Saturday, September 12, 2009

Why Single-Payer Insurance Is the Best Solution for Our Health Care Woes

As I've documented earlier, the US has by far the most expensive health care system in the world, and we're basically the only developed country that does not guarantee access to health care. A big part of that is because of our terrible insurance system. Most Americans buy health insurance, either individually or as part of their employer's plan, from a number of private insurance companies. Although we are not the only developed country with a partially private health insurance sector, we have the system with the least public sector involvement and the least regulation, and the result is high economic and human costs.

The idea for years has been that competition forces companies to offer their products at lower prices. That's often true in some areas of our economy. Health insurance, however, is one sector in which the "invisible hand" of competition actually drives up costs. You don't have to be a socialist to see that, and to understand that we have to replace private insurance companies with a government-run "single-payer" plan to cut costs.

Under our current system, we pay premiums to health insurance companies, and in return they pay when we have to go to the doctor or to a hospital. In a single-payer system, the government acts as the sole payer for treatment, as the name implies. In return for citizens paying their taxes, the government guarantees health care access for everyone. It's way more efficient than a fragmented system of private insurers, and no one has to forego treatment because they don't have insurance.

Here's a couple reasons why single-payer insurance system would accomplish the three goals of health care reform I outlined back in August: universal coverage, lower health care costs, and improved health care outcomes.

1) Overhead and Profits

Private insurance companies have far higher administrative costs than single-payer systems, basically higher overhead. They need sales departments to add to their customer base, and huge marketing departments to bolster their image and attract more customers. Whereas single-payer systems get their premiums automatically through taxes, private plans have to have a billing department to make sure people pay. Because of the profit motive, they spend money to deny claims so they have to pay for less treatment, and they spend money to deny coverage to people who might cost them more to begin with ie. people with "pre-existing conditions." Finally, they pay massive salaries to their executives, which obviously doesn't happen in government agencies.

On average, overhead in the private industry ranges from 12-14%. In the small group market it's 25-27% and higher than 40% on the individual market (see here)! Meanwhile, the overhead for Medicare is somewhere below 3%, and the Canadian system has attained overhead below 1.5%.

Studies of insurance industry overhead generally don't include profits that go to shareholders, and they don't always include their spending on political contributions and lobbying. Jacob Hacker cites a study of profits of Medicare Advantage plans, a privatized portion of Medicare in which Medicare pays a private insurance company to cover a person. Those private plans spent 6.6% of premiums on profits! On the Bill Moyers Journal, former industry executive Wendell Potter explains how companies compete for Wall Street investment by paying the least amount of premium dollars on actual treatment that they can (here).

So between the motivation of profits and competition, private plans are far more inefficient than government-administered insurance plans. As Congressman Anthony Weiner is fond of saying, insurance companies basically take a piece of the action on every health care transaction, so who needs them? I'm sick and tired of liberals as well as conservatives defending the need to have a private health insurance industry. If the government can provide the same service for far less cost, than it should do so.

2) Administrative Costs Outside of the Insurance Industry

Overhead and profits aren't the only part of the story. A key study by Dr. Steffi Woolhander and Dr. David Himmelstein from Physicians for a National Health Care Plan found that 31% of our health care expenditures in total go to administrative costs, about twice that in Canada. They document how a private insurance system not only creates costs in overhead and profits, but creates costs on the health care delivery side as well because of its fragmented nature.

Because they have to handle payments from a number of different entities, hospitals, clinics, nursing homes, and doctors have to hire more clerical staff to deal with all the paperwork. On top of that, they spend a significant amount of time dealing with that paperwork themselves, time better spent treating patients. Furthermore, large employers have to hire clerical staff to deal with their insurance plans as well. Dr. Himmelstein finds that hospitals would save $120 billion in overhead and doctors would save $95 billion under a single-payer plan, which is well more than the $131 billion that would be saved from less overhead (see his testimony to Congress this spring here).

Dr. Himmelstein finds that a single-payer plan would save nearly $400 billion per year over our current system in lower administrative costs alone! Keep in mind that the mainstream Dems are looking for ways to cut the $1 trillion price tag of their reform plan over ten years. A single-payer plan would save our economy more than the entire cost of that 10 year plan in 3 years!

3) Negotiating Lower Prices

Because they take a piece of the action on each transaction, insurance companies don't have the incentive to negotiate lower prices with health care providers and pharmaceutical companies, nor do they have enough customers to have a lot of bargaining leverage. A single-payer plan obviously has the incentive because taxpayer dollars are at stake. Because a single-plan would cover so many people, it would have way more bargaining power. As a result, we would reduce overpayments to hospitals, doctors, and drug companies.

Here's a case in point. The Veterans Health Administration negotiates drug prices with pharmaceutical companies, and Medicare Part D does not. Consequently, the VA pays 49% less for the same drugs!

These savings can't be calculated in as straightforward a fashion as administrative savings, but they would certainly be huge.

4) Guaranteeing Health Care for All!

These savings would allow the government to pay for everyone's health care without co-payments and deductibles, according to Dr. Himmelstein and others. Because the government is accountable to the people, unlike insurance companies, nobody would be denied care or stuck with huge medical bills. Thus a single-payer plan would eliminate the problem of the un-insured and under-insured in one fell swoop.

Although single-payer is the only way to dramatically cut costs from our private insurance sector, it's not the only way to cover the un-insured and end under-insurance. For example, the Democrat's plan would cap what insurance companies can make consumers can pay out-of-pocket and require plans to have basic benefits to end under-insurance. It would ban denial based on pre-existing conditions and create subsidies to cover the un-insured.

However, the Congressional Budget Office found that 3% of Americans would still go without insurance under their best bill, HR 3200. 3% of Americans is no paltry sum. Single-payer is the only way to guarantee coverage for all. With universal coverage, we can save the lives of 18,000 Americans every year who otherwise would have died without insurance coverage.


So there you have it folks. As I said earlier, we have to keep in mind the basic goals of reform: universal coverage, lowering costs for families and businesses, and improving our health. Single-payer is the way to go because it achieves all three goals. Any "reform" plan that maintains a mostly private insurance system will not be able to cut costs nearly as much, and probably won't truly guarantee coverage for all.

A nice thing about single-payer is that you can still have a private health care delivery system. Doctors and hospitals would still be private entities (private hospitals, some hospitals are already public). The only difference would be that government would be the sole payer for your treatment. So single-payer is far from socialized medicine, it's just socialized health insurance.

Another thing to note is that we already have government-run insurance programs: Medicare, Medicaid, the VA, and several others. Primarily because older people need more health care and they're covered by Medicare, our government already pays for 47% of health care in the US! And as some of the examples I cite above demonstrate, it does so far more efficiently than private insurance companies. Some critics say that moving to single-payer would be too much of a disruption because it would be starting a system from scratch. But it would actually consist of building on government-run programs we already have. That's why a lot of single-payer advocates refer to the system as "Medicare-For-All."

I'll talk more about the politics of single-payer later on. For now let me say that currently single-payer doesn't have the votes to pass in Congress. John Conyers' single-payer bill in the House, HR 676, has 85 co-sponsors, which is great, but not enough to pass because of opposition from Democrats that favor the regulate-and-subsidize approach. No matter what passes or doesn't pass this fall, single-payer has to be the long-term goal of American progressives. It's the only way we can insure everyone and hold down costs that threaten to swamp our middle class and restrain our economy as a whole.

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