The Case for Single-Price Health Care

We could largely solve the cost crisis simply by making Medicare prices universal.

Obamacare has taken a licking but keeps on ticking. The prospect of repeal died on the Senate floor. Republican efforts to roll it back continue, but the bulk of the program is still in place and unlikely to go anywhere. Virginia appears, as of this writing, on the way to expanding Medicaid, and other states will likely follow. Thanks mostly to the Affordable Care Act’s expansion of Medicaid, some eighteen million more people have health insurance today than when Obamacare went into effect, cutting the uninsured population nearly in half.

But while progress has been made on expanding access, another problem keeps getting worse: the soaring cost of health care for those who get their insurance through their employers. For these folks—who make up the majority of middle-class, working-age Americans—the ever-rising costs of premiums, deductibles, and co-pays has turned into a full-blown crisis.

Take a median-income family of four whose members are covered by a standard employer-sponsored plan. Last year, the amount that hospitals, doctors, and other providers charged to treat such a family reached an average of $26,944, according to the Milliman Medical Index—nearly $9,000 higher than in 2010, when the ACA was enacted. Families typically paid about a fifth of that difference directly in the form of increased premiums, deductibles, and co-pays. Who exactly paid how much of the rest is not certain, but it’s axiomatic among economists that employees bear most if not all of the cost of employer-sponsored health care. To employers, health insurance is just a form of employee compensation. When the cost goes up, they typically respond by cutting back on raises and other benefits.

To put this in perspective, the hit to middle-class families with employer-sponsored insurance has been roughly the same as if the government had imposed a 4.5 percent payroll tax increase beginning in 2010. No wonder, then, that four in ten adults with health insurance now say they have difficulty meeting the cost of their premiums and deductibles, according to Kaiser Family Foundation tracking polls, and another 31 percent say they have difficulty covering the cost of co-payments.

Obamacare didn’t cause this crisis—in fact, relative to wages, the rate of medical inflation in the employer-provided market was substantially higher before the law. Nor is the rising cost of employer-provided health insurance the result of Obamacare forcing hospitals and other providers to shift costs on to nongovernmental, or commercial, payers, as some Republicans assert. Instead, as we shall see, it’s mostly the result of monopolistic hospitals engaging in price discrimination as they exploit their increasing market power over private purchasers of health care.

But it’s easy to understand why many people with commercial insurance feel that the law has made them worse off. In their experience, Congress passed the ACA and now they pay much more for health care. Adding to the grievance of many middle-class Americans is the fact that, even as their own costs have gone up and their choice of doctors has narrowed, millions more lower-income people are now paying little or nothing thanks to the expansion of Medicaid.

Fortunately, there’s a straightforward way to attack this middle-class affordability problem. The Affordable Care Act dramatically tightened existing price controls on health care purchased by the federal government. It did so by setting fee schedules for how much doctors and hospitals can charge Medicare, Medicaid, and other federal health care programs for performing specific services or, in some cases, treating specific conditions. Similar price controls apply to Medicare Advantage Plans, under which private insurers are allowed to contract with providers at Medicare prices.

These cost controls save the government roughly enough money each year to fund the entire Defense Department. At a time when the price of health care paid for by commercial insurance has been increasing two to three times faster than the wages earned by most Americans, the price of health services delivered through the federal programs—which account for 37 percent of all health care bills—has actually been declining relative to the average wage.

The answer to the most pressing aspect of our health care crisis is simply to apply these cost controls to commercial plans as well. For a typical middle-class family, such a move, if enacted today, would drop the total price of health care by about a third in the first year, without having to pass any new taxes and without forcing anyone to change their health care plan. Proof of concept comes from the fact that we already do this for everyone covered by Medicare and Medicaid. You’ve heard of single-payer. This is the case for single-price.

To show why direct cost controls are the best fix for our broken health care system, we need to get straight on what’s causing the crisis.

You might assume that Americans are just getting older and sicker—but that’s not it. The increasing number of old people has accounted for only about a tenth of the rise in health care spending since the late 1990s, according to consensus estimates. And while risk factors like obesity and opioid abuse have gotten more prevalent, their effect on spending has been more than offset by other trends, especially the dramatic decline in smoking and related heart disease.

Another theory is that Americans consume too much health care. But we actually don’t see more doctors, or receive more scans or surgeries, than our counterparts in other advanced countries. We spend dramatically fewer days in hospitals than we used to, and seek out less routine preventive care, thanks to the rise of high-deductible plans and narrower provider networks. Overall, the typical American’s utilization of health care has been flat since the mid-1990s.

