Would State-Based Single-Payer Health Insurance Cure What Ails?

 

simon haeder is a political scientist at the John D. Rockefeller IV School of Policy and Politics at West Virginia University.

Illustrations by James Fryer

Published October 29, 2018

 

Health care was likely to be an issue in the mid-term Congressional elections under almost any circumstance.

America is spending almost one-fifth of the GDP on it, and in a business-as-usual scenario this percentage will almost certainly grow. Moreover, spending by federal, state and local governments account for well over half of the total — and in California, the number is pushing 70 percent.

But, of course, this isn’t “any circumstance.” Even after 8 years in which Republicans have made repeal of the Affordable Care Act a high priority, Americans seem to have grown attached to the idea that the federal government should subsidize insurance for middle-income families and prevent insurers from denying coverage for pre-existing conditions.

Certainly, the idea that Americans don’t want government in the thick of the market for health insurance can no longer be presumed. And many Democratic candidates, who see their main chance in focusing on bread-and-butter issues rather than immigration or race, have put plans aimed at transforming health care finance and delivery at the top of their agendas.

One approach that is gaining converts in the political mainstream is a switch from market-based private insurance to a single-payer health care system — that is, one in which the government wields considerable power in setting the terms for health care financing and delivery. Even physicians (at least younger ones), who have stridently opposed a bigger role for government in the past, are starting to view single-payer as better than the status quo.

At the core of the proposals are the dual goals of expanding coverage and reining in medical costs. Interestingly, improving health care quality, the third component of the “iron triangle of health care,” is taking a back seat in the conversation, although single-payer systems are uniquely positioned to address this issue because they give the government leverage over how providers do their jobs as well as what they charge.

Of course, proponents didn’t discover the single-payer idea growing in a cabbage patch: dozens of countries depend on single-payer systems. However, in the United States, both state and federal efforts to create single-payer systems have been stillborn.

Generally, the initiatives have died for lack of popular support — most recently, in Vermont and Colorado. But supporters are not deterred. Indeed, California has emerged as a leading battleground with a proposal that would provide universal coverage at a price tag of $400 billion annually.

Here, I analyze the barriers to establishing a state-based single-payer system in our federal constitutional system. In my opinion, only an improbable confluence of circumstances would allow individual states to go their own way with single-payer systems. At the national level, by contrast, a single-payer approach seems viable, but wouldn’t overcome all the problems inherent in insuring consumers who know little about the cost or value of health care services.

What a Single-Payer System Is (and Is Not)

By its strictest definition, single-payer refers solely to the mechanism for financing health care. With a single-payer system, only the government is responsible for reimbursing care providers. Its purported advantage: by unifying the financing in one entity, the buyer of services functions as what economists call a “monopsony,” which can drive hard bargains on behalf of patients.

A corresponding feature is the pooling of risk. By creating a single insurance pool with no option for households to drop or expand coverage, the insurer (here, the government) has no need to match the risk characteristics (such as age, gender, pre-existing conditions, etc.) of the insured with likely costs. Everybody’s in it together.

As a practical matter, a number of other features go with single-payer financing. For one, the system is generally financed with taxes rather than premiums charged to individuals or their employers. The taxes are generally progressive, effectively subsidizing lower-income households by delivering the same benefits for less money.

In some single-payer systems, the monopsony is absolute — no health care services can legally be purchased for cash. This feature isn’t needed to make single-payer functional, however. For example, a limited single-payer system might be confined to providing catastrophic coverage, leaving households to buy supplemental private coverage or go it alone for the first thousands of medical bills. But there’s a trade-off: if medical providers ranging from doctors to hospitals to drug companies can sell services to other buyers, the government loses some of its price leverage.

Note some distinctions here. There are “all-payer” systems, like the one in Germany, where multiple private insurers band together (with government permission) to assert monopsony power over providers. Single-payer systems should also not be confused with hybrid systems that include a “public option,” in which households can buy coverage from what amounts to a government-owned insurer operating in a market with private insurers. Finally, in some single-payer systems (like the UK), the government also owns the hospitals and employs the doctors. In others (like Canada) only the financing component is socialized.

Cost Savings and Then Some

Single-payer health care systems have operated successfully in a variety of advanced economies. Indeed, even in the convoluted patchwork that is the U.S. health care system, Medicare functions as a Canadian-style health insurer, while the Veterans Health Administrations provide the care as well as the financing (a la Britain’s National Health Service). Of course, Medicare and the VHA serve only limited populations — and hardly anybody acknowledges the resemblance to foreign systems.

