Health Care Reform: In Defense of Single Payer Systems

In this (long) post, I will make the case for single-payer health care on equity and efficiency grounds. I will start by showing that the US lags the rest of the advanced world in health care. I will then discuss the current predicament, leading into options for reform. I will argue that the consumer-driven approach to health care is fundamentally flawed, and that a single-payer system offers the greatest benefits.

The US health care system in a comparative perspective

Let me start with a simple observation: the US spends more than any other advanced country for health care, and gets less in return. According to data from the OECD, the U.S. spends $4,497 a year on health care per capita (in PPP dollars), as opposed to a G-7 average of $2,524. And for almost double the spending, the outcomes are far worse. Life expectancy in lower in the US. The infant, child, and maternal mortality rates are substantially higher. Americans have fewer doctors per capita, go to the doctor less often, and are admitted to hospital less frequently. They are less satisfied with the quality of health care than those in other countries. And of course, the US stands apart from other advanced countries by having a a huge hole in the health care net, as around 47 million people (including 8 million children) are uninsured. The leading cause of personal bankruptcy in the US arises from unpaid medical bills.

A recent study by the Commonwealth Fund is illustrative. in a detailed study of six countries– Australia, Canada, Germany, New Zealand, the UK, and the US– America ranks last along an array of indicators, including: quality care, access, efficiency, equity, and healthy lives. Yes, the US is still at the bottom of the heap in access, even worse than those countries that ration health care. The explanation is straightforward: cost. The US system is terribly efficient, largely due administrative overhead (more on that later), but also because patients tend to end up in the emergency room for cases that should be dealt with by a primary care physician. Death rates in the US from “conditions amenable to medical care” are 25-50 percent higher than elsewhere in the study. And when it comes to equity, “Americans with below-average incomes were much more likely than their counterparts in other countries to report not visiting a physician when sick, not getting a recommended test, treatment or follow-up care, not filling a prescription, or not seeing a dentist when needed because of costs.” A staggering 40 percent of lower-income Americans reported avoiding seeing a doctor when sick during the past year for cost reasons.

The current impasse

Much ink has been spilled analyzing the current predicament. Paul Krugman and Robin Wells argue that the predominant employer-based system in the US came about almost by accident. During the second world war, although there was a labor shortages, firms were prevented from offering higher wages. The loophole they found was offering health care benefits. Unions supported this policy because unions largely negotiated at the firm level, unlike at the political level as in some European countries.

But with rising health care costs, this employer-based system became untenable. The long-term rise in health care costs are well-known, in the US and elsewhere. Much of this relates to new and improved medical technology. It is important to note, however, that costs have been rising in both public and private insurance, and that Medicare premiums have actually expanded at a slower case than their private sector equivalents. So this is by no means a case of runaway big government. But it does place great pressure on old-style employer-based insurance, and the numbers covered by these schemes is falling rapidly. More and more are falling outside the net. At the same time, as costs increase, the inherent inefficiency in the American health care system becomes magnified. Clearly, the current framework is unsustainable.

Basic health care economics

Before analyzing the issues, we need to review a few basic concepts. There are two key issues in health care economics, adverse selection and moral hazard. Let’s start with adverse selection. Let’s say an insurance company offered policies to a certain group, based on the average person’s health in the group. Who would join? The less healthy, as for them it’s a great deal. Premiums would rise, and more healthy would drop out, until the insurance company is left with the worst risks. Insurance companies deal with problem by carefully screening out the highest risks, and devoting immense resources to the task.

What about moral hazard? Moral hazard simply means that not bearing the full cost induces overconsumption. If something is free, or subsidized, you will consume more of it than if you had to pay for it. In the domain of health care, some argue that the very nature of insurance causes you to over-consume, pushing up costs. For these people, the solution is forcing the patient to pay more out of his or her own pocket.

Consumer-driven health care?

One solution, pushed by many in the Republican party and the pseudo-conservative world would move toward a system of individual health insurance. Adherents argue that this would bolster flexibility, allowing people to transfer insurance between jobs, and save money by making people more financially responsible for their health insurance choices. And so they propose tax-advantaged health savings accounts. The idea is that people can park some of their savings in these tax-free accounts, using them to meet medical expenses. There will be a residual catastrophic insurance policy, but with a huge deductible. Now, this all makes sense only if you believe moral hazard in the biggest problem in health insurance. In other words, if you are forced to pay out of pocket for more of your own health care, you will refrain from overconsuming, holding down costs.

The problem with this mode of thinking is that people simply do not consume health care as they consume ordinary goods and services. As quoted by Malcolm Gladwell, Princeton economist Uwe Reinhardt makes the point that moral hazard arguments are overblown as “you always hear that the demand for health care is unlimited. This is just not true. People who are very well insured, who are very rich, do you see them check into the hospital because it’s free? Do people really like to go to the doctor? Do they check into the hospital instead of playing golf?” A RAND study back in the 1970s showed that people, when faced with higher co-payments, did indeed cut back on the medical care they sought. But here is the problem: they cut back equally on frivolous and not-so-frivolous care.

