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The Single-Payer Siren
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The United States is facing another crisis in organizing its health care system. It is clear that the private exchanges concocted under the Obama administration are failing at a record rate for the simple reason that they violate all known sound principles of insurance. The planners who put these programs together unwisely thought that universal coverage would overcome the standard insurance problems of adverse selection and moral hazard.
But that didn’t happen. Under the Obamacare plans, the insurers are allowed to compete only on the cost of providing a fixed set of government packages of mandated services. They have no power to select their own customers, or to charge those customers rates sufficient to cover insurance expenses. People are allowed to game the system by signing up just before they need treatment, only to leave once the treatment is received. The young dump plans that require them to pay for the insurance of the old. The old sign up in droves. Systems with cross-subsidies are inherently unstable. Yet the insurers are unwisely limited in what they can spend on administrative expenses, which unhappily limits their ability to recruit new customers or to monitor the behavior of their existing ones.
The failure of the Affordable Care Act was predictable before the ink was dry on the page. But now that the results are in, there are all too many people who think that the cure for excessive government regulation is the complete takeover of the health care market, here in the form of a single-payer system under which the government provides the financing for all health care in the United States, effectively ending the private provision of these services. One notable effort to defend this position comes from the economist Robert Frank, who takes the heroic view that single-payer can provide the same level of health care at lower costs, making it a bargain for the public as a whole. Unfortunately, his analysis is riddled with errors. The program has thus far proved to be a nonstarter in the states—those laboratories of democracy. Places like California, Colorado, and Vermont have gagged at the huge prospective costs of putting that a single-payer system into place.
To Frank, this common-sense objection rests on the supposed fallacy that an increase in taxes always results in a loss of social welfare. In his view, the benefits of taxation can more than offset those rising taxes if those tax revenues can deliver superior levels of health care in exchange. But this is one big “if.”
To Frank, one of the two obvious sources of savings are the elimination of competitive advertisements, which he notes can run to 15 percent of total costs. Yet he links to an article that sends a very different message. It praises how additional advertisement can fuel needed revenue growth. Frank is also blind to the benefits of advertisement, which allow consumers to learn of the full range of services of benefit to them. That increased demand can allow firms to spread their fixed costs over a larger customer base, thereby reducing average costs. Advertisements may not be needed for a national health plan, but only for the worst of all reasons. Legislative menus of mandated goods are so rigid and standardized that firms have nothing new to sell. But this in turn reveals the weakness of a top-heavy health care plan, namely not developing a sensible innovation policy because of the inability to market its fruits. It also leads to a systematic reduction in long-term capital investment, which translates into chronic shortages tomorrow.
Frank also insists that a single-payer system could reduce administrative costs to around two-percent of total budget, or about one-sixth the total for private insurers, including those that operate under the current mandates of the Affordable Care Act. But again, that gross figure is misleading for several reasons. The first is that there is no a priori way to decide just what fraction of health care expenditures should be spent on administration. One of the many design failures of the ACA was its artificial limitation on these expenditures. In a working market, firms try to equilibrate the margin, so that the last dollar spent on each category of expenses generates the same level of additional system benefit. It follows that Medicare and Medicaid may be faulted for spending too little on administrative expenses, hampering their ability to control fraud and making them less able to identify the best treatment protocols—or locate new facilities, train employees, counsel patients, or conduct any number of activities that a sensible business undertakes to improve its market position.
The failure of single-payer health care to innovate is then complicated by the impossible constraint whereby people do not have to pay for any of the health care they get. Despite what Frank alleges, the huge uptick in the quantity of services demanded when participants get all care at zero-price threatens to overwhelm the system. Since single-payer does not ration health care by price, the care gets rationed of necessity in other ways. Thus, the Canadian system relies on long-waiting times to curb demand. Unfortunately, the people at the head of the queue are not always those who have the greatest need for treatment. Even prices that cover a fraction of full costs can help to tamp down on the demand. But, sadly, no one in a single-payer system has any idea of how these prices should be set. Hence, government’s duty to take all comers at a zero price means it cannot re-price efficiently to respond to shifts in supply and demand as is routinely done in airlines, hotels, and leasing in ways that eliminate the queues from price controls.
