Magazine | October 16, 2017, Issue

Bernie’s Bad Medicine

The folly of Medicare-for-all

On September 13, Senator Bernie Sanders (I., Vt.) unveiled “Medicare for all” — an entitlement to comprehensive medical care for every resident of the United States, free at the point of use, to be administered and funded entirely by the federal government. The senator admits that his proposal to expand benefits, eliminate cost-sharing, and cover medical expenses currently paid for by private insurance would require an enormous increase in federal taxes. But realistic budget constraints mean that it is also likely to reduce access to essential care. As leading Democrats seek a return to power, they risk being stuck with a 2020 presidential nominee committed to a policy that has long distinguished itself by its unpopularity.

In one respect, Sanders’s proposal was hardly news. The Vermont liberal has introduced similar legislation in every Congress since his arrival in the Senate in 2007, never succeeding in getting it out of committee and usually failing to attract any co-sponsors. But after Sanders won 43 percent of the vote in the 2016 Democratic presidential primary, 16 Senate Democrats (many with an eye on the 2020 presidential nomination) embraced the latest version of the proposal.

Sanders is proposing not simply to expand eligibility for Medicare coverage but to transform that program. After a four-year phase-in, he would prohibit individuals from receiving competing coverage from private insurers and eliminate every sort of cost-control mechanism, such as provider networks, claims reviews, and cost-sharing — with the sole exception of $200 out-of-pocket costs to discourage the use of branded drugs. Sanders would expand the benefit package to cover dental and vision care and expand immigrants’ eligibility for public assistance, eliminating the five-year residence requirement currently associated with federal welfare and health-care benefits and extending coverage to “every individual who is a resident of the United States.”

The cost of such a proposal would be phenomenal. It would make federal taxpayers liable for expenses currently borne by employers, states, and individuals and would increase the total consumption of health-care services. Assessing the version proposed by Sanders during his presidential campaign (which included an additional $212 billion long-term-care entitlement), the Urban Institute estimated that it would increase total federal spending by $2.5 trillion annually — requiring a tax increase equivalent to 70 percent of the total federal revenue projected for 2017.

Although the draft legislation is 94 pages long, it presumes that no change whatsoever would be required to Medicare’s hospital- or physician-payment systems other than those already authorized under current law. It gives the secretary of health and human services the authority to establish a national health budget but provides no guidance as to which services would need to be cut, for whom, and how. These difficult trade-offs are the essence of health-care policymaking, and the Sanders bill has nothing to say about them at all.

This unwillingness to admit trade-offs is not an oversight but the essence of single-payer’s appeal. Setting out the case for his bill, Sanders argued: “In 2015, the United States spent almost $10,000 per person for health care; the Canadians, Germans, French, and British spent less than half of that, while guaranteeing health care to everyone. Further, these countries have higher life-expectancy rates and lower infant-mortality rates than we do.”

Since government spending already accounts for more than half of U.S. health-care costs, this suggests that if the dollar amount of spending is the most important measure, we could achieve outcomes similar to those of these other nations by reforming the portion of health-care spending already controlled by the government. But not even Sanders thinks that would be enough. Single-payer advocates rely so frequently on this framing of the issue because a broader assessment of relevant data shows their claims to be greatly misleading.

The main reason we spend much more on health care now than we did, say, 50 years ago is that vastly more can be done now to treat people who are ill. As countries get wealthier, they are able to afford more such health-care services. According to the World Bank, per capita health-care spending in the three wealthiest European countries — Norway ($9,522), Switzerland ($9,674), and Luxembourg ($8,137) — is similar to that in the United States ($9,403).

Higher rates of disease also cause worse health-care outcomes while increasing the need for health-care spending. The United States suffers from higher levels of heart disease (21.8 percent) than Europe (11.4 percent), as well as diabetes (16.4 percent vs. 10.9 percent), cancer (12.2 percent vs. 5.4 percent), and stroke (5.3 percent vs. 3.5 percent). This owes much to higher rates of obesity (33.1 percent vs. 17.1 percent). It also has higher rates of arthritis (53.8 percent vs. 21.3 percent) and chronic lung disease (9.7 percent vs. 5.4 percent). Health-care spending can alleviate these conditions but will never give people better health than those who never were sick in the first place.

A similar relationship is visible at the state level. According to the Kaiser Family Foundation, average per capita health-care spending in the U.S. was $8,000 per person in 2014. Health-care spending was $11,944 per resident of the District of Columbia and only $5,982 per resident of Utah. Yet life expectancy at birth is 76.5 in D.C. and 80.2 in Utah, while infant mortality was 0.67 percent in D.C. and 0.52 percent in Utah. Although these metrics are beloved by single-payer advocates, they never draw the obvious inference that D.C. should emulate Utah’s health-care system.