If you follow the train of thought in the moral hazard argument to its inevitable conclusion, you will conclude that the problem in American health care is not too little insurance, but too much of it. In fact, those without insurance often choose to be without insurance as they are young and healthy, and this is (by the logic of the Bush administration and its allies– see the 2004 Economic Report of the President) not a bad thing at all. So the solution is not to insure the uninsured but make the insured behave more like the uninsured. Bush himself complains that bad incentives allow workers to choose “overly expensive, gold-plated plans”. Does this sound a little like bizarro-world yet?

As Gladwell notes, the unspoken word in this whole debate is poverty. About a third of those lacking insurance lie below the federal poverty line. This is not mentioned in the arguments for consumer-oriented health care. There’s another problem, something Krugman and Wells refer to as the 80-20 rule: 80 percent of medical costs derive from 20 percent of the population. A mere 1 percent account for 22 percent of expenses. These are the people with serious long-term illnesses that require constant treatment. On the other hand, about half of the population has practically no medical expenses at all. This kind of skewed distribution suggests there is a lot more going on than moral hazard.

Which brings us back to adverse selection. The fundamental flaw of the individualist approach is that it encourages adverse selection. Think about it. The young and the healthy would benefit from health savings accounts, as they pay very little on health care. Those who are left behind in the traditional insurance plans are the older and the sicker, who will face higher premiums from a diminishing (and less healthy) pool. Traditional employer-based insurance, already under grave strain, would wither away. This is exactly the problem of moving from social insurance to actuarial insurance. Social insurance involves a social bargain. By paying similar premiums, the young and the healthy agree to subsidize the old and the sick, on the basis that if they themselves ever need help, it will be readily available. Actuarial insurance treats medical insurance like car insurance, based on individual situation and risk.

The advantages of single payer

So what is the alternative? Well, there are two core principles that must be met. First, there should be some mechanism to prevent adverse selection. The old employer-based model was able to guard against adverse selection, partially at least, by pooling the risk over a large group of workers. But now? This is why the health care reform plans by people like John Edwards and Arnold Schwarzenegger impose “community rating” requirements that forbid insurance companies from discriminating between people. Second, there needs to be universal coverage, which is why most reform plans offer financial aid to the less well off to purchase insurance (Edwards promises to roll back Bush’s tax cut on those earning more than $200,000 a year to pay for it). Coverage needs to be mandatory, to prevent emergency rooms taking on the burden of leading with the sick– a sure recipe for ballooning costs.

There is one simple solution to all of these problems: follow the lead of most advanced economies and move to a single payer system, where a single entity, usually a government body, provides insurance. The US has a wealth of experience with a successful single-payer program called Medicare. Although this violates every ideological bone in a psuedo-conservative’s body, it turns out that Medicare outscores private insurance on both equity and efficiency grounds. As well as providing universal health care, single payer systems can be pretty cost-effective. Why? A number of reasons:

First, the administrative costs are far less. As Paul Krugman notes, Medicare devotes less than 2 percent of its resources to overhead, while private insurance companies spend as much as 20 percent on profits, marketing and administrative expenses. Two-thirds of the administrative costs of the drug companies are devoted to marketing and underwriting. The reason for the discrepancy is that private insurance companies need to weed out high-risk customers, screening applicants carefully.

Second, and related, moving to a single-payer system reduces the administrative costs arising from excessive fragmentation and administrative duplication in the health care market. The current health care jungle explains why the US is slower than other countries at adopting electronic medical records that can both reduce costs and save lives by reducing errors.

Third, costs can be contained by using the negotiating power of the single payer to get better deals from suppliers, including drug companies. As it stands, Medicaid recipients and those under the auspices of the Veterans Administration get deals on drugs similar to Canada. Everybody else pays a lot more.

Fourth, a single payer system would make it easier to focus on preventive care, and to look after the patient in a holistic manner. Eliminating the fragmentation and complexity would make it much easier to facilitate such a policy. It would also end the incredibly inefficient practice of using emergency rooms as primary care providers. Although preventive care is cheap and saves money in the long-run, it is not necessarily in the insurer’s immediate interest. An example of how this can be put into practice is the Veteran’s Administration, where the underlying philosophy is a lifetime relationship with clients. This makes it easy to keep track of patients’ medical histories, facilitates better use of information technology, and encourages cost-effective preventive medicine.

