Etienne Deffarges has counseled, created, and invested in countless organizations during his professional life as a management consultant, business executive and entrepreneur. As a senior partner with Booz Allen Hamilton and global managing partner with Accenture, he advised businesses and governments all over the world, and orchestrated billion-dollar deals.
With U.S. voters consistently putting healthcare at the very top of their concerns, it is no surprise that Medicare for All (MFA) has garnered a lot of attention during the very competitive 2020 Democratic presidential primary. In terms of definition, let’s keep it simple and assume that MFA means a single payer healthcare system, administrated by the federal government, with private health insurance phased-out of our current system. Hospitals, physicians, and companies involved in healthcare products today—pharmaceuticals; medical devices, etc.—all remain in the private sector, with a few exceptions like the VA.
Do single payer healthcare systems exist today? Yes, starting with the UK’s National Health Service, or NHS. William Beveridge, author of a 1942 report on the welfare state, is considered the father of the NHS, created in 1948 under the Clement Attlee’s labor government. In Canada, our great neighbor of the North, Medicare was set-up in 1961, following a very popular and successful program launched in 1946 in the province of Saskatchewan. There are really thirteen Medicare plans in Canada, one for each of the country’s ten provinces and three territories. But all these plans follow strict federal rules and guidelines, and are for the most part funded by Ottawa. Other former British “Dominions” or Commonwealth countries such as Australia, Ireland and New Zealand, have adopted similar nationalized single payer healthcare systems.
MFA costs, compared to the current U.S. healthcare system: Analysis and available research
Single payer healthcare represents a relatively simple set of processes, at least compared to the very complex U.S. healthcare system. This translates into lower costs: According to figures released in December 2019 by the U.S. Department of Health and Human Services (DHHS), we spent $3.6 trillion in healthcare in 2018 (17.7% of GDP), or $11,000 per capita. The equivalent figure for the UK was $3,900, a mere 35% of the US spending. Australia and Canada were at $4,900 and $4,800 per capita respectively, all three countries spending less than 10% of their GDP on healthcare.
Which are the areas where a MFA system could bring significant savings relative to our current costs?
Administrative costs: We spent $270 billion in healthcare administration in 2018. We spend more on administrative costs than the United Kingdom spends on total healthcare. Admin costs represent 7.5% of our healthcare costs, versus 2% in the UK, and 3% in Australia and Canada. It is important to note here that this spending is a direct consequence of having a myriad private insurance companies interacting with a myriad of health providers. Think about it: A typical U.S. hospital has contracts with about a hundred health insurers, each contract several hundred pages long. Administrative costs have grown hand in hand with ever more complex electronic health records, patient accounting systems, the use of big data and other IT innovations. On the other hand, U.S. Medicare spends only 2.2% in administrative costs, in line with what happens in single payer countries.
U.S. prescription drug costs reached $335 billion in 2018, or 9.3% of total healthcare costs. Americans spend about twice as much on pharmaceuticals per capita than residents of other rich developed countries. We all know what should be done, which would happen easily and naturally in a single payer MFA system: First, eliminate the absurd clause within Medicare Part D that does not allow Medicare, the largest purchaser of drugs in the country, to negotiate prices directly with pharmaceutical companies. Have you ever heard of any other large industry where the principal purchaser of products is not allowed to exercise its negotiating power? I think not. Second, allow the import of lower-priced drugs from reputable countries such as Canada, Germany and Japan. This would end the protectionism, leading to price fixing, that our pharmaceutical companies enjoy today in the U.S. Think about this: A dose of insulin from our very own Eli Lilly cost $65 in Germany, whereas in the U.S. we have to pay at least $250 for the same product! We spend over $1,000 per capita on prescription drugs, versus $580 in Canada, $380 in the UK and $350 in Australia.
Hospital services and physician costs in the U.S. are about 60% higher than in Australia, Canada and the UK. There are lots of reasons for this—the high cost of going through medical school means our physicians need to earn more; increasing hospital concentration gives the largest provider systems the ability to raise prices; cost and pricing transparency is quasi inexistent in the U.S., enabling oligopolist pricing; And most patients have little incentive to act against high prices, even when they could, because what they pay is reimbursed in a large part by their health insurer. The toughest payers in U.S. healthcare? First Medicaid, and then Medicare, which pay hospitals and physicians at much lower rates than private insurance. This means that a move towards MFA would likely put significant downward pressure on hospital costs.