Sanders recently argued that “our idea is to do what every other major country on earth is doing,” but this claim is similarly fictitious. In fact, there is not a single country in the world that offers comprehensive coverage with an unlimited choice of providers, fully paid for by taxpayers, without insurer gatekeeping, service rationing, or out-of-pocket payments. In reality, there is a direct trade-off between ease of access to providers and the cost borne by individuals in out-of-pocket expenses. The less a health-care system relies upon cost-sharing to constrain or fund the consumption of health-care services, the more it must employ bureaucratic methods.

The absence of cost-sharing is very expensive. When patients bear no expense for visiting the doctor, physician time gets overwhelmed by trivial matters. When individuals have no financial incentive to see a nurse at an urgent-care facility rather than go to a hospital’s emergency room, enormous costs can be incurred for the sake of minor conveniences.

Yet Sanders claims that reducing administrative expenses will actually pay for much of the coverage expansions and reductions in cost-sharing of his Medicare-for-all proposal. The senator has argued that “layers of bureaucracy associated with the administration of hundreds of individual and complicated insurance plans is stunningly wasteful, costing us hundreds of billions of dollars a year.”

It is indeed complicated for insurers to make sure that health-care services are purchased efficiently, through network arrangements and utilization reviews, but it is undoubtedly cheaper than paying every claim that might be submitted by providers. The latter approach led Medicare to improperly pay $41.1 billion in 2016 — accounting for 11 percent of the program’s total cost, or $1,412 per beneficiary.

Some analysts believe that Medicare is able to get the same hospital services at a substantial discount from the rates charged to private insurers. But that’s because providers are often more reluctant to accept private insurance than to accept Medicare. The reason is that tax exemptions, subsidies, and drug discounts worth $73 billion per year to hospitals are tied to participation in public health-care programs. These indirect payments mean that the real cost of hospital care provided to Medicare beneficiaries is much greater than what shows up on the program’s accounts and does not represent any sort of efficiency gain that could be enjoyed by enrolling more individuals in the program.

In its early years, Medicare reimbursed hospitals for whatever costs they claimed were necessary to treat patients. This encouraged the expansion of facilities designed around costly high-tech care delivery, such that Amy Finkelstein of MIT has estimated that the introduction of Medicare was responsible for a 37 percent increase in the real cost of hospital care between 1965 and 1970 alone. Although prices are now set by regulations, past cost increases have become embedded in what is a de facto price floor.

Federal law prohibits providers from selling services to the Medicare program at prices higher than their “usual charges” to privately funded patients, so Medicare payments serve to inhibit price competition for those covered by other payers. Medicare also pays more for services performed by hospitals’ outpatient facilities than for the identical services performed by independent clinics (three times the amount, in the case of chemotherapy) — fueling consolidation that gives large hospitals market power to impose high fees on private payers.

Medicare has traditionally paid physicians according to the volume of services provided rather than in return for improving patient outcomes. It pays for physicians to do tasks that nurses are capable of doing, reimburses for every diagnostic test that is provided, and funds every consultation with a specialist regardless of necessity. It often takes years to correct well-documented overpayments for services — and then largely as a result of the demonstration of lower payments by private payers.

A single-payer system is necessarily a politicized system, and one with little flexibility to improve payment arrangements. When prices for tens of thousands of medical procedures are set by a government agency, the individual prices are monitored closely only by those who stand to gain from them (as opposed to consumers, who are affected by many different prices). Each medical specialty has its own lobbying group with an intense focus on ensuring favorable reimbursement rates. Single-payer, which Sanders sees as the potential triumph of a populist movement, would in reality serve to further empower well-funded special interests capable of influencing technocrats.

Sanders claims that “as the only major country not to negotiate drug prices with the pharmaceutical industry, we spend tens of billions more than we should.” In 2013, 84 percent of prescriptions dispensed under the privately managed Medicare Part D were generic drugs — compared with the OECD average of 41 percent. Their prices fell by 59 percent from 2010 to 2015, and the United States enjoys some of the lowest generic-drug prices among developed countries. It is only for branded pharmaceuticals that the United States pays more, and Sanders’s proposal would save money only by capping the revenue that innovative drugs can generate during their temporary period of patent coverage. Given that we owe our enormous progress in treating heart disease to drug development, and that the prospect of similar advances for cancer and Alzheimer’s requires billions of dollars of investment, such caps would come at the cost of the future.