Overall, then, one solution to the American health care crisis would be to simply adopt a “Medicare for all” solution. This would be paid by a dedicated tax that would almost certainly be less than current health care premiums. Coverage would automatically be universal, cheaper, and more focused on preventive care. Before people drive themselves into a tizzy over “socialized medicine”, it is important to note that, under such a system, people would be be able to choose their own doctors. And there is no reason why private insurance companies could not participate in the system, provided they played by the rules.

Of course, the main complaint from opponents of single-payers systems revolves around long waiting lists. Rationing by cost, they say, is replaced by rationing by time. Of course, one could argue that a short wait is eminently more preferable to not being able to afford care in the first place. Remember the results of the Commonwealth Fund study: the US is at the bottom of the list in terms of access, even without rationing by time. The US has a distinct insider-outsider model of health care access, where insiders get every medical treatment they desire (at whatever cost), and outsiders get nothing. Krugman and Wells liken this to “robbing Peter of basic care in order to pay for Paul’s state-of-the-art treatment.”

At the same time, these waiting list problems are overblown, driven by revolving anecdotes and urban legends. Krugman and Wells also note that, while there are sometimes long waiting lists for elective surgery, this is not the case in all single payer systems, and anyway, the “waiting list procedures” account for only 3 percent of US health care spending, so the cost is decidedly minor. As noted by Jonathan Cohn, critics spend a lot of their time focusing on the UK and Canada, two of the most centralized systems in the world. Note that the UK really has socialized medicine, where doctors work for the government, and it tends to spend very little on health care. Cohn instead would divert critics attention to countries like France, Japan, and Switzerland, all offering high-quality universal care with no waiting lists and free choice of doctors. Patients in these countries see doctors more and spend more time in hospital, all the while securing better health outcomes at lower cost.

The Catholic perspective

Moving to a single-payer health care system is justifiable by appealing to Catholic social teaching. The existence of 47 million people without health insurance, many of whom are below the poverty line, is a scandal, showing neither solidarity nor a preferential option for the poor. Catholic social teaching emphasizes that the provision of basic health care is an essential component of the common good that all societies are called upon to foster (Compendium of Social Doctrine, 166). Also, the preferential option for the poor relates to social and well as individual responsibility and embraces “those without health care” (Compendium of Social Doctrine, 182).

It should be noted that the proposed solution by many pseudo-conservatives, pushing for consumer-based health insurance also feeds into a radical individualism with little place in Catholic social teaching. For the basic argument is that the young and healthy should be free to spend less on health care by not being forced to subsidize the old and less healthy. This violates the principle of solidarity.

What about subsidiarity? Catholic objectives to a single-payer system are largely based on subsidiarity considerations. The Church justifiably opposes “certain forms of centralization, bureaucratization, and welfare assistance and to the unjustified and excessive presence of the State in public mechanisms” (Compendium of Social Doctrine, 187) on the grounds that bureaucratic modes of thinking tend to downplay the dignity of the person. It is important, however, to note that subsidiarity and solidarity go hand-in-hand: “Solidarity without subsidiarity, in fact, can easily degenerate into a “Welfare State”, while subsidiarity without solidarity runs the risk of encouraging forms of self-centred localism” (Compendium of Social Doctrine, 351). Therefore the role of the state should be neither “invasive nor absent”. The state can have a role “when the market is not able to obtain the desired efficiency and when it is a question of putting the principle of redistribution into effect.” (Compendium of Social Doctrine, 353). Well, if one thing should be clear by now, it is that the market does not work well in the domain of health care.

But the caution holds. A health care system overly-laden with an interpersonal bureaucracy is not in accord with human dignity. But what is the essence of subsidiarity in health care? It is that the patient should be able to choose his or her own doctor, and build a personal relationship. This is why long-term preventive care, sadly undeveloped in the current US system, is so critical. At the end of the day, does it really matter to the patient if a large impersonal government or a large impersonal insurance company is making the decision for the patient? The current system in the US is not one based on subsidiarity. Indeed, any form of risk-pooling (through government or private insurance companies) automatically implies a modicum of centralization. There is no way to avoid it. What we must do is make it less impersonal. In fact, if we regard bureaucracy as synonymous with overhead, then bureaucracy is actually more pronounced under the current framework in the US, lessening the link between the institution and the patient’s care. And one more thing. Remember that the last attempt to curb burgeoning health care costs was by restricting consumer choice and letting insurance companies make key medical decisions. Absent reform, this approach– not exactly aligned with the principles of Catholic social teaching– is still on the cards. Also, as noted, single payer systems support an emphasis on preventive care that is laudable. But, at the same time, we must resist the urge to overly-centralize in a single payer system. The patient must remain in control of his or her destiny. In this regard, the French model works better than the overly-centralized British system. But we should remain open to alternative models that achieve the same results.

In conclusion, it is not enough to oppose these proposals using the catchall “subsidiarity” critique. It is necessary to put forward a reform agenda that would guarantee all the benefits of a single payer system in a more decentralized manner.

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