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Refuting Myths on Health Care and Medicare for All
After reading some comments here lately I wanted to address a few myths
on health care that have been circulating. Medicare for All advocates
and critics alike, please read this so we do not have to keep rehashing
the same old flawed arguments.
The truth is somewhere in the middle. In the first place, we should consider the size of the problem. The US health care system costs about 17% of GDP, compared to perhaps 11% in more reasonable systems. So in order to reduce spending to that level we need to cut costs about 36%.
There are two main sources of administrative waste caused by the US for-profit insurance system, namely insurer overhead and the provider overhead needed to keep up with insurance billing. Both Medicare for All advocates and their critics seem to concentrate only on the first one, but the second one is probably the bigger of the two. To understand the size of the first one, check out this Ezra Klein article. The overhead of private insurers is about 12% on average. By comparison, Medicare's real overhead is probably about 5%, which is somewhat larger than the official rate of 3% cited by most Medicare for All supporters, but certainly lower than for private insurers.
The other part of administrative waste from this system, and the larger one, comes from all the costs providers must incur to deal with an extremely fragmented for-profit insurance ("free") market. Because fees are negotiated directly by individual insurers, provider billing becomes much more complicated. No other country compares to the US system in this regard. In single payer systems it is obviously not an issue. In systems with non-profit private insurers, fees are either negotiated directly by the government (Japan) or at a regional level by associations of providers and insurers (Germany, Switzerland). Incidentally, the way that Japan does this, combined with the fact that its insurers do not compete with each other, actually makes it a de facto single payer system (see T.R. Reid, The Healing of America).
Putting these together accounts for the difference in overhead between the US system, at roughly 31%, and the Canadian system, at 17%. Hence if we could get to Canadian levels we could save roughly 14% of health care expenditures. Some people think you could quickly get all those savings by switching to single payer. Others don't--but even if you could get 10%, that is not a trivial fraction of the 36% that I said earlier is needed.
The truth is therefore somewhere in the middle: these savings are not a majority of the waste in the US health care system, but they are still a big chunk.
Of course, the question now is where we get the rest of the savings. This leads to the second myth.
This is why provider lobbies like the AMA and the ACP only favor a public option that can compete "fairly" with private insurers, meaning one that does not crowd out the marketplace and accrue substantial bargaining power. They are amenable to a public option only that negotiates rates directly with providers, not with rates based on Medicare, and basically want it to look exactly like a non-profit insurance company that happens to be owned by the government. They're absolutely terrified of the idea of a really strong public option, much less Medicare for All, because it would mean painful cost cutting.
Part of that also relates to actual personal income of doctors, which is not most of the problem, but is still a non-trivial part and is too high.
Finally it's worth noting that under a single payer system we would most likely be able to save a respectable amount of money on pharmaceutical bulk purchases. Now there's an industry with a high profit margin!
To conclude, my central points here for both Medicare for All advocates and critics are:
1. Most administrative waste due to US for-profit insurance is actually laid at the feet of providers, not the insurers themselves.
2. Administrative waste is a big problem but not the majority of waste.
3. Single payer would still help us cut down on much of the other part, the provider waste.
Myth #1. (Two distinct versions, both wrong.)
A. For-profit insurance system administrative overhead is the biggest source of waste in our health care system
B. For-profit insurance system administrative overhead is a very small or even trivial source of waste in our health care system
The truth is somewhere in the middle. In the first place, we should consider the size of the problem. The US health care system costs about 17% of GDP, compared to perhaps 11% in more reasonable systems. So in order to reduce spending to that level we need to cut costs about 36%.
There are two main sources of administrative waste caused by the US for-profit insurance system, namely insurer overhead and the provider overhead needed to keep up with insurance billing. Both Medicare for All advocates and their critics seem to concentrate only on the first one, but the second one is probably the bigger of the two. To understand the size of the first one, check out this Ezra Klein article. The overhead of private insurers is about 12% on average. By comparison, Medicare's real overhead is probably about 5%, which is somewhat larger than the official rate of 3% cited by most Medicare for All supporters, but certainly lower than for private insurers.
The other part of administrative waste from this system, and the larger one, comes from all the costs providers must incur to deal with an extremely fragmented for-profit insurance ("free") market. Because fees are negotiated directly by individual insurers, provider billing becomes much more complicated. No other country compares to the US system in this regard. In single payer systems it is obviously not an issue. In systems with non-profit private insurers, fees are either negotiated directly by the government (Japan) or at a regional level by associations of providers and insurers (Germany, Switzerland). Incidentally, the way that Japan does this, combined with the fact that its insurers do not compete with each other, actually makes it a de facto single payer system (see T.R. Reid, The Healing of America).