The Affordable Care Act dramatically tightened existing price controls on health care purchased by the federal government. The answer to the most pressing aspect of our health care crisis is simply to apply these cost controls to commercial plans as well.

So what’s driving the relentless increase in health care spending? In the words of a seminal 2003 research paper published in Health Affairs, “It’s the Prices, Stupid.” Study after study has found that the biggest reason Americans pay more per person for care than the residents of any other advanced country is simply that the same pill or treatment costs dramatically more in the United States.

Most people are well aware of the inflated price of prescription drugs in the U.S. But drugs account for only about 10 percent of health care spending. By far the largest source of medical inflation is the increasing cost of medical services. A report by the International Federation of Health Plans shows, for example, that in Australia, hospital and physician charges for an appendectomy typically came to around $3,800 in 2015; in the U.S., the same operation cost $16,000 on average, and often far more. Giving birth will cost you around $2,000 in Spain, but a normal delivery in the U.S. costs an average of $11,000—and more than $18,000 in the most expensive hospitals.

For people with commercial insurance, it keeps getting worse. On the current course, by 2024, the increase in price for a typical middle-class family of four with employer coverage will be equivalent to another increase in the payroll tax—this time of 4.8 percent. That’s on top of the 4.5 percent of wage income lost to medical inflation during the Obama years, and the 7.3 percent lost under George W. Bush. By 2028, the total annual health care hit will come to $44,000 per family.

Study after study has found that the biggest reason Americans pay more for care than the residents of any other advanced country is simply that the same pill or treatment costs dramatically more in the United States.

How did this happen?

A major, underappreciated reason is that in most markets, medical providers have merged with each other to the point that they effectively operate as local monopolies. According to the standard metric used by the Federal Trade Commission, not a single “highly competitive” hospital market remains in any region of the United States. A full 40 percent of all hospital stays now occur in areas where a single entity controls all hospitals. Another 20 percent occur in regions where only two competitors remain. The result is that when an insurer or employer wants to create a health care plan, they have to negotiate with providers who dictate their own prices.

Where health care consolidation is strongest, hospital prices run roughly 20 percent higher than in markets where some real competition remains. Since we first wrote about the phenomenon in these pages (“After Obamacare,” January/February 2014), a vast literature has grown up confirming that monopoly in health care is a major factor pushing up prices for Americans not covered by Medicare or Medicaid.

What would happen if we just took the single measure of applying Medicare prices to all commercial health insurance—and did nothing else? According to a study by the Congressional Budget Office, the price for a one-day hospital stay is 89 percent higher when charged to commercial insurance plans and their customers than when a Medicare patient stays in the same bed for the same amount of time. Overall, the discounts Medicare and Medicaid receive are in the 20 to 40 percent range. Thus, if done at a stroke, the first-order effect of imposing Medicare prices universally would be to reduce the price of the health care received by a typical family by about one-third. That would translate into annual savings of about $9,000 today, and much more over time. The savings would still be substantial even if we implemented the plan in phases to ease the transition.

Wouldn’t “Medicare prices for all” cause massive disruption across the health care sector? Yes, but in a good way. Importantly, hospitals that disproportionately serve low-income and elderly patients—typically found in rural or poor, urban locations—would be the least affected. That’s because they already know how to break even or even earn a surplus at Medicare and Medicaid prices. Unable to pass inflated costs along to patients with commercial insurance, they’ve had to learn to be more efficient.

The same is true more generally of hospitals that lack monopoly power. Studies show that hospitals with real competition in their local markets have found ways to lower costs to the point that they can get by on Medicare prices. These hospitals might even welcome a move to universal Medicare prices because it would help level the playing field with monopolistic competitors when it comes to recruiting and retaining doctors.

It would be a different story, though, for hospital systems that have been living high off their ability to extract monopoly prices from commercially insured patients. These hospitals will scream that they are already losing money on every Medicare and Medicaid patient, and that unless they are able to inflate the prices they charge commercial payers, they will go broke. But the reason they lose money on Medicare and Medicaid patients is that their costs are too high. And the reason their costs are too high is that they don’t need to cut them so long as they can gouge commercial payers—which, as monopolies or near monopolies, they can. The majority of these hospitals are classified as nonprofits, so the revenue from their high prices doesn’t even have to go back to shareholders. Instead, it turns into inflated salaries for administrators, lucrative contracts for specialists, and, often, giant building projects. In order to survive on Medicare prices, they would have to become much more efficient and cost conscious.