Regrettably, the standard defenses of single-payer assume that every technique that works in ordinary product markets will fail with health care. Indeed, this tunnel vision led to the market breakdowns that paved the way for the 2010 adoption of the ACA. Part of the reason the United States has the highest health costs of any nation is because of the added costs of onerous government regulation. Illinois, for example, lists 18 pages of required benefits for private insurance plans that covers everything from alcoholism to infertility, all at government-mandated levels, with high compliance costs added in. Ironically, in contrast, the Canadian single-payer system offers at most limited coverage for mental care, dental care, eye care, prescription drugs, and a whole lot more. And no nation commits as much money for the treatment of end-state-renal disease through dialysis as does the United States—$42 billion per year, of which $34 billion is covered through Medicare.
At this point, the proper path of reform has to move away from single-payer and towards market liberalization, which would lower costs by removing these mandates, and by opening up insurance markets to interstate competition. Matters would still get better by removing the state mandates for coverage in private employer plans, which have led many firms to terminate their employee coverage. Any reform should also kill the 3.8 percent Net Investment Income Tax, which has done so much to retard overall growth. Nonetheless, it appears that the Republicans who have so far flubbed health-care reform are still taking a statist approach that keeps many of the worst features of the ACA intact.
Here is one illustration. Senators Ted Cruz and Mike Lee introduced a program into the bill that allows any insurer offering two ACA-compliant plans to also offer other plans for sale. This proposal does not go the full way to market liberalization because the market plans would not carry the government subsidy. But the possibility that consumers might nonetheless prefer these plans offers powerful testimony as to how far off base both the ACA and these latest reforms are. But the current legislation waters down this proposal so that any price increase on the ACA plans requires a like price increase in the noncompliant plans by the same percentage as in the compliant plans. This disguised form of price controls prevents two plans from competing on price, which means that the option is illusory and the worst features of the ACA remain unchallenged.
It seems, therefore, that the public debate has been broken down by the constant war cry that all reforms hurt poor health care recipients to benefit rich taxpayers. Public policy now ignores growth and innovation; the debate has become a struggle about redistribution. A one-way ratchet embeds all tax increases forever and makes it impossible to address the many design errors in the ACA. Reckless Democratic claims for a single-payer system are a massive distraction. Republican naiveté on dismantling a flawed system has led to the rhetoric of repeal-and-replace that tends to slight critical design elements, which can spell success or failure. I am not alone in doubting that the Republican reforms will get through.
© 2017 by the Board of Trustees of Leland Stanford Junior University
I still want my free stuff. This is where we are now. This is Sander’s appeal, free stuff.
Republicans can’t repeal the ACA because you will take away free stuff from someone.
Our health care system, and how it is paid for, has run aground because the people making the choices are not the people paying. Under single payer, the payer (the government) will make the care choices, and the money supply is limited.
And given the poll numbers of people who want the free stuff, the progressives have won. And they have won because they give out free stuff.
To each according to his wants, from each….ah, forget it.
You went over your 140 character limit, which means America will tune this argument out.
All forms of insurance are nothing more than legalized gambling. The actuary tables are really just the odds. As in all gambling, the odds are always tilted in favor of the house.
Enter the government and insurance become assurance. Every bet is guaranteed to payout except for the healthy. Die old of a massive heart attack before having any other major health expenditures and you could pay hundreds of thousands in premiums and never see a return. But congratulations! That allows a politician to claim that they provided you with “healthcare.”
What they also do not talk about is where that massive amount of money would normally go – to places like the purchases of new cars, homes and other goods. Barack Obama remains the only president never to witness at least 1 year of 3%+ of economic growth. (Average for his 8 years: 1.48%)
The healthy pay for almost zero service. Hooray, they get a yearly exam for free*. The monthly payment for any ACA compliant plan is so cost prohibitive, that it’s better to just pay out of pocket once a year for a yearly wellness check. The penalty, then, is for the sick. You have coverage that you pay an exorbitant fee to have, only you cannot actually use it because the deductible is so high and your copay is so large that it is unmanageable.