In the op-ed launching his bill, Sanders endorsed Canada’s health-care system, declaring that it had “guaranteed health care” to “every man, woman and child” and “not only improved the lives of the Canadian people” but also “saved families and businesses an immense amount of money.”

Canadians spend less on health care than Americans mostly because they are not allowed to use as much — not because they are getting a better deal. In 2010 the average income of family physicians (net of practice expenses) was $159,000 in the United States and US$156,000 in Ontario, while that of cardiologists was $325,000 in the United States and US$283,000 in Ontario. Canada rations the time available for surgeons to use operating rooms, limits the ability of doctors to order costly services, and restricts access to specialists. While the United States has 0.55 specialist surgeons per 1,000 residents, Canada has only 0.35. The upshot is that Canadians face average waiting times of ten weeks for an initial consultation with a gynecologist, 38 weeks for joint surgery, and 47 weeks for neurosurgery — and in each case only after referral from a general practitioner.

The economist John Goodman has rightly observed that, by allocating the bulk of medical resources according to political priorities (such as improving life-expectancy statistics) instead of in response to consumer preferences, health-care-rationing systems tend to share certain systematic skews. Since many citizens are relatively healthy, the services that they use heavily (such as primary care) tend to be highly subsidized in such systems. By contrast, the elderly and those with serious illnesses, who in any case have little time left to live, are rarely thought to merit expensive treatments. Procedures that do not save lives, such as cataract or hip-replacement surgeries, are made hard to access. Political pressures are always focused on meeting immediate needs, and investment in developing new therapies is frowned upon for potentially inflating costs. Waiting lists are generally seen as the single-payer budgeter’s friend, as some patients will return to health by themselves, others will be discouraged from seeking treatment, and a large proportion of the most expensive cases will die before any money is due to be spent on them.

Through Medicaid, the United States currently provides free access to a range of medical services more extensive than that enjoyed by the poor in almost any other nation. Indeed, it is precisely because this assistance has traditionally been limited to the most deserving cases that it can be so generous. This means that Sanders’s proposal would do little to increase spending on those who are currently enrolled in Medicaid.

Rather, the essence of what he is advocating is an enormous increase of entitlement spending and restriction of access to care for those who are already well insured. The exact cost of the proposal would depend on the extent of rationing, but Sanders’s suggestion that a 7.5 percent payroll tax might be sufficient is likely to be a substantial underestimate.

Many Americans receive health insurance through their employers and have been little affected by the upheaval the Affordable Care Act (Obamacare) inflicted on the individual market. According to Gallup, 65 percent of Americans are satisfied with how the health-care system works for them. For most, single-payer represents an enormous amount of pain for very little benefit.

Democrats recently excoriated Republicans for proposing per capita caps to slow the growth of federal assistance to Medicaid. Yet the national health budget proposed by Sanders would go a lot farther, imposing much tighter caps on coverage currently financed by the government, employers, and insurers, while preventing individuals from purchasing more of it themselves.

Although voters are sometimes attracted by the promises that single-payer advocates advertise, they tend to react with horror when they learn the details. In 1994, a ballot initiative was organized to establish a single-payer system in California. The insurance industry had planned a multimillion-dollar advertising blitz to inform voters of the costs of the proposal, but they barely needed to dip into the war chest they had set aside, as voters rejected the proposal by a margin of 73 to 27 percent. John McDonough, one of the Democratic congressional staffers who later crafted the Affordable Care Act, recounted that “telephone-poll takers had gauged support for the single-payer plan by reading the proponents’ own description to prospective voters and found that support dropped precipitously with the addition of each successive sentence.”

Things have not changed much since, even after Sanders’s campaign for the presidency. In November 2016, Colorado voters rejected a single-payer ballot initiative by a margin of 80 to 20 percent, while a similar effort in Washington State did not even secure the signatures needed for consideration.

With single-payer proposals remaining toxic among voters even in deep-blue states, Democratic leaders have become concerned that Sanders is pushing a wedge issue that puts members of his own party in a painful position. The drive to make single-payer a litmus test for the presidential primary has even upset former single-payer supporters such as Paul Krugman, who fear it will take energy and attention away from other, more viable initiatives.

Sanders’s proposal is far less likely to blaze a trail for leftward reform than it is to force every sector of the health-care industry into the arms of Republicans, while tarring every Democrat running for office as a potential advocate of widespread rationing and astronomic tax increases.

– Mr. Pope is a senior fellow at the Manhattan Institute.

Chris Pope — Chris Pope is a senior fellow at the Manhattan Institute.

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