Single-payer systems have some well-documented advantages. While some of these can be achieved through regulation in multi-payer or all-payer systems, the frameworks are necessarily complex and subject to unintended work-arounds.

Most prominently, single-payer systems offer the chance to control costs with minimal sacrifice in quality. Consider the one-two punch of global budgeting and monopsony bargaining power. While the former creates an overall spending limit that gives administrators some political cover to say no to patients, the latter gives them my-way-or-the-highway leverage over provider prices. Additional savings follow from the reduced complexity of insurance with a single payer — Medicare’s administrative costs are a small fraction of those of private insurers.

Most importantly, enrollment is automatic and universal, which eliminates the need for eligibility determination and maintenance, two costly features of the current system. Additional savings are realized because there are no private insurance companies seeking supernormal profits, and there are little to no marketing costs.

Single-payer systems also create significant benefits for insured individuals beyond the health care itself. Benefits are portable, eliminating job-lock and reducing the risk of leaving a job to start a business. Many employers stand to gain, too, since they shed the cost of health insurance or the hassle of gaming their hiring practices to weed out high medical cost employees without breaking the law.

Finally, don’t forget the intangible benefits associated with single-payer health care systems ranging from social solidarity to preventing free-riding by individuals who refuse to buy health insurance, yet use the health care system when they become ill.

Federalism and Single-Payer Don’t Mix Well

Supporters of federalism see the federal structure as crucial for the preservation of democracy. The system limits the power of individual state governments because they can’t easily control the flow of people or property between the states. One consequence: interstate competition in combination with open borders drives states to give priority to economic development, sometimes at the expense of redistribution of income and wealth through tax policy or social welfare programs.

The problems encountered with efforts to expand health coverage in general, and to expand it with single-payer programs in particular, illustrate the constraints on states in a federal system. States would be forced to raise taxes, significantly so, to replace private funding. And higher taxes might push residents to relocate to other states — a problem that may be especially serious in metro areas that sprawl across state borders. Indeed, other states may use the lure of lower taxes to encourage migration.

Even if a state can manage to raise revenue to pay for expanded health care without losing businesses or workers, there may be negative economic consequences. Higher taxes almost inevitably lead to inefficiencies by driving production in the direction of less-taxed output and by outright tax evasion. This is always an issue for states that must compete for business and labor. But it could be especially problematic for health care expansion because the revenues needed would be very large.

Consider, too, that revenues from most taxes are volatile, fluctuating with the national business cycle. The federal government, for its part, can easily buffer deficit spending by borrowing. But states are often constrained by statute or constitution from borrowing to cover deficits — and even if they aren’t, the need to maintain their credit ratings limits borrowing. Many states are also required to maintain rainy-day funds to buffer tax shortfalls in hard times.

 
Enrollment is automatic and universal, which eliminates the need for eligibility determination and maintenance, two costly features of the current system. Additional savings are realized because there are no private insurance companies seeking supernormal profits, and there are little to no marketing costs.
 

Then, there’s the issue of monopsony power. One of the great appeals of a single-payer system is the bargaining power it gives the representative of consumers with respect to providers. But federalism limits that bargaining power to the degree that providers (health care professionals, drug companies) can move out of state or country or, in the case of medical equipment and pharmaceutical suppliers, afford to abandon the market. Big rich states like California are relatively safe, albeit not fully immune, in this regard. But smaller, poorer states plainly are not.

Complications layer on complications. Heavily subsidized (or free) health care coverage may attract individuals from other states, or even other countries, who generate relatively little tax revenue yet make big demands on the health care system. This is not a problem unique to health care. States that provide generous services of any sort below cost to residents must consider this potential. And many do attempt to limit benefits, like subsidized tuition at public universities, that are provided to new residents. But this free movement of people is especially problematic in the case of health care, both because it would be viewed by many as immoral to deny care to anyone and because it might break federal law — or even violate the U.S. Constitution.

It should go without saying that a major initiative like health care reform within a state couldn’t — and shouldn’t — be undertaken without popular support. But even minority opposition could slow or stop the initiative because it would need to be reconciled with state constitutions that require super-majorities in the legislature to levy new taxes, or restrict borrowing, or oblige the legislature to give priority to other sorts of spending.

California, for example, has both the super-majority requirement and a spending priority for education on the books. One way or another, it’s likely conversion to a single-payer health care would require a popular vote, giving well-funded opponents an opportunity to defeat the effort.