Private insurance has high marketing costs and needs to show profits for its shareholders. How much? To the tune of $27 billion in marketing expenses, with health insurers achieving $23 billion of net profits in 2018. None of this would be needed in a MFA system.
Let’s add up the resulting potential cost savings: Assuming a MFA system would need no more than 2.5% in administrative spending, well in line with what we have seen above for large single payer countries and our own Medicare, our costs in this area would fall to one third of what they are today, from $270 billion to $90 billion—a saving of $180 billion per year.
Similarly, in a MFA system where pharmaceutical companies would have to negotiate with Medicare and be exposed to competition from other developed countries, our prescription drug costs could be brought in line with those of other developed countries, and cut in half —a saving of $170 billion per year. Hospital services ($1.2 trillion in 2018), and clinical and physician spending ($730 billion) could fall too. Let’s be conservative and say they decrease by well below 10%, or 8%. This would yield savings of $160 billion per year. And Medicare does not need advertising, marketing or profits—that’s another $50 billion per year saved.
The resulting $560 billion in annual savings would bring our per capita costs to $9,300, a 15% cost reduction in a MFA system relative to our current healthcare costs. This is a very high-level analysis, but to bring it into perspective, let’s remind ourselves that Medicaid ($597 billion spending in 2018, covering all tranches of age, according to the Center for Medicare and Medicaid Services, or CMS) insures its 74 million enrollees at a cost of only $8,070 per capita. (The Medicare cost per enrollee is much higher at $12,500 capita, but its enrollee population is by definition above 65 years of age, closer to end of life and therefore in need of much more medical attention and services.)
This analysis is also validated by much more detailed recent studies and research:
In Lancet 2020, Alison Galvani, Alyssa Parpia, Eric Foster, Burton Singer and Meagan Fitzpatrick calculate that a single payer, universal healthcare system would lead to a 13% decrease in U.S. national healthcare expenditure, equivalent to more than $460 billion in annual cost savings. The entire system could be funded with less financial outlay that is incurred today by employers ($536 billion in 2018) and households paying for healthcare premiums ($738 billion), combined with existing government allocations, such as the over $200 billion per year tax relief to employers through their tax deductibility of private health insurance costs for their employees. The Lancet 2020 study identified the same healthcare spending categories as above in its tally of cost savings: Reduced administrative costs; reduced pharmaceutical prices (by 40%); reduced reimbursement rates for hospitals (5.5% lower if Medicare rates used, and 18.7% lower if Medicaid rates used); and reduced reimbursement rates for physician and clinical services (7.4% lower if Medicare rates used, and 19-23%% lower if Medicaid rates used)
An economic analysis of Medicare For All from the Political Economy Research Institute(PERI), authored by Robert Pollin, James Heintz, Peter Arno, Jeannette Wicks-Lim and Michael Ash in November 2018, determined that Medicare For All could reduce total healthcare spending in the U.S. by 10 percent.
Another economic research article from PLOS Medicine, authored by Christopher Cai, Jackson Runte, Isabel Ostrer, Kacey Berry, Ninez Ponce, Michael Rodriguez, Stephano Bertozzi, Justin White and James Kahn, looked at the projected costs of single payer healthcare financing in the U.S. and reviewed existing economic analyses. The authors compared the cost analyses of 22 single payer plans for the U.S. or individual states. All these analyses suggested the potential for long-term cost savings, with the largest savings predicted to come from simplified billing (or reduced admin costs) and lower prescription drug costs. Total savings ranged from 3.3% to 26.5%, with a median of 12.1%. Nineteen out of the twenty-two analyses predicted cost savings in the first year of single payer operation (despite significant transition costs), ranging from an increase of 7.2% to a reduction of 15.5%.
Single payer healthcare represents a relatively simple set of processes, at least compared to the very complex U.S. healthcare system.