This is why the ACA needs to go. It isn’t just that it is fiscally insolvent without interstate competition and diversification of risk pools, but it does the exact opposite of what people want. It provides the appearance of healthcare without actually having to provide any, you know, care.
(*free=just the low, low, monthly cost for an ACA plan!)
In other words “Mission Accomplished” by the Democrats with the added bonus of making it look like the Republicans and the “free market” failed.
Richard,
I think the Charlie Gard affair is indicative of what single-payer can do to the ethics of even the best of medical efforts. Charlie’s parents requested to take Charlie to America for an experimental treatment in November 2016. The Hospital (NHS of Britain) knew his condition and prognosis then. Instead of acceding to the parents request the Hospital (NHS of Britain) decided to make a decision for the parents that wasn’t the Hospital’s to make. They held Charlie for the next eight months in the most expensive care, ICU, and fought the parents in court. One of their major arguments is that Charlie is brain damaged thus the experimental care is useless. If this was a private Hospital doing this they would be sued. If you could prove Charlie was irrevocably brain damaged now, and that is far from proven, there would be no way to prove that he was not brain damaged in November when the first request was made. The Hospital has been holding this child for eight months at huge expense to the British taxpayer for the sole purpose of performing a mercy killing.
The question is why. What rational reason does the Hospital have to do this? The answer goes to Lord Acton’s dictum. “Absolute power corrupts absolutely.” Single-payer gives the system absolute power over those caught in it. The system becomes so used to this power that anything that is perceived as a challenge to their absolute authority must be crushed. It makes no difference that keeping the child in ICU for eight months was fabulously expensive. It makes no difference that the experimental treatment is offered by a highly reputable American Medical team. It makes no difference that the experimental treatment has been successful in the past.
All that matters is the exercise of power, absolute power. Pure stupid corruption. Only complete fools would imagine that single-payer will do a better job at lower cost. I’m praying that we all aren’t that foolish.
Regards,
Jim
Gutless and Useless, our Republican representatives. 8 years of lies about Obamacare.
Actually, we know from experience that advertisements would be needed. President Obama wanted to put the NFL and other sports organizations to work on selling ObamaCare to the masses. When he took office, President Trump pulled the plug on some of the other advertising, though I don’t think it saved anywhere near 15 percent of the cost of the program.
Hospitals and other medical systems are gearing up for single payer. Without near total destruction of existing norms we will have single payer. Given my take on America, its inevitable. Sorry.
I’d prefer free country hospitals that suck, an actual high deductible insurance system with choices to reduce costs, and a free market system that actually sets the price of goods/services instead of the insurance/government/provider lunacy.
Don’t call it single payer. Call it single decider.
Obamacare was clearly designed to fail then collapse into a single payer system. I find it beyond belief that anyone who was around during much of the 20th century or who has any knowledge or reality believes that socialism works. It simple does not because it cannot. So how then do we explain the Nordics or French single payer systems? That’s a longer story about different places and different history, but mostly it’s good PR by the left and the fact that most people are healthy most of the time and when they’re really sick they can go to places with market based systems. That will end if we join them. We can pay for poor peoples health care because most of them will be healthy most of the time but to move the entire country to a socialist system is complete insanity. Worse it’s part of the suicide pact the left has made about western civilization.
In communist or even socialist countries, the safety-valve for state-controlled health care (and, for that matter, chocolate, booze and blue jeans) was that those with means could travel to capitalist countries to get what they were willing to pay for. Charlie Gard’s parents are attempting to make use of that option for their son, demonstrating that even First World countries have to use force to prevent people from attempting to purchase what their government in its wisdom refuses to provide.
At the moment, the US is a destination for medical tourists, including Canadians who are tired of waiting for a hip replacement. Won’t the demand for care that a socialized U.S. system does not provide drive Americans (and their money) overseas, and push other countries to ramp up their medical tourism offerings? At the moment, I assume that hospitals in India are offering nose jobs and infertility treatment using techniques developed in the US. But what happens to American medical innovation under a single-payer system?
According to wikipedia:
India actually illustrates perfectly the problems associated with privatised medicine.