Meanwhile, going to a “Medicare prices for all” system would also help to structure the market for health insurance in ways that promote the public interest. For one, once you eliminate all the haggling and gamesmanship involved in setting different complicated fee schedules for patients on different plans, much of the administrative cost in health care vanishes. For another, since all employers would pay the same amount for health care, eliminating price discrimination would shrink the advantage large employers have when it comes to attracting workers by offering generous plans.

Moreover, large insurance companies would no longer have any advantage over smaller ones in negotiating contracts with providers. That, in turn, would encourage new companies to enter the health insurance business and actually compete over who can deliver the most value at a given price. This would mean developing plans that optimize choice, easy access, integrated care, and expanded benefits like gym memberships and discounted drug prices. These perks are already commonly offered under Medicare Advantage Plans, which all pay the same prices for care and must therefore find more creative ways to compete for customers.

Could we be sure that all these savings would get passed on to average Americans? Provisions in the Affordable Care Act already require insurers to spend 80 to 85 percent of premium dollars on medical care, thus ensuring that the lower prices couldn’t be turned into higher profits and salaries for insurance companies and their executives. That leaves open the question of whether employers would pass along savings to employees. In a truly competitive labor market, there is no reason to believe they wouldn’t. But, of course, labor markets today are often noncompetitive, due to factors ranging from industry consolidation to the fading power of unions. To make sure that employers shared the savings with employees, a new law might include a requirement that existing employer-sponsored plans cut premiums, deductibles, and co-pays in line with the reductions in health care prices.

In normal markets, price controls are seldom a good idea. But health care is not a normal market. Purchasers, whether consumers, insurers, or employers, have a hard time evaluating the quality of medical services, for example. There are also all kinds of agency problems involved with so much care being purchased with other people’s money, and a moral problem involved with the fact that a large and increasing share of the population can’t afford to pay the price of their own health care. And that’s all before you get to the problem of industry consolidation. In highly concentrated, opaque health care markets, administered prices are the only real alternative to prices dictated by the fiat of monopolists.

These are the reasons why literally every other developed country in the world uses administered prices in health care, including countries that rely on privately owned hospitals and entrepreneurial doctors. And it’s why their use in the Medicare and Medicaid programs has been successful in containing cost inflation while predatory pricing prevails everywhere else in the increasingly cartelized U.S. health care sector.

Getting legislation passed to allow the federal government to set prices directly may sound far-fetched, but it’s likely more politically doable than you might think. Just as Obamacare made it through Congress in part because key sectors of the health care industry came to see it as advantageous, so too with a single-price system.

Ending price discrimination would liberate insurers, employers, and other large purchasers of health care from the growing monopoly power of their “suppliers.” It would also establish new opportunities for insurers to expand into local markets and take on entrenched incumbent players, including both monopolistic providers and monopolistic insurers. The single-price plan also preserves a role for a private health insurance industry, albeit one more like those found in France and Germany, where the government sets the prices and private-sector insurers compete over who can provide the best service.

Meanwhile, hospitals that have already learned how to reduce costs enough to make a living on Medicare prices would have reason to support the idea. They would stand a better chance of attracting and retaining doctors if they didn’t have to match the inflated pay scales offered by monopolistic institutions living off inflated commercial prices A major political benefit of the single-price system is that it could split the interests of providers, isolating price-gouging, monopolistic networks from smaller, community-minded hospitals and doctors. At the same time, by preserving a role for commercial insurance, it spares health care reformers from being pitted against the entire medical industrial complex. (See “How Big Medicine Can Ruin Medicare for All,” November/December 2017.)

The idea of applying Medicare and Medicaid prices across the board is so compelling that it has started getting serious attention from influential policy wonks. On the conservative side, the Council for Affordable Health Coverage recently issued a white paper that calls for the expansion of Medicare prices to commercial plans. On the liberal side, Princeton’s Paul Starr broached the idea in an article in the American Prospect in January. More recently, the Center of American Progress has included the idea in a policy paper.

The first-order effect of imposing Medicare prices universally would be to reduce the price of the health care received by a typical family by about one-third. That would translate into annual savings of about $9,000 today, and much more over time.

