Cost Savings under Medicare for All

CASE STUDY 6.3: SINGLE-PAYER SYSTEM 1

Abstract

Case 6.3 seeks to assess the cost-effectiveness of the Medicare for All system. It discusses the cost savings to be realized by insurers, providers, and patients in implementing the Medicare for All system. For insurers, the plan would reduce costs by reducing redundancies and streamlining administrative procedures as well as granting Medicare significant power to bargain over pharmaceuticals’ prices. For patients under private insurance, the plan will reduce spending on care by $455 billion. At the same time, it would increase spending for those under Medicaid by approximately $160 billion. This text responds to questions one to four in the case study. More specifically, it seeks to determine the extent to which moving to a single-payer system would reduce administrative costs, how much provider revenues would fall if Medicare replaced private insurance, how much provide revenues would rise if Medicare replaced Medicaid, and the effect of Medicare for All on aggregate healthcare spending.

Case 6.3

Introduction of Topic and Facts

The case seeks to determine whether the Medicare for All system would help reduce costs for insurers, providers, and patients. On the part of insurers, the case argues that Medicare for all would reduce costs in two ways. First, it would cut down on redundancies and inefficiencies in administration processes that push up administration costs. In so doing, the plan would realize cost savings of $125 billion annually. Additionally, it would give Medicare strong price bargaining power over pharmaceutical companies, which is projected to realize cost savings of between $120 and 140 billion annually. For patients, the plan would lower some prices and increase others. Since private insurance prices are higher than Medicare prices, moving to Medicare would reduce both hospital and clinical fees for patients under private insurance plans. At the same time, the move would increase hospital and physician fees for patients under Medicaid since Medicaid charges lower rates than Medicare. Therefore, cutting private insurance prices to Medicaid levels will reduce aggregate spending on care by approximately $455 billion. Conversely, increasing Medicaid prices to Medicare levels is projected to increase spending by approximately $160 billion. To address this, policymakers may settle for a Medicare reimbursement rates that takes into account both private insurance and Medicaid rates for the plan to benefit all members of society.

Summary of the Areas Pertinent to the Course

Case 6.3 demonstrates some crucial concepts covered in the course content. These include the idea of improving the experience of care through a single-payer system, modification of social determinants of health, and reference pricing (Lee, 2019). The case recommends moving to a single-payer healthcare management model as a means to improve the experience of care by reducing the administrative processes in billing and payment processing that cause redundancies and inconveniences for patients. The case also brings to light the concept of modifiable social determinants of health, which are social factors that hinder the effective administration of care, but could be modified to improve patient’s experience of care. The modifiable social determinant identified in the case is low-income, which makes it difficult for an unemployed person to get private insurance cover. The proposed strategy is to implement a form of value-based insurance design that uses Medicare rates as the reference price for health insurance to increase access to coverage for low-income citizens.

Detailed Case Discussion

How much would moving to a single payer plan reduce administrative costs?

Studies have shown that the United States (US) spends more in healthcare administrative expenses than other developed countries (Gee & Spiro, 2019). The main component of administrative costs is billing costs, which are costs surrounding claims submissions, reconciliations, and payment processing (Gee & Spiro, 2019). Besides billing, insurance providers may also incur administrative costs in the areas of general management, record-keeping, initiatives targeting the quality of services, and programs seeking to combat abuse and fraud (Gee & Spiro, 2019).

The case study acknowledges that it is not clear how much administrative cost savings would be realized by moving to a single payer plan. However, a report by American Progress estimates that healthcare providers and payers in the US spend approximately $496 billion on administrative costs, twice the necessary spending (Gee & Spiro, 2019). The authors posit that $248 billion of these administrative costs are excess and could be trimmed by adopting a single-payer system (Gee & Spiro, 2019). In their study titled ‘Economic Analysis of Medicare for All,’ Pollin et al. (2018) estimate that moving to a single payer system would reduce the share of administrative costs from the current 8.5 percent to 3.5 percent of total healthcare spending (Pollin et al., 2018). This would translate to a 58 percent decline in insurance-related administrative costs and a 5 percent decline in total healthcare costs (Pollin et al., 2018).

Friedman (2013) categorizes these cost savings by type to provide a clearer picture. According to the author, moving to Medicare for all would reduce the costs of administering private insurance by $197 billion (Friedman, 2013). Further, it would reduce the administrative costs of running Medicaid as a separate payment system from Medicare by $26 billion (Friedman, 2013). Employers will, on their part, realize administrative cost savings amounting to $32 billion in regard to the processing and collection of payments (Friedman, 2013). In total, moving to a single payer system would bring about administrative cost savings of close to $255 billion (Friedman, 2013). Thus, putting the various studies together, one could conclude that Medicare for all would attract administrative cost savings of between $200 and $260 billion (Friedman, 2013).