Putting these together accounts for the difference in overhead between the US system, at roughly 31%, and the Canadian system, at 17%. Hence if we could get to Canadian levels we could save roughly 14% of health care expenditures. Some people think you could quickly get all those savings by switching to single payer. Others don't--but even if you could get 10%, that is not a trivial fraction of the 36% that I said earlier is needed.
The truth is therefore somewhere in the middle: these savings are not a majority of the waste in the US health care system, but they are still a big chunk.
Of course, the question now is where we get the rest of the savings. This leads to the second myth.
Myth #2. (Again two versions, both wrong.)We just refuted the first part. The second seems intuitively obvious when one realizes that much provider waste takes the form of unnecessary procedures and excessive payment fees, which can respectively be denied and reduced by a properly functioning insurance system. In short, what is needed is bargaining power. Obviously a single payer system where the government just negotiates rates by fiat has a huge amount of bargaining power, although there are other ways to get it too.
A. Provider waste is not the biggest issue in health care reform; insurance waste is.
B. Proper reforms of the insurance system would not curtail much of this waste.
This is why provider lobbies like the AMA and the ACP only favor a public option that can compete "fairly" with private insurers, meaning one that does not crowd out the marketplace and accrue substantial bargaining power. They are amenable to a public option only that negotiates rates directly with providers, not with rates based on Medicare, and basically want it to look exactly like a non-profit insurance company that happens to be owned by the government. They're absolutely terrified of the idea of a really strong public option, much less Medicare for All, because it would mean painful cost cutting.
Part of that also relates to actual personal income of doctors, which is not most of the problem, but is still a non-trivial part and is too high.
Finally it's worth noting that under a single payer system we would most likely be able to save a respectable amount of money on pharmaceutical bulk purchases. Now there's an industry with a high profit margin!
To conclude, my central points here for both Medicare for All advocates and critics are:
1. Most administrative waste due to US for-profit insurance is actually laid at the feet of providers, not the insurers themselves.
2. Administrative waste is a big problem but not the majority of waste.
3. Single payer would still help us cut down on much of the other part, the provider waste.
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Hello khin,
Thanks for a good overview of the mythology of waste in the health care system. I appreciate the link to Ezra's article, too.
Eliminating the unproductive administrative burden caused by our competitive insurance industry is a necessary step, but, as you point out, it will not be sufficient to stem the undue escalation of health care costs all by itself.
The underlying mythology, though, and it is even more pernicious, is that waste is the problem and wringing waste and duplication out of the system at all levels – insurors, providers, contractors and consultants – will do the trick. It won't.
75% of health care expenditures are attributed, by the CDC, to a handful of chronic illnesses. Because our system is so complex and fragmented, because so many Americans are uninsured, and because the incentives for treating and managing these diseases are upside down, we don't handle these illnesses very well. Patients suffer as a result, and costs rise because we postpone dealing with them until they are life-threatening.
Sure we can squeeze waste, fraud and duplication out of the system. A 10% - 15% savings in administrative costs alone would be a huge step forward and it's fairly low-hanging fruit (absent political considerations, I know, I know). But the real health care benefits, with associated cost savings, will come when we get serious about managing chronic illnesses. And negotiating realistic pharmaceutical fees.
By the way , I enjoyed reading the AMA and ACP links, where I learned that these leading physician organizations are conditionally in favor of any public option that doesn't involve a) more than a negligible impact on their fees, or b) any requirement that they actually participate in the system. Nice to have these team players on our side.
October 14, 2009 5:02 PM | Reply | Permalink
I believe Khin has made some useful points, but exaggerated to some extent. The 11 percent of GDP for other nations is at the high end, not the average. If we were to match the average, we would need to reduce costs closer to 50 percent. The 11 percent nations are facing financial difficulties similar to ours, although not as severe.
The U.S. is far larger and more heterogeneous than Canada. Some of our excess overhead reflects this population heterogeneity, whereas another part reflects, as Khin states, excess time spent in interaction with a multitude of different insurers. Many providers, however, even complain about the paperwork spent dealing with Medicare, and so no single change would bring us down to the Canadian level.