Because despite this exciting news:
The fact remains that the vast majority of Indians cannot afford that $7,000.
Our private sector is doing just fine selling these things to foreigners, they don’t need to make these things affordable for the majority of Indians in order to turn a profit, and so they don’t try to.
It’s an exaggerated version of the choice that keeps getting posited (but never fully articulated) for single payer in the US. It may well reduce the rate of improvement of medical knowledge and technology (though that’s arguably not inevitable if you match single payer with private providers, which maintains the profit motive and competition), but it’s essentially people who can afford insurance choosing greater innovation that benefits themselves over ensuring that everybody in their country has the standard of health care they themselves enjoy now.
It doesn’t seem to be an obviously moral decision to me – what am I missing?
The reality is that most people do not pay for their health insurance now, so any reform that upsets that applecart are not going to happen. We were in the small segment that bought individual insurance before ObamaCare. Nobody really cares about us (the only politicians I’ve heard talk about this segment is Rand Paul and Tom Price), so I see single payer coming, and in some ways will be relieved. Then all those that are aghast that we don’t have insurance will be in our boat. People take it for granted they are secure.
Ha! Keeping Prof. Epstein to 140 sentence limit is difficult enough. There is no way he could keep it to 140 characters!
It doesn’t seem to me immoral that it works this way, unless you think that using the rich as guinea pigs is immoral. I’m glad to see them use their money to pay for expensive new treatments while the providers work out the bugs and figure out how to make even more money by bringing prices down where they can get richer because everybody can afford them. It’s as good as taxing the rich to pay for our health care research. Better, even.
What’s a little more worrisome, though, is the trend toward personalized, genomic-specific medicine. In those cases there is no large market for which those who can afford treatment will serve as guineas pigs. Only those who can afford the treatment (or have the requisite political clout) will get treatment.
What’s also not so good are cronyistic systems by which governments create greater inequalities of income and wealth than we’d have without their intervention. They make it harder for poorer people ever to share in national prosperity and to afford health care.
It’s good to hear from you again, btw.
Wow. How does this not have 500 likes here at Ricochet? I did not even get to the replies, but I’m sure they are all glowing.
We are waging our own civil war here on this site, as is the nation at large, as far as Trump is concerned.
I am as much to blame as you.
(But, yes, you are to blame here too.)
(Truth be told, you are to blame more than me, but let’s not go there.)
I hate those who hate Trump.
And I hate those who love Trump.
I know, I know, I am Sybil.
But so are you…
Here is our chance to join forces.
Who here can argue with this great article.
Seriously, who?
I am unhappily coming to the conclusion that the goal of universal coverage, even just for catastrophic injury/illness, is incompatible with the notion of “insurance,” because requiring universal coverage, cradle to grave, simply obviates all actuarial science.
Thus, what arises is a system of transfer payments only. It is not insurance where it is not against risk of financial losses (cost of care) that are both uncertain and yet unrestricted by any kind of restraint (no exclusions for pre-existing conditions; not allowing a reasonable waiting period before coverage for pre-existing conditions applies; no ability to turn down any applicant for any reason; not even limited to American citizens for heaven’s sake — if they can get here, they’re covered!).
Given all this, why not just create a system that has the patient send all the bills to Uncle Sugar — who needs a policy? That IS the policy.
Earlier generations of doctors and the AMA were adamantly and loudly opposed to socialized medicine, such as they saw Medicare to be. Nowadays, it’s doctors in their stagey white coats who stand around gleefully while Obama signs Obamacare into law.
Do physicians really all want to become employees of the federal government? Well, I would initially have thought no, until I analogized their potential position, at the trough of endless taxation largesse under so-called single payer, to today’s millions of government employees with public union representation, who overall have not done too bad, to put it mildly — great pay, benefits and pensions. And I suppose if sovereign immunity is ever to make a comeback in our common law, it will return to insulate the federal government from liability when some drug- or alcohol-impaired doc botches a procedure. It’ll be tough luck on recovering anything — but at least the government will pay for your [whatever gross medical outcome you can conjure].
As disgraced criminal Rep. Traficant used to say, “Beam me up, Scotty. There’s no intelligent life down here.”