Impact of Medicare For All on premiums, our economy, the current Medicare program and overall healthcare coverage
Let’s say that, pronto, we wake up and we live in a country with a MFA program, no private health insurance and healthcare costs lower by 15% or so—never mind the complicated transition to such an end-state. What happens to the economy? It would be more productive, since a good share of our lower healthcare costs come as a result of fewer administrative tasks (which are unproductive by nature) and stronger competition in the pharmaceuticals sector—a healthy development. Since GDP growth is driven by two factors, population growth and the productivity of that population, our economy would gain potential additional growth. MFA would mean universal healthcare for all Americans, or 100% coverage: Fewer working hours lost due to lack or insufficient access to healthcare would also improve productivity and economic growth—we would no longer have to carry the negative economic consequences of having 30 million uninsured people and another 30 million under-insured. Health outcomes would improve too: Today’s life expectancy at birth is 79 years in the U.S., versus 81 in the UK, 82 in Canada and 84 in Australia. U.S. maternal mortality at birth is twice as high than in Canada: An average of 14 women die in childbirth in the U.S. for every 100,000 live births, versus 7 in Canada, 9 in the UK and 5 in Australia. Universal healthcare would likely lead to higher life expectancy, healthier lives and population growth, all excellent outcomes.
Premiums represent a difficult area to assess, since in a MFA regime they would depend a lot on political decisions. My personal view on premiums is that a government managing MFA should set them up to achieve four key conditions: Ensure the financial viability of the MFA program; keep these premiums for all Americans at a lower level than the premiums they pay today for their private health insurance coverage; keep deductibles and out of pocket costs for patients to a minimum; and leave current Medicare rates for those over 65 unchanged. What would this mean in practice? The good news is that our level of spending today is so high that it leaves us with plenty of potential options:
a) Employers could pay into the new MFA system through a new Medicare tax, calibrated to equal the current $536 billion paid annually by employers for their employees’ private health coverage, minus the tax deduction they get for this expense, and minus an amount to be determined, let’s say 15%, so employers save money on healthcare concurrent with total system cost savings;
b) Today American households pay $738 billion in health insurance premiums: The new MFA rates for Americans below 65 should match this amount in aggregate, minus also 15% so that everyone benefits from total system cost savings. This means that the new MFA premiums for those below 65 would remain significantly higher than today’s Medicare rates—most people will pay only $145 for Medicare Part B in 2020, with an annual deductible of $198; there are also deductibles that go with Medicare Part A (covering in-patient hospital and a few other services), which can reach $1,408; premiums for private Medicare Advantage Plans and for Part D prescription drug plans are also very reasonable, way below typical private health insurance premiums. I would advocate not touching these current Medicare premiums, for obvious political reasons.
c) The biggest savings for American households, from both a financial and emotional standpoint, would be ending the current maddening array of deductibles; patient pay after insurance; much higher costs of “out of network” medical interventions; total coverage caps, both for individuals and families; and “surprise medical bills,” occurring when a patient is treated in an “in network” hospital by an “out of network” physician. Americans spent $ 376 billion in 2018 on these out of pocket costs, or 36% of their total healthcare expenditures. Much more than the already expensive private insurance premiums, it is this unpredictable collage of fees hitting the pockets of U.S. patients that a MFA system should end once for all. So whereas I would propose to finance MFA premiums out of the existing premiums paid by U.S. households, the financing to end all these seemingly random out of pocket costs for U.S. patients should come from another source, perhaps an increase of the current Medicare payroll tax rate (2.9%, paid half by employees and half by employers) of 0.5% to 1%?
On the negative side of the ledger, waiting times and potential “rationing” of care are the Achilles heel of most single payer systems, and would likely pose a problem for a U.S. MFA system as well. Absolute control of healthcare expenditures by a government, like in the UK where every year the government determines by “fiat” the NHS funding, can lead to under-budgeting, all the way to potential rationing of healthcare services. In the UK, where successive conservative governments have starved the NHS of funds to pursue austerity driven national budgets following the 2008 financial crisis, there is a real issue for the much-admired NHS to be able to deliver much needed health services to the population. For example, if a patient needs a mundane operation like a hip replacement, age is likely to be a factor, with “productive” citizens, i.e. below retirement age, likely to be placed in the “queue” ahead of senior citizens—not a great situation for a wealthy developed country.