I would argue that insurance reform alone would have only meager ability to reduce costs. Most of the excess resides within healthcare itself, in the form of duplicate or unnecessary facilities, test, procedures, and specialty referrals driven by a fee for service paradigm that rewards excess. These can't be reformed simply by virtue of having insurers reduce payments to providers. Of all the insurers in America, the most powerful is Medicare, but its leverage has so far done little to constrain healthcare costs. Medicare has reduced reimbursement rates below those of private insurers, and the result is the financial insolvency of many hospitals ir rural areas, and an increase in cost shifting to private insurers or public out of pocket expenses. Recently, the Mayo Clinic branch in Arizona decided to exclude Medicare patients from its primary care services because of inadequate reimbursement.
Through its management, Medicare has negotiated reasonably favorable drug prices with a number of drug companies, but drug costs here are still excessive because U.S. providers often make extravagant choices in prescribing drugs.
This is not to say that insurers could play no useful role in healthcare system reform. The current reform proposals make a start in this direction, in some cases via Medicare. This includes increased financial rewards for primary care vs specialty care, increased incentives for preventive medicine, penalties for hospitals with excessive readmission rates, pilot studies of alternative payment paradigms based on bundled services or integrated accountable care organizations, and funding for comparative effectiveness research to distinguish medical interventions that work from those that don't or are harmful, and often expensive. Much more needs to be done, but it's a start.
With its enormous leverage, Medicare is in a position to reward the kind of healthcare restructuring that would dramatically reduce inefficiency and cost excess. A public option, as currently proposed, would have much less leverage. If Medicare accomplishes the needed changes over the next decade, the new structures, organizations, and payment methods will appeal to all insurers, public or private outside of Medicare, and would have competitive power to extend into the general population. This does not mean that a single payer system would not have value, but it contradicts the notion that desirable changes are achievable only through single payer.
They require major overhauls within healthcare that can be aided by insurance reform, but not accomplished simply by paying providers less. Without the emphasis on healthcare restructuring, insurance reform can correct indequities in the availability of insurance but would have only minor effects on healthcare costs.
October 14, 2009 8:45 PM | Reply | Permalink
An additional point about overhead is worth making. It's true that on a percentage basis, Medicare overhead at 3-5 percent is less than private insurer overhead at about 12 percent. However, on a per patient basis, they are very similar. The reason resides in the fact that there are fixed overhead costs that don't differ whether the plan pays for much or little medical service for an individual. The Medicare population uses more medical services than the younger individuals outside of medicare. Therefore, the percentage of costs attributable to medical services is higher for Medicare and the percentage attributable to overhead lower because Medicare spends more on services, not because it spends less on overhead. This may not account for the entire difference, but it appears to explain much of it.
October 14, 2009 9:41 PM | Reply | Permalink
October 15, 2009 9:06 AM | Reply | Permalink
For a start on this, PseudoCyAnts, visit Maggie Mahar's excellent piece on insurance industry profts -
http://www.healthbeatblog.com/2009/08/who-is-making-the-biggest-profits-from-us-healthcare-you-might-be-surprised-.html
and also her article describing the Dartmouth research on healthcare costs -
http://dartmed.dartmouth.edu/spring07/html/atlas.php
October 15, 2009 10:52 AM | Reply | Permalink
Fred, thanks for these links to Maggie Mahar's articles. Please see my note to Pseudo, just below, as it refers to you, too.
October 15, 2009 1:42 PM | Reply | Permalink
A Quick thought regarding The Dartmouth study, and Mahar's article about it.
The Care of Patients With Severe Chronic Illness; The Dartmouth Atlas of Health Care 2006.
The study covered a very specific sub-group of the total population: patients enrolled in Medicare who were in their last two years of life, and suffered from a chronic illness.
This study wasn't about health care in general, but instead looked at whether persons on Medicare, who were near the end of their lives, and afflicted with a chronic illness, received better care simply because they received more care.
Although informative, it is not proper to extrapolate this data, pretending it is valid throughout all of the U.S. health care system. More may still indeed be better, when it comes to saving premature infants, etc.
October 15, 2009 3:06 PM | Reply | Permalink
I started a reply to this Q&A but it got so long that I thought it best to create a new thread, at "Do Provider Waste & Duplicate Services Constitute The Main Driver Of Health Care Costs?."
Fred's comment and your question are quoted there, so you may want to check it out. Keep me honest.
October 15, 2009 1:38 PM | Reply | Permalink
I'm disappointed that at this point, Khin's post had only one recommend; I've added another, so that others can add to the discussion if the post gets onto the recommended list. His problem is that his posts are too intelligent, logically argued, moderate, and fact oriented, and not sufficiently inflammatory to stay around long.