States Going It Alone —
A Progress Report

Healthy California

The most recent initiative in the golden state, termed Healthy California, envisions a benefit-rich, single-payer system. Private insurance coverage and carriers would be excluded. There would be no premiums, co-payments or deductibles, and all residents would be covered. This implies full incorporation of current government programs including Medicare, Medicaid and the CHIP.

Funding streams for the program, expected to cost about $400 billion annually, have yet to be specified. Part would have to come from payments redirected from various federal health care programs. The California legislature has estimated that an additional payroll tax of about 15 percent of earned (as opposed to investment) income would also be needed. In order to implement it, California would have to obtain a series of federal waivers as well as solve constitutional spending and taxing restrictions.

New York State Health Act

Legislation currently under consideration would establish a single-payer system with comprehensive benefits for all state residents. There would be no premiums, co-payments or deductibles. Funding would come from a tax on payrolls, along with a tax on investment income. As with California, broad federal waivers would be required. The program would cost about $300 billion and change per year.

RomneyCare

In 2006, Massachusetts passed its comprehensive health reform package (dubbed RomneyCare after Gov. Mitt Romney who championed it), which later served as the blueprint for the Affordable Care Act. The program contained all of the major components later incorporated in the ACA including an insurance marketplace, premium subsidies, free coverage for low-income individuals, and employer and individual mandates in order to make premiums more affordable for high-risk households and to prevent free-riding. However, it cannot be described as a single-payer system since insurance companies remained in the loop.

The program relied heavily for financial viability on federal funding through a waiver negotiated by Gov. Romney and Sen. Kennedy with the Bush administration.

Green Mountain Care

In the wake of the passage of the Affordable Care Act, Vermont created its own single-payer system that sought to take advantage of a waiver under the ACA that would become available in 2017. Like the ACA, the Vermont approach was designed to ruffle as few feathers as possible by preserving many institutional features of the current health insurance system.

The resulting public-private single-payer system would have obtained its funding through payroll taxes in excess of 10 percent, and would have offered a generous benefit package. Medicare and Medicaid, the latter already operating with a relatively flexible waiver, were largely left untouched. Coverage was expected to be “near-universal.” Private insurers were thrown a bone in the form of continued participation as administrators of the program. The reforms also included a shift to a no-fault medical malpractice intended to tame the trial lawyers.

But in the run-up to becoming operational, Green Mountain Care lost public favor – presumably when people realized they would pay considerably higher taxes. The Democratic governor abandoned it in 2014.

Overcoming Legacy Liabilities

A crucial stumbling block to a total makeover of health insurance is the complexity of the insurance it would replace. While the states currently serve as the primary regulator of private insurance, a patchwork of federal programs covers tens of millions of Americans today. Thus, states seeking to shift to single-payer systems would need a lot of cooperation from Washington in the form of regulatory approval — and probably statutory changes as well.

For one, seniors, who make up 10-20 percent of the population of every state, are largely covered by Medicare, a program regulated by the feds. Moreover, states also have to rely on federal regulators to make changes to their Medicaid and Children’s Health Insurance programs (CHIPs), which are largely paid for by Washington and which cover about another 20 percent of their residents. Finally, 5-10 percent of state residents obtain coverage (typically heavily subsidized coverage) through the Affordable Care Act’s insurance marketplaces.

In all three cases, states may seek waivers that would allow them to circumvent some program requirements. But not all of them. For example, substantive waivers in Medicare are unprecedented. And even if the waivers could withstand legal challenges, the states would require active and continued cooperation from the federal government — which is implausible under the current administration or, indeed, any administration opposed to greater government involvement in health care.

Waivers, it’s worth noting, are time-limited, putting states at the episodic whim of federal officials unless specific statutory provisions were written into law. States and localities would also have to make decisions on how to fold public providers like county and university hospitals and clinics into the single-payer system. These details may seem like  … details. But they carry significant consequences in terms of access and quality of care for individuals, and thus would be subject to political pushback no matter what decisions were made.

Then there’s the obstacle inadvertently created by the Employee Retirement Income Security Act of 1974, commonly referred to as Erisa. While mostly aimed at protecting private pensions, Erisa also preempts states from regulating companies that choose to self-insure with regard to health care. So any effort to take over the insurance provided by employers that are self-insured — which includes most large corporations — would likely trigger legal challenges.