The Canadian Medicare system suffers from the same type of “rationing” issues: Only 43% of Canadian patients are able to get a same or next-day physician appointment when sick, versus 51% of American patients. Relative to the U.S., wait times to see a specialist are six times longer in Canada, three times longer in the UK and twice longer in Australia.
MFA means the federal government suddenly controls the health insurance purse of the country. A U.S. government that would implement a MFA system would also likely be quite generous with that purse. However, what would happen when that government would be replaced by another one, of an opposing party and for example more focused on lowering government expenditures? Reversing a successfully implemented MFA would likely be very difficult politically (as Republicans have learned with Obamacare), but the option of starving the MFA of funds would be much easier to implement, leading to the types of problems seen with the UK’s NHS and Canada’s Medicare.
Medicare For All or simply Universal Healthcare, that is the question:
As seen above, if we suddenly woke up with a MFA system in our country, we would likely be better off on a number of fronts (economic; medical outcomes; and population health) relative to where we are today. Unfortunately, nobody has a magic wand: The problem is not with a potential MFA steady-state, but in the transition to get there. Just to think of a few problems, I can see three major issues in a potential transition to MFA:
First, there is the serious political challenge of telling 180 million Americans they will have to forego their private insurance for a new government program. Granted, private health insurers are not popular, mostly because of the array of out of pocket fees mentioned above and their often abusive reimbursement denials, but when it comes to health and access to care most people are likely to take a “better the devil you know” approach. Politically, the transition to MFA is a mine field.
Second, we do not have in the U.S. a strong tradition of big government programs and the legions of skillful civil servants they require, principally over the last four decades. Long gone are the FDR, Eisenhower, JFK and Lyndon Johnson days when many of our best and brightest chose to join the government to implement ambitious infrastructure and social programs. Many people remember the debacle of the ACA government website launch: Among other things, this will make Americans weary of automatically assuming MFA would work smoothly from day one.
Third, what happens to private health insurance? This is not an abstraction: We are talking about millions of people employed, hundreds of billions of dollars in market capitalization, and of course a lot of lobbying power—what is the desired course of action here? Wholesale nationalizations? At what cost to our federal budget? What happens to the myriad Blue Shield Blue Cross employees in state after state? Are they automatically offered a job in the federal government, or in an affiliated state agency? Are the United Health shareholders compensated? With an “acceptable” premium?
So many questions, all with challenging and most likely imperfect answers…
My personal compass leads me to Universal Healthcare: It is completely unacceptable that we are the only developed country in the world that does not offer healthcare access to all its citizens, but I believe a more pragmatic solution can take us to universal access to care faster and more reliably than MFA.
What do I mean by that? That we should build upon the one program we already have that works smoothly and to the satisfaction of all Americans who enjoy it: In other words, I am talking about the promised land we reach with 65 years of age, Medicare and Medicare Advantage plans. This program of universal healthcare insurance administrated by the federal government, supplemented by many private sector plans, appears to please everyone. There is no reason to change it. Instead we should aim to expand it to the whole population. This could be done both in gradual implementation steps and with benefits (and costs) decreasing with age—healthier young people not needing the same richness of health coverage than seniors.
Every two years we could expand Medicare (and the assorted private sector Medicare Advantage plans) to a new tranche of age: We would start with those between 65 and 55 years of age; two years later move to those between 55 and 40; and end with those older than 26, up to 40 years old. As mentioned above, the premiums of these “Medicare expansion” plans would be higher than current Medicare rates, mirroring existing private insurance rates minus 15% or so. But the current array of out of pocket fees, notions of “in or out of network,” “medical surprises,” and capricious reimbursement denials would be eliminated, replaced by the types of simple guidelines our seniors enjoy today with Medicare. To contain costs, the equivalent of Medicare Parts A and B would cost more and offer less generous benefits with decreasing age. One could think of the current Medicare for seniors as the “platinum” plan; those between 65 and 55 would have access to a gold plan; those above 40 would have a “silver” plan; and the younger people would have to do with a “bronze” plan. But that is where the private sector would come in, with anyone being able to supplement the “basic” government administrated Medicare plans available to all with a choice of private, supplemental Medicare Advantage plans, tailored to all specific health coverage desires and needs beyond what offered by the government. This would still be a very complex undertaking, but I dare think much simpler than transitioning to MFA.