Sources contend that the current multi-payer system is characterized by widespread redundancies and inefficiencies in claims processing, contracting, credentialing, and validation of payments, (Pollin et al., 2018; Gee & Spiro, 2019). This is a result of all parties operating within their own claims processing requirements and rules and having to deal with many insurance providers (Pollin et al., 2018). A single payer system could help reduce the inefficiencies associated with the current system and hence, realize cost savings (Pollin et al., 2018).

How much would provider revenues fall if Medicare replaced private insurance?

Data from the Kaiser Family Foundation indicates that private insurers pay 203 percent of the Medicare rate for outpatient services, 165 percent for inpatient services, and 125 to 133 percent for physician payments (Schwartz et al., 2021). This implies that commercial insurers pay 65 percent more for inpatient services, 103 percent more for outpatient services, and 25 to 33 percent more for physician services than Medicare. Under the Medicare for All plans, reimbursements would be at the Medicare rate, which implies that provider revenues would fall by approximately 25 to 33 percent (Schwartz et al., 2021). On the same front, hospitals would lose on both inpatient and outpatient payments, resulting in decreased revenues of $200 billion annually (Daly, 2019). According to the Healthcare Financial Management Organization (HFMA), savings generated from the streamlining of administrative processes would not be sufficient to offset this loss in revenue, forcing hospitals to close down (Daly, 2019).

However other sources indicate that in the long-run, provider revenues would rise (Cai, 2022). For instance, Cai (2022) found that the streamlining of administrative processes under Medicare for All would free up 5 percent of providers’ work hours, allowing them to increase the quantity of care, thus increasing per-physician reimbursement by between $39,000 and $ 157,000 annually.

How much would provider revenues rise if Medicare replaced Medicaid?

It is not clear to what extent revenues would rise if Medicare replaced Medicaid. Most sources compare the two by rates rather than actual figures. Medicaid reimbursement rates are lower than the Medicare rates for physician and hospital fees, averaging 72 percent. Lee (2019) indicates that if Medicare replaced Medicaid, provider revenue would rise by 28 percent (Lee, 2019), while hospital fees would rise by 18 percent (Galvani et al., 2020).

How much would spending change if Medicare replaced private insurance and Medicaid?

The case indicates that in 2016, Medicaid spent $566 billion ($7,941 per capita for 71 million patients), Medicare spent $672 billion ($12,946 per capita for 56 million patients), and private insurance spent $1,123 ($5,721 per capita) (Lee, 2019). If Medicare replaced Medicaid and private insurance, then the Medicare reimbursement rate would be the average of the three per-capita prices as was the case in Maryland adopted a global model (Lee, 2019). The likely Medicare rate would be a per-capita rate of $8,900, which is lower than the private insurance coverage, but more than the Medicaid rate.

As discussed previously, private insurers reimburse hospital and providers at lower rates than Medicare. A study by the Kaiser Family Foundation (KFF) approximates that total spending on private insurance for 173 million Americans aged 65 and low would be $859 in 2021 under the usual commercial rates (Schwartz et al., 2021). However, if insurers were to reimburse at the Medicare rates, total spending would only be $507 billion, representing a 41 percent decrease in spending (Schwartz et al., 2021). Thus, replacing private insurance and Medicaid with Medicare would reduce aggregate spending for people with private health insurance by approximately $352 billion (Schwartz et al., 2021). Aggregate spending on care for people under employer-sponsored coverage would reduce by approximately $310 billion (from $757 to $447 billion) if private insurers charge the Medicare rates (Schwartz et al., 2021). The authors attribute this to a decrease in the amount of premiums for services covered under the employer’s plan and lower out-of-pocket costs for costs that the employer does not cover (Schwartz et al., 2021).

Looking at the reduction in spending by type of service, outpatient services are covered by private insurers at 203 percent of the Medicare rate, while inpatient services are covered at 165 percent (Schwartz et al., 2021). If private insurers were to charge Medicare rates, outpatient care would account for the greatest reduction in total spending at 45 percent, while inpatient care costs would reduce by 27 percent (Schwartz et al., 2021). Finally, if private insurers were to charge Medicare rates, aggregate per-person spending would reduce, although the decline would be greater among people aged 19 to 65and lower for children below 18 years given that Medicare rates rise steadily with age beginning from age three (Schwartz et al., 2021 ). Generally, replacing private insurance and Medicaid with Medicare would reduce aggregate spending on care in the economy.