Medicare for All: Single-Payer Cost Analysis Case Study

Introduction: The Medicare for All Proposal

This case study seeks to determine whether a Medicare for All system would help reduce costs for insurers, providers, and patients. Regarding insurers, the case argues that Medicare for All would reduce costs in two ways. First, it would cut down on redundancies and inefficiencies in administrative processes that drive up costs. In doing so, the plan is projected to realize cost savings of $125 billion annually. Additionally, it would give Medicare strong price-bargaining power over pharmaceutical companies, which is projected to yield cost savings of between $120 and $140 billion annually.

For patients, the plan would lower some prices while increasing others. Because private insurance prices are higher than Medicare prices, moving to Medicare would reduce both hospital and clinical fees for patients currently on 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. Cutting private insurance prices to Medicare levels would 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 tension, policymakers may need to settle on a Medicare reimbursement rate that takes both private insurance and Medicaid rates into account, so that the plan benefits all members of society.

Course Concepts Illustrated by the Case

Case 6.3 demonstrates several important concepts from the course. These include improving the experience of care through a single-payer system, the 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 of improving the patient experience by reducing the administrative processes in billing and payment processing that create redundancies and inconveniences.

The case also highlights the concept of modifiable social determinants of health — social factors that hinder effective care delivery but could be changed to improve patient outcomes. The primary modifiable social determinant identified in the case is low income, which makes it difficult for unemployed individuals to obtain private insurance coverage. The proposed strategy is to implement a form of value-based insurance design that uses Medicare rates as the reference price for health insurance, thereby increasing access to coverage for low-income citizens.

Administrative Cost Reductions Under a Single-Payer System

Studies have shown that the United States spends more on healthcare administrative expenses than other developed countries (Gee & Spiro, 2019). The primary component of these costs is billing — encompassing claims submission, reconciliation, and payment processing (Gee & Spiro, 2019). Beyond billing, insurance providers may also incur administrative costs in general management, record-keeping, quality improvement initiatives, and programs designed to combat fraud and abuse (Gee & Spiro, 2019).

The case study acknowledges that the exact amount of administrative savings from moving to a single-payer plan is uncertain. However, a report by American Progress estimates that healthcare providers and payers in the US spend approximately $496 billion on administrative costs — roughly twice what is necessary (Gee & Spiro, 2019). The authors posit that $248 billion of these costs are excess and could be eliminated by adopting a single-payer system. 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 administrative cost share from the current 8.5 percent to 3.5 percent of total healthcare spending. 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. Moving to Medicare for All would reduce the costs of administering private insurance by $197 billion, reduce administrative costs from running Medicaid as a separate payment system by $26 billion, and yield employer savings of $32 billion in payment processing and collection. In total, moving to a single-payer system would produce administrative cost savings of close to $255 billion (Friedman, 2013). Taken together, the various studies suggest that Medicare for All would attract administrative cost savings of between $200 and $260 billion (Friedman, 2013).

Multiple sources note that the current multi-payer system is characterized by widespread redundancies and inefficiencies in claims processing, contracting, credentialing, and payment validation (Pollin et al., 2018; Gee & Spiro, 2019). These inefficiencies arise because all parties operate under their own claims-processing requirements and rules, and must interact with many different insurance providers (Pollin et al., 2018). A single-payer system could substantially reduce these inefficiencies and produce significant cost savings (Pollin et al., 2018).

Impact on Provider Revenues: Medicare Replacing 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 means 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 Medicare for All, reimbursements would shift to the Medicare rate, implying that provider revenues would fall by approximately 25 to 33 percent (Schwartz et al., 2021). Hospitals would lose revenue on both inpatient and outpatient payments, resulting in decreased revenues of $200 billion annually (Daly, 2019). According to the Healthcare Financial Management Association (HFMA), savings generated from streamlining administrative processes would not be sufficient to offset this revenue loss, potentially forcing some hospitals to close (Daly, 2019).

Other sources, however, indicate that provider revenues could rise in the long run (Cai, 2022). For instance, Cai (2022) found that the streamlining of administrative processes under Medicare for All would free up approximately 5 percent of providers' work hours, enabling them to increase the volume of care delivered and thereby increasing per-physician reimbursement by between $39,000 and $157,000 annually.

Conclusion and Key Takeaways

This paper analyzed the feasibility of collapsing the multi-payer health system currently in place and replacing it with a single-payer system. The US incurs significantly high healthcare administration costs compared to other developed nations, largely due to redundancies and inefficiencies in administrative processes. Based on the analysis of the four case questions, the following conclusions can be drawn: Medicare for All would (a) yield administrative cost savings of between $200 and $260 billion annually, (b) decrease provider revenues by between 25 and 33 percent as private insurance is replaced, and (c) reduce aggregate healthcare spending across the economy.

Three key takeaways from this analysis are:

First, Medicare for All would significantly decrease hospital revenues, with outpatient services accounting for the greatest decline among hospital service categories.

Second, the cost savings realized from streamlining administrative processes may not be sufficient to fully offset the loss in hospital revenues, raising concerns about the financial viability of some hospitals under the new system.

Third, Medicare for All would reduce hospital and physician fees for people currently under private insurance, while increasing fees for those currently under Medicaid — meaning the net distributional effects would vary considerably by patient population.

References

Cai, C. (2022). How would Medicare for All affect physician revenue? Journal of General Internal Medicine, 37, 671–672.

Daly, R. (2019). Medicare for All to cost hospitals $200 billion annually: Analysis found. Healthcare Financial Management Association. Retrieved from https://www.hfma.org/topics/news/2019/07/medicare-for-all-cost-hospitals-200-billion-annually.html

Galvani, A. P., Parpia, A., Foster, E., Singer, B., & Fitzpatrick, M. (2020). Improving the prognosis of healthcare in the United States. Lancet, 395(10), 524–533.

Gee, E., & Spiro, T. (2019). Excess administrative cost burden in the US healthcare system. American Progress. Retrieved from

Friedman, G. (2013). Funding HR 676: The Expanded and Improved Medicare for All Act — how can we afford a national single-payer health plan? Physicians for a National Health Program. Retrieved from http://www.pnhp.org/sites/default/files/Funding%20HR%20676_Friedman_7.31.13_proofed.pdf

Lee, R. H. (2019). Economics for healthcare managers (4th ed.). American College of Healthcare.

Pollin, R., Heintz, J., Arno, P., Wicks-Lim, J., & Ash, M. (2018). Economic analysis of Medicare for All. Political Economy Research Institute. Retrieved from https://peri.umass.edu/publication/item/1127-economic-analysis-of-medicare-for-all

Schwartz, K., Biniek, J., Rae, M., Neuman, T., & Levitt, L. (2021). Limiting private insurance reimbursement to Medicare rates would reduce health spending by about $350 billion in 2021. Kaiser Family Foundation Issue Brief.