The Economic Incentives of Single-Payer Healthcare Systems
Paper written for my PST 3127 class.
The Economic Incentives of Single-Payer Healthcare Systems
The healthcare system in America is frankly an embarrassment. In 2004, the average cost of healthcare in the United States was $6,037 per person; compare that to Canada at $3,161 or the U.K. at $2,560. For all this spending, America has nothing to show but millions of uninsured and one of the lowest life expectancies in the industrialized world. Obviously, severe economic inefficiencies plague the current US system.
The US “has the most bureaucratic health care system in the world, including over 1,500 different companies, each offering multiple plans, each with its own marketing program and enrollment procedures, its own paperwork and policies, its CEO salaries, sales commissions, and other non-clinical costs-and, of course, if it is a for-profit company, its profits” (Harrison). Additionally, doctors and hospitals are forced to maintain large billing and negotiating staffs to deal with all the plans. All these overhead costs add up: nearly 30 cents of every dollar spent on healthcare are for expenses other than actually providing healthcare.
The government is simply more efficient than private insurers when it comes to administrative costs. In addition to eliminating the aforementioned inefficiencies, the government enjoys much larger economies of scale as well as zero costs for collecting premiums. Indeed, only 3% of Medicare’s total expenditures are administrative. Furthermore, a single-payer monopsony is far better equipped than individual insurers to exert downward pressure on costs.
The question inevitably arises: if the current, public-private hybrid system is to blame, why not instead remove all government involvement in healthcare and let the free market run its course? Many advocates of free market healthcare will tout the increased efficiency afforded by capitalistic, incentive-driven economies. Unfortunately, amid the American capitalist mentality, it is rarely understood that free markets result in efficient resource allocation only under certain conditions. The healthcare market fails to meet several of these conditions outright.
First, healthcare is unique in that demand for it is perfectly inelastic. That is to say most people would pay any price necessary, even all their assets, in order to save their lives. Put another way, the demand curve is infinitely vertical. This, combined with limited supply, makes it very difficult for free market corrections to take place.
Second, there exists massive information disparity. This is not the case in, say, the restaurant business. If you are not satisfied with the product for the price you paid, you will not come back. In healthcare, the product (i.e. the result/effectiveness of treatment on your health) is regularly not evident for weeks or months and often not at all. This cannot make for an efficient market.
Third, in an efficient market, all actors (consumers and producers) are assumed to be rational. Decisions leading to truly efficient resource allocation must be made rationally and objectively. Admittedly no real market has perfectly rational actors, but the healthcare market - with the lives of people at stake - stirs powerful emotions, leading to irrationality on a scale not seen anywhere else.
Having shown that free market healthcare does not necessarily equate to efficiency, I will now show that it in fact equates to inefficiency. Unlike a single-payer system, a free market system does nothing to solve the problem of administrative costs. If anything, overhead costs could increase as Medicare is replaced by even more private insurers and plans.
In a free market, and as it stands now, if you cannot afford to pay for a doctor visit, the doctor does not have to treat you. But if you show up in an emergency room, they are obligated to get you stable and over your emergency. This results in many people who might have wanted to go to the doctor early on in an illness, who instead end up in the ER. Typically, for the same services rendered, an ER is 8-10 times more expensive than a traditional doctor visit. When you take into account that people going to the ER have usually progressed further in their diseases, the bill comes out to about 20-30 times the hospital bill they might have had otherwise, all of which ends up being paid for by the government anyway. One potential response to this inefficiency is to cut the emergency coverage. This would however create such a public relations nightmare that I have not yet heard it supported by even the staunchest of libertarians. The only reasonable way, then, to solve this inefficiency is to make preventative care something everyone has access to.
Some libertarians will argue that a single-payer system will result in lower quality healthcare. Yet these same libertarians fail to explain why, then, numerous quality of care, cost of care, and treatment outcome studies, including patient satisfaction surveys, show the VHA (Veteran’s Health Administration, a purely government funded branch of healthcare) consistently outperforming the private health care sector.
Here’s one reason: the VHA, unlike the private sector, has invested substantially in electronic medical records and other improvements to the quality of care they offer. Dr. David Brailer, Bush's National Coordinator for Health Care Information Technology, “estimates that if the U.S. health-care system as a whole would adopt electronic medical records and computerized prescription orders, it would save as much as 2 percent of GDP and also dramatically improve quality of care” (Longman). The fact of the matter is hospitals and doctors have no financial incentive to justify the substantial up-front costs of electronic records (or other improvements). Again because of information disparity, consumers are often not cognizant of any such investment or its benefits, and certainly will not pay higher insurance premiums for them. To attain maximal profits, insurers need only persuade consumers that they are getting quality healthcare without actually burdening themselves to provide it. With such information disparity, and with enough advertising dollars, consumers will be unable to tell the difference until it’s too late. A single-payer system (such as the VHA), in contrast, need not justify to shareholders the profitability of an investment needed to improve healthcare and save lives.
