May 14th, 2013
The Affordable Care Act survived the Supreme Court and a presidential election, so why does it face such an uncertain future? One reason is that it was essentially silent on how to control costs. This has led many pundits — including the likes of Paul Krugman and Robert Reich — to argue that the best approach would be to extend Medicare to everyone. A January National Research Council report on the relative disadvantage of America in global health outcomes, especially compared to countries with national health insurance, added further fuel to the fire. But is a larger government role in health insurance the best approach?
The idea of universal Medicare is powerful and attractive. Mr. Krugman points out that in the last forty years, average Medicare costs per person have grown by 400 percent while those for private insurance have increased more than 700 percent. His numbers suggest that if everyone had Medicare for the last 40 years, we might now spend only 14 percent of GDP on health care instead of nearly 18 percent, while also reaching universal coverage. Mr. Reich argues that “Medicare-for-All” would save between $58 billion and $400 billion annually, and similarly concludes: “Medicare isn’t the problem. It’s the solution.” Critics of the U.S. system are also quick to point out that Americans don’t live as long as their counterparts in countries that spend much less, suggesting universal Medicare could save money and improve our health.
The argument for universal Medicare basically comes down to three key claims: (1) Medicare gets lower prices; (2) Medicare’s administrative costs are lower; and (3) greater spending does not mean better health. Each of these deserves closer attention.
Prices. Consider first the argument that Medicare has lower prices. This happens because the government, as the largest purchaser of health care, can demand lower payments for services compared to private insurers. In fact, because Medicare is the only payer for people aged 65 and older, it can quote take-it-or-leave-it prices, and choosing to leave it means providers can’t treat 40 million of the sickest Americans. That is a lot of market power; indeed, economists have a word for it: monopsony.
The classic problem of monopsony buying power, however, is underprovision of services. The medical market is no exception. This problem manifested in Medicaid years ago — as states started to clamp down on payments, providers exited the market, leaving us with the patchwork system we have today. Could the same happen to Medicare? We are already hearing reports of doctors who do not take Medicare patients. In a 2010 survey of 9,000 physicians, the American Medical Association reported that 17 percent of doctors restricted the number of Medicare patients; among primary care physicians, a whopping 31 percent did. With universal Medicare, is the population really going to accept, and would Congress really allow, the continued reductions in prices?
Administrative costs. Proponents of universal Medicare often point to the much higher administrative costs in private plans. But are such higher administrative costs necessarily bad? For one, the large variation in Medicare costs suggests inefficiencies that might be corrected through more administrative spending. Over the last 40 years, the Dartmouth group has documented extensive geographic variation in Medicare spending that is unexplained by demographics, income, or disease severity. Areas with 30 percent higher spending seem to have no better outcomes.
Ironically, Medicare’s low administrative costs — about 3 percent compared with 17 percent in the private sector — may be to blame for the high spending. The private sector uses these funds to do a better job controlling excessive use. Tomas Philipson and colleagues have shown that the variation in Medicare hospital use is four times larger than the private sector when it comes to heart disease. Because it can rely on its monopsony power to control overall spending, Medicare has a weaker incentive to limit overuse. Meanwhile private insurers have become more efficient, employing tools such as utilization review and case management (which count as administrative costs) to assess patient needs and then either restrict services or steer patients towards more cost-effective care. In a world without private insurance, we would likely see more money wasted on care that produces no benefit for patients.
In addition, administrative spending protects against fraud. By some estimates, the Medicare program loses a staggering $60 billion to fraud each year. This amounts to 11 percent of the Medicare budget and would be enough to double Federal spending on primary and secondary education. No private company would ever tolerate this abuse. Imagine the fraud if Medicare covered 300 million Americans.
International comparisons and spending. Finally, it’s time we made sense of international comparisons, since they are often used to assail the current health care system. Despite spending more than any other nation per capita on health care, American life expectancy at birth ranks 34th worldwide. Several countries ranked ahead of the U.S., including Canada and England — have single payer health systems, raising the question of whether replacing private insurance with universal Medicare would make us healthier.
But, as the NRC points out, these comparisons conflate health care with numerous other influences. What we eat, the stress in our lives, exercise, the air we breathe, our genes, and a host of other personal and environmental factors determine our health. Take obesity for example. Much of American’s low life expectancy stems from obesity, but the primary causes of American obesity are not health care. Steven Woolf, the Chairman of a recent study on life expectancy by the National Research Council and Institute of Medicine concluded, “Much of our health disadvantage comes from factors outside of the clinical system and outside of what doctors and hospitals can do.”
Once we get a disease, there are certainly places where higher U.S. spending buys better care. Cancer is a poignant example. The largest study to date of global comparisons in cancer survival finds the U.S. ranks first or within the top three for the three cancers analyzed: breast, prostate, and colorectal. The magnitude of the differences between countries is also large; an American diagnosed with prostate cancer has a 91 percent chance of surviving at least five years, but the odds drop to fifty-fifty if you live in England. Or take breast cancer, where the 5-year survival rate is 83 percent in the U.S. compared to 69 percent in England. In Canada, where financing is public but provision is private, the differences are narrower but the higher U.S. survival rates remain statistically significant.
Improved survival in the U.S. does not appear to be driven by Medicare. Data from the Surveillance Epidemiology and End Results (SEER) project reveals survival rates are higher for groups under age 65 than over 65 and cancer prevalence is only slightly higher among the older group. While lead-time bias is a possibility, better U.S. cancer survival suggests our largely private insurance system delivers value in treating (if not preventing) certain diseases. Cancer is only one example, but it’s an important one.
All this is not to say that private insurance is perfect. Problems of adverse selection, care coordination, and complexity exist. Waste is still an issue. However, the argument that Medicare is superior in terms of cost savings and quality is flawed and ignores key factors that make any conclusion decidedly more nuanced. As the country’s fiscal challenges pressure us to make dramatic health system changes, we should be wary of calls to implement “Medicare-for-All.”Email This Post Print This Post
Don't miss the insightful policy recommendations and thought-provoking research findings published in Health Affairs.
to the #1 source of health policy research.