  Although this pessimistic scenario remains somewhat distant, it highlights the need to understand the factors behind the growth in health spending, and substantially reduce excess cost growth in the coming years.

Geographic Variations:  Another CBO report issued in February examined one source of excess cost growth in health care: geographic variations in total spending.  The report notes that state per capita health expenses in 2004 ranged from a low of about $4,000 in Utah to a high of nearly $6,700 in Massachusetts—a more than 50% disparity.  Analysis of Medicare claims data showed a similar disparity among states—ranging from a per-beneficiary expenditure of $5,600 in South Dakota to $8,700 in Louisiana—and additional variations in areas within states.

The report also notes that geographic differences in price inputs (i.e. cost of labor, etc.), health status, and demographic factors (e.g. income, race, education level) likely constitute at most half of the observed deviation in expenditures, meaning that much of the geographic variation in health spending cannot be explained by known factors.  In other words, similar patients with similar diseases, living in areas with similar prices, are likely to receive differing levels of medical treatments and services.  Of particular note is the fact that patients living in areas with higher spending yield no better results with respect to both health processes and outcomes than patients in low-spending areas—and on some measures at least may receive worse care.

While the CBO report cites studies attributing some geographic variations in health spending to areas with a high supply of health providers (particularly hospitals and specialist physicians) creating additional demand for services, competition among a greater number of providers is likely to exert downward pressure on prices, if not the number of services performed.  To the extent that geographic variation in health costs are in fact driven by excess supply, some conservatives may be wary of government efforts—such as a Certificate of Need model for approving new hospital construction, or restrictions on physician-owned specialty hospitals—that impose bureaucratic regulations to stifle the supply of health providers, as they are likely to have adverse and unintended consequences that reduce access to care.  Many conservatives might prefer a more productive solution focused on mechanisms to place reasonable restraints on demand, by reducing the historical trends that have increased reliance on third-party payment, and making price and quality measures more transparent, so that consumers can have more information about available treatment options—and make a rational choice as to whether or not the additional treatment justifies the marginal cost.

Summary and Conclusions:  The growth in health care spending projected in the coming decades, following upon years of sustained increases, is likely to place significant and exacting demands on both the private and public sectors of the American economy absent external action.  Many conservatives believe that a discussion of ways to stem the growth in health care costs should be a part of any discussion to achieve so-called universal coverage, as health insurance would become much more affordable for all Americans at the point when premium costs and related expenditures rise at a more modest (and therefore more sustainable) rate.

The geographic variations in Medicare spending, particularly those portions of which cannot be explained by regional differences in income or health status, might prompt some Democrats to call for a centralized, government-controlled mechanism to reduce spending in higher-cost areas, likely through rationed care.  One popular variation on this approach has emerged in the form of comparative effectiveness, which would attempt to conduct research on the cost-effectiveness of various treatment options with an eye towards establishing more uniform practice standards.  While such efforts by the private sector could help reduce costs, many conservatives might have strong concerns as to whether a government-run effectiveness institute—such as the center proposed by Democrats in a wide-ranging health bill last July (H.R. 3162), which would have been funded by tax increases on insurance premiums—would result in a federal bureaucracy micro-managing the doctor-patient relationship, and ultimately, rationing care to patients.

A better alternative might lie in the data showing that private health spending is not rising as dramatically as expenditures on public health programs, suggesting that competition—and placing health care dollars in control of patients—holds the true solution to containing health costs.  The significant decline in out-of-pocket spending over the past three decades, and the escalating rise in costs during that time, demonstrate the perils associated when third-party payment of health expenses, particularly incidental (i.e. non-catastrophic) expenses, insulates patients from the marginal costs of additional treatment.  Likewise, the geographic variations in Medicare spending stem from a publicly-funded system where the costs for additional treatment can be minor—especially in areas where a high percentage of seniors own Medigap policies that can insulate beneficiaries from any increase in marginal costs.

The funding warning issued by the Medicare trustees, and the subsequent action required by Congress to act on legislation addressing this “trigger,” provides an opportunity for conservatives to construct a system designed to address the geographic variations in Medicare costs—with an impact that could stretch throughout the entire health system.  An improved and enhanced Medicare system similar to the Federal Employee Health Benefits Plan (FEHBP)—where beneficiaries receive a defined contribution from Medicare to select a health plan of their choosing—would eliminate much of the geographic variations currently present within Medicare, slowing the growth of health costs and restoring the program’s long-term stability.