The Starr and CAP Medicare price proposals were, however, just one small part of broader plans to achieve universal coverage—by expanding eligibility to the existing Medicare program or creating a brand-new, very expensive entitlement that would require big tax increases. Administered prices of some kind would also be a part of any single-payer plan.

But there are very strong reasons to believe that starting with price controls alone is a better idea than trying to achieve them and universal coverage in one shot. To see why, we first have to look at the potential pitfalls of more far-reaching proposals.

The most ambitious plan so far, of course, is Bernie Sanders’s “Medicare for All” bill, which would shift every American onto Medicare, as the name suggests, over the course of four years. While the bill has gained momentum among prominent Democrats, it has two widely remarked-upon shortcomings. First, people who are currently satisfied with their insurance might balk at being forced into a different plan. Second, it would be terrifically expensive, requiring a major tax increase to pay for it. The Urban Institute estimated that the plan Sanders proposed during the last presidential election would increase federal spending on health care by 232 percent, or a cumulative $32 trillion by 2026. Sanders says his more recent plan could be paid for with a 7.5 percent payroll tax on employers plus a 4 percent income tax surcharge on individuals.

Medicare for All advocates make the case that, despite the sticker price, the plan will actually bring down overall health care spending by imposing lower prices on providers and saving on administration. But here’s the problem: almost all of those savings will come from money that voters don’t know they’re currently spending. More than 150 million Americans have employer-sponsored group health care plans. They can see what they are forking out directly for premiums, deductibles, and co-pays, and they don’t like it. But they are largely innocent of the far greater amounts they pay in lost wages. In a typical employer-sponsored family plan, two-thirds of the premiums are nominally paid by the employer, who in turn shifts much if not all of that cost to employees by reducing other forms of compensation. Yet few employees are aware of this reality. So selling a single-payer system involves promising to save people money on costs they don’t know they pay, while at the same time telling them that they’ll have to share more of their paycheck with Uncle Sam. Not easy.

A plan based purely on Medicare prices for all would address the biggest concern of the largest group of voters—without asking them to pay higher taxes. This would raise the chances of the party that passed it actually being rewarded for health care reform.

Some Democrats have been trying to finesse this political reality by proposing what might be called “single-payer lite” plans. The Center for American Progress’s “Medicare Extra for All” proposal is an example. Under this plan, everyone can choose between buying into Medicare or keeping their current insurance. And because the plan would impose Medicare prices universally, the price of private insurance would go down.

But that is just a part of the proposal. It would also establish a new federal health program offering enhanced benefits, including dental, vision, hearing, and maybe even coverage for long-term nursing home stays, which Medicare and standard commercial health insurance currently don’t cover. Premiums would be free for people living in poverty and would be capped at no more than 10 percent of income for anyone else who wanted to join. Deductibles and co-pays would likewise be eliminated for low-income people and reduced for everyone else.

Sounds pretty good, but who would pay for it? CAP doesn’t specify. Instead, it merely says that “Medicare Extra would be financed by a combination of health care savings and tax revenue options,” adding that it “intends to engage an independent third party to conduct modeling simulation to determine how best to set the numerical values of the parameters.”

Whatever numerical values come back, they’ll be substantial and controversial. Even if the CAP plan was financed in good measure by new taxes on the super-rich, it would still involve large transfers from middle-income people, who will be at least partially financing their own benefits, to people with lower incomes, who would be paying nothing for the health care they receive.

A plan based purely on Medicare prices for all would avoid these political land mines. Ending price discrimination against people with employer-provided or other commercial insurance in one fell swoop would address the biggest concern of the largest group of voters—crucially, without asking them to make any sacrifices in the form of higher taxes. This would raise the chances of the party that passed it actually being rewarded for health care reform, rather than punished, as the Democrats were for Obamacare. Voters would quickly feel the benefits in lower premiums, deductibles, and co-pays. And that, in turn, should make them more open to efforts to extend health coverage to those that lack it.

So why not just keep it simple, at least to start? A “Medicare prices for all” plan doesn’t require tax increases or involve transfers paid for by the middle class. It doesn’t require Americans to give up their current health care plans. And it doesn’t repeal or replace the popular features of the Affordable Care Act. But it does directly attack the middle-class affordability crisis using a proven approach that the great majority of Americans might actually support.

Paul S. Hewitt and Phillip Longman

Paul Hewitt is an economic adviser to the Council for Affordable Health Coverage. His views do not necessarily reflect those of CAHC or its members. Phillip Longman is senior editor at the Washington Monthly and policy director at the Open Markets Institute.