The Economic Incentives of Single-Payer Healthcare Systems
The healthcare system in America is frankly an embarrassment. In 2004, the average cost of healthcare in the United States was $6,037 per person; compare that to Canada at $3,161 or the U.K. at $2,560. For all this spending, America has nothing to show but millions of uninsured and one of the lowest life expectancies in the industrialized world. Obviously, severe economic inefficiencies plague the current US system.
The US “has the most bureaucratic health care system in the world, including over 1,500 different companies, each offering multiple plans, each with its own marketing program and enrollment procedures, its own paperwork and policies, its CEO salaries, sales commissions, and other non-clinical costs-and, of course, if it is a for-profit company, its profits” (Harrison). Additionally, doctors and hospitals are forced to maintain large billing and negotiating staffs to deal with all the plans. All these overhead costs add up: nearly 30 cents of every dollar spent on healthcare are for expenses other than actually providing healthcare.
The government is simply more efficient than private insurers when it comes to administrative costs. In addition to eliminating the aforementioned inefficiencies, the government enjoys much larger economies of scale as well as zero costs for collecting premiums. Indeed, only 3% of Medicare’s total expenditures are administrative. Furthermore, a single-payer monopsony is far better equipped than individual insurers to exert downward pressure on costs.
The question inevitably arises: if the current, public-private hybrid system is to blame, why not instead remove all government involvement in healthcare and let the free market run its course? Many advocates of free market healthcare will tout the increased efficiency afforded by capitalistic, incentive-driven economies. Unfortunately, amid the American capitalist mentality, it is rarely understood that free markets result in efficient resource allocation only under certain conditions. The healthcare market fails to meet several of these conditions outright.
First, healthcare is unique in that demand for it is perfectly inelastic. That is to say most people would pay any price necessary, even all their assets, in order to save their lives. Put another way, the demand curve is infinitely vertical. This, combined with limited supply, makes it very difficult for free market corrections to take place.
Second, there exists massive information disparity. This is not the case in, say, the restaurant business. If you are not satisfied with the product for the price you paid, you will not come back. In healthcare, the product (i.e. the result/effectiveness of treatment on your health) is regularly not evident for weeks or months and often not at all. This cannot make for an efficient market.
Third, in an efficient market, all actors (consumers and producers) are assumed to be rational. Decisions leading to truly efficient resource allocation must be made rationally and objectively. Admittedly no real market has perfectly rational actors, but the healthcare market - with the lives of people at stake - stirs powerful emotions, leading to irrationality on a scale not seen anywhere else.
Having shown that free market healthcare does not necessarily equate to efficiency, I will now show that it in fact equates to inefficiency. Unlike a single-payer system, a free market system does nothing to solve the problem of administrative costs. If anything, overhead costs could increase as Medicare is replaced by even more private insurers and plans.
In a free market, and as it stands now, if you cannot afford to pay for a doctor visit, the doctor does not have to treat you. But if you show up in an emergency room, they are obligated to get you stable and over your emergency. This results in many people who might have wanted to go to the doctor early on in an illness, who instead end up in the ER. Typically, for the same services rendered, an ER is 8-10 times more expensive than a traditional doctor visit. When you take into account that people going to the ER have usually progressed further in their diseases, the bill comes out to about 20-30 times the hospital bill they might have had otherwise, all of which ends up being paid for by the government anyway. One potential response to this inefficiency is to cut the emergency coverage. This would however create such a public relations nightmare that I have not yet heard it supported by even the staunchest of libertarians. The only reasonable way, then, to solve this inefficiency is to make preventative care something everyone has access to.
Some libertarians will argue that a single-payer system will result in lower quality healthcare. Yet these same libertarians fail to explain why, then, numerous quality of care, cost of care, and treatment outcome studies, including patient satisfaction surveys, show the VHA (Veteran’s Health Administration, a purely government funded branch of healthcare) consistently outperforming the private health care sector.
Here’s one reason: the VHA, unlike the private sector, has invested substantially in electronic medical records and other improvements to the quality of care they offer. Dr. David Brailer, Bush's National Coordinator for Health Care Information Technology, “estimates that if the U.S. health-care system as a whole would adopt electronic medical records and computerized prescription orders, it would save as much as 2 percent of GDP and also dramatically improve quality of care” (Longman). The fact of the matter is hospitals and doctors have no financial incentive to justify the substantial up-front costs of electronic records (or other improvements). Again because of information disparity, consumers are often not cognizant of any such investment or its benefits, and certainly will not pay higher insurance premiums for them. To attain maximal profits, insurers need only persuade consumers that they are getting quality healthcare without actually burdening themselves to provide it. With such information disparity, and with enough advertising dollars, consumers will be unable to tell the difference until it’s too late. A single-payer system (such as the VHA), in contrast, need not justify to shareholders the profitability of an investment needed to improve healthcare and save lives.