Finally, states adopting their own health insurance would face the question on how to pay for treating undocumented immigrants. Given federal opposition to providing services to the undocumented, federal regulators would likely insist on a strict segregation of funding streams with commensurate administrative complexities.

Single-Payer and the U.S. Political System

One of the defining features of contemporary American politics is widespread distrust of government and elected officials. And nowhere is this more apparent than in decisions about health care — particularly end-of-life care. With the current hybrid system, the government is partially shielded from the most difficult decisions by the intermediary role of private insurers. However, the switch to a single-­payer system would eliminate the cover. And one would guess that part of the price for obtaining popular approval for a single-payer reform would be guarantees of no-strings benefits, undermining the monopsony power to restrict free access of services that can’t be justified in terms of cost and benefit.

Distrust of government would also make it difficult for a single-payer system to secure adequate funding. While a single-payer approach might get more bang for a buck — indeed, that’s one of its primary attractions — funding it with taxes would make those costs far more visible. Americans may not have a clue what, say, Medicare or veterans’ health insurance costs them, but a state-based single-payer system would not enjoy that luxury.

More generally, there is a real issue whether, once established, a single-payer system could withstand ongoing opposition. Hardly any politician can risk open opposition to Medicare, but a single-payer system would not necessarily obtain both the potent interest group support and the sense of inevitability that protects it. This raises questions whether long-term stability could be achieved without first obtaining a near-universal consensus about the appropriate nature of the American health care system.

A Bridge Too Far?

There is much to like about single-payer systems that could translate into popular appeal. In particular, it would make universal coverage — and an end to free-riding — practical and it would give insurers (here, the government) the tools (if not the will) to cut costs. But a go-it-alone single-payer system at the state level would face formidable obstacles even if it had the wholehearted support of the federal government. Which it would not.

Of course, this does not preclude the possibility for such a transition at the national level. Indeed, given the new popularity of ObamaCare and the escalating cost of insurance for the middle class, it seems plausible that we are closer to such a system than ever before. If the pendulum does swing back to the Democrats, we will certainly see some effort to test the waters.

Ultimately, the American health care system as currently organized is bound to collapse because the cost will become intolerable.
 

This doesn’t mean states that want to expand insurance coverage have necessarily hit a brick wall. The expansion of the Medicaid program under the Affordable Care Act serves as the most immediate opportunity to extend coverage — though political opposition that stopped them from taking up the offer in the first place would have to be overcome. By the same token, states have the opportunity to expand eligibility in their CHIPs to more kids and pregnant women.

States also have options for making coverage more affordable to the struggling middle class. For one, states can improve coverage through the Affordable Care Act marketplaces by counteracting Washington’s current efforts to destabilize them. This might include establishing a state-based individual mandate that gives the young and healthy the incentive to buy insurance, and in the process reduce premiums for the older and more at risk. Another untapped option: band together with neighboring states to establish regional marketplaces that are more liquid and more likely to have stable premiums.

States could also establish Medicaid buy-in programs that would open access to those who earn too much for Medicaid as an entitlement, allowing them to purchase coverage at subsidized rates. Perhaps the greatest potential to quickly reduce costs would be an all-payer model that allowed private insurers to assert (more) market power in negotiating provider prices. Greater efforts to improve transparency in medical pricing and quality, which would allow consumers to comparison-shop for non-covered services, also offer the potential for marginal improvements to affordability.

All approaches described here are less disruptive and less subject to the problems of state-based single-payer systems discussed above. But by no coincidence, they offer less potential for cost-cutting and redistributing the burden of insurance to those who can better afford it.

The American health care system as currently organized is bound to collapse someday because its costs will become intolerable. The rising burden created by the dependent population as Americans age out of the workforce and aren’t replaced by new workers, domestic or foreign, will further exacerbate this situation for individual and government budgets alike.

Current consumer-driven approaches, such as high-deductible health plans, have clearly failed to even make a dent in expenditures. We are simply spending too much. And excessive spending is not a result of excessive consumption of health care. “It’s the prices, stupid,” and until we are able to rein them in, partial reforms are bound to fail.

All this suggests that the single-payer approach may emerge as Plan B for the nation as a whole since a monopsonist is plainly needed to bring health care prices in line with other developed nations. As must be clear by now, though, I don’t believe a single-payer system would be the cure for all that ails. In the end, every health care system reflects the underlying pathologies of the political system that created it.

main topic: Health
related topics: Insurance, Public Policy, Social Safety Net