I could give him some examples for him to model himself after for better results, but I don't want to name names.
October 14, 2009 11:01 PM | Reply | Permalink
Now, now Fred, lets not be petty.
There I rec'd khin's post. Is that better?
October 15, 2009 1:03 AM | Reply | Permalink
Nah, I was just having fun. I'm not good at snarkiness of the mean-spirited type, and I knew that no-one who would take my remark seriously would even be reading Khin's post, so I wasn't concerned about igniting a flame war.
October 15, 2009 10:37 AM | Reply | Permalink
THE CORPORATE MODEL DOES NOT WORK ANY MORE IN THIS COUNTRY FOR ANYTHING.
The shareholders have been shut out of the courts and have no say about anything.
The management buys off the directors and pays itself half and sometimes 100% of the corp's profit.
This model does not work for health insurance. Unless you consider that 80% of Americans are just commodities. And it is not just that two years ago one asshole CEO was paid one billion dollars for one years service...although considering the number of people that insurance company KILLED it was material...but the management makes too goddamn much money off of the system.
No regulation was the rule because of lack of laws and, mostly over the last nine years, lack of enforcement of the laws we had on the books.
THESE PEOPLE ARE CROOKS, CONSPIRATORS AND MURDERERS AND SHOULD BE TREATED AS SUCH.
THE END
October 15, 2009 3:19 AM | Reply | Permalink
More and more, I'm reluctantly leaning toward agreeing with you about the corporate model, especially when it comes to health care.
Part of the problem lies in our perception of what a corporation is. The best discussions I've seen about this lately have been in the context of the pending case before the Supreme Court: Citizens United v. Federal Election Commission. The debate about corporate personhood goes back to at least 1868, but I'm straying off-topic.
A for-profit corporation has these legal, legitimate goals:
So the question before us is, do private, for-profit insurance companies, whose overriding interests are self-preservation and profits, have a net positive contribution to make to health care?
Conceptually, I think it's a mis-match. The evidence so far seems to back this up.
The best argument I've heard for keeping them in the mix is that the economy sucks and we don't want to throw a lot of people out of work just now. But propping up non-productive financial services companies, like AIG, is a big part of what got us into this mess in the first place so we may just be asking for worse to come if we don't deal with the insurance companies now.
October 15, 2009 2:34 PM | Reply | Permalink
If MDs are overpaid, then the costs of their education needs to be somehow subsidised. MDs must complete a BS, then a Med Degree. Generally, that's 8 years ot life, and tremendous tuition costs. They then must complete years of residency(ies) depending upon their specialties. Some doctors are not even earning money until they are almost 40yrs old because of this. Doctors often start their private careers buried in debt. If we desire quality practitioners, yet who earn less than they do today, we must help cover the overhead of medical practise.
This isn't cost savings, as much as it is cost shifting.
October 15, 2009 9:24 AM | Reply | Permalink
Just below this you note that "We have just refuted the first part." That confused me a bit. If by "provider waste" you mean excess administrative cost imposed on providers because by our fragmented insurance system, then I understand the comment.
But there's another kind of waste that Fred talks about when he says that most of the excess cost of health care resides in provider-side waste of a different kind – unnecessary procedures, duplication of services and facilities, etc. That's a whole different matter.
Pseudo asked for some details, and I began a reply that got so long, and so off-topic, I put it in a new thread at "Do Provider Waste & Duplicate Services Constitute The Main Driver Of Health Care Costs?"
Then I saw that Fred has added links, above, to good articles by Maggie Mahar.
One thing to keep in mind. Provider waste, if we're talking about services and facilities, is at least a form of waste that is incurred in the provision of actual health care services to actual people. It's less productive than it should be. But maybe not as counter-productive as insurance waste.
Sometimes what we think of as provider waste might alternatively be characterized as a distortion in the culture of health care, affecting certain parts of the system or certain geographical locations, as the Dartmouth studies discovered. Changing culture sounds more difficult than eliminating waste, and it is.
October 15, 2009 2:19 PM | Reply | Permalink
Sorry, I probably didn't adequately define my terms. In the second myth, when I compare insurance and provider waste, by "insurance waste" I mean waste due to for-profit insurance both inside insurers and that is picked up by providers. By "provider waste," I mean unnecessary tests and procedures, excessive fees and physician income, etc.
October 15, 2009 3:55 PM | Reply | Permalink