The core appeal of the 2020 Democratic presidential candidate’s Medicare-for-All proposals, whether it’s optional buy-ins floated by moderate Democrats or Sen. Bernie Sanders’s comprehensive single-payer reforms, is the notion that enormous savings could be generated by dispensing with private insurance.
Advocates claim that that insurer profits, as well as costs associated with managing risk and advertising plans, could be dispensed with. They also argue that hospitals could be saved the costs of billing multiple insurers, and that hospital fees could be greatly reduced by imposing Medicare rates, which are 40 percent lower. Many of these assumptions have been granted even by conservative analysts, seeking to demonstrate the astronomic costs associated with single-payer proposals in even best case scenarios.
Yet, it is notable that no such savings have ever materialized—even under the most propitious of circumstances. No federal law stops states from unilaterally fixing hospital rates and establishing a public option or single-payer plan, funded through state taxes—but not even the bluest of blue states have taken more than the most tentative of steps in this direction. Vermont abandoned proposals for a single-payer scheme when it became clear the proposal would require a doubling of state taxes. Proposals for single-payer in New York were kicked into the long grass by Gov. Andrew Cuomo when the promised easy savings needed to finance the reform proved similarly unforthcoming.
The recent evolution of a proposed public option in Washington State, as recounted by Charles Gaba of ACAsignups.net, offers another opportunity to see politicians walk back the promises of Medicare for All as trade-offs present themselves.
First, it became clear that to be a competitive alternative to private plans, a public option would need to incur many of the same administrative costs that private insurance currently involves—without eliminating any existing expenditures. Indeed, it seems likely that the state will simply contract with an existing private insurer to administer the “public option.”
Secondly, rather than simply adopting Medicare rates, which would likely result in most hospitals refusing to treat patients nominally covered by the new plan, the final version of the legislation merely capped aggregate payments to providers that plans are allowed to make at 150 percent of Medicare rates. A healthcare plan that refuses to cover treatment by relatively expensive hospitals might offer better value, but this seems like a poor way to advance that objective.
Thirdly, to avoid this payment ceiling resulting in the omission of inefficient low-volume rural hospitals, the arrangement establishes a payment floor according to 100 percent of costs that such facilities incur. This arrangement is similar to the way Medicare currently supports rural hospitals, and reflects how the program has evolved from an entitlement for beneficiaries to also serve as a safety-net for providers.
Subsequent stages in the likely process may be observed from state experience with all-payer rate-setting. During the 1980s, a half-dozen blue states regulated prices for inpatient hospital care, but every state abandoned this arrangement, with the exception of Maryland.
Why was Maryland the only state not to abandon all-payer rate-setting? Because it was the only such state in which caps on rates didn’t seriously threaten hospital revenues. Indeed, the system entitles the state’s hospitals to a unique $2 billion bonus in the Medicare reimbursements they can claim from the federal government. When the growth of managed care in the 1980s and 90s made it possible for insurers to steer patients to in-network facilities which offered them discounted prices, the state legislature prohibited such discounts from being made. The political concern for maintaining hospital solvency again inexorably turned the price ceiling into a price floor.
Healthcare costs are largely expenses associated with hospital facilities and medical staff. So long as there is a desire to maintain or expand capacity, merely reforming insurance arrangements will make little difference to the bulk of healthcare costs that are incurred.
Editor’s Note: This piece was originally published by Economics21 at the Manhattan Institute.