Thursday, November 21, 2013

Why I Don't Like Single Payer

There are a few competing narratives surrounding the troubled rollout of the ACA. One narrative is that the problems thus far are emblematic of deep and fundamental flaws in any approach to health care reform (or virtually any other societal problem) that involves a large expansion of the state.

A differing narrative that is popular on the progressive left is that attachment to private medicine or multi payer health care financing is the underlying problem and, according to this narrative, a transition to single payer would be much smoother and efficient (example of this narrative here).

My goal here is not to dissect the differing interpretations of the implementation of the ACA. Instead, I'd like to explain why I do not support single payer, largely in response to the recent surge in discussion about transitioning to such a system.

Single payer is often defended on grounds of fairness and efficiency. Single payer, it is argued, is fairer than other health care financing systems because the state is a more egalitarian financing mechanism than the market. It is also argued that single payer is more efficient because it is able to use its large amount of bargaining power to force down prices for providers. Also, single payer health care systems do not need to put resources towards advertising, profits, etc. and can therefore run a health care system at less cost.

The empirical evidence to support such claims about the superiority of single payer is straight forward:

1.) Medicare is a single payer system. The program is popular and has lower administrative costs than private insurance.

2.) Other countries that have single payer have lower health care costs and higher life expectancies than the USA. These systems are also popular.

I'm obviously not convinced by this line of reasoning. The USA is an very large and diverse nation. Health care is a very individualized matter as well with each individual having very different health care wants and needs. Given this, it is hard to imagine the federal government's taking over of the entire financing of this sector going particularly smoothly.

Even if single payer were successful in countries like Sweden, that would hardly imply that a similar system would be successful in the USA. Sweden, for its part, seems to be moving away from a purely public health care model towards a model with a larger and more active private sector.

Then, there is the question of the empirical evidence. It is actually not clear that Medicare has lower administrative costs than private insurance. That result can only be found if you measure as a percentage of total costs. Per beneficiary, Medicare actually has higher administrative costs than private insurance. Regardless, Medicare's administrative costs don't include the many services that they outsource to other agencies (like revenue collection). They also don't include the deadweight loss inherent to the taxation used to finance Medicare.

Low administrative costs don't even necessarily indicate efficiency. It is quite possible that low administrative costs indicate underinvestment in management, fraud detection, and many other crucial services that are considered "administrative".

The large amount of bargaining power that supposedly allows these large public programs to "bargain down" prices typically have the unintended effect of eliminating competition among the sellers. Imagine a market with only one buyer. Whatever products that buyer decides not to purchase would ultimately have to go out of business due to the lack of sales. One buyer ultimately means one seller. There is no competition in this setup which means the traditional mechanism for lowering price (competition) is gone. The seller, eventually, has as much power as the single payer because neither of them has any other options. Instead of paying less for the same services, a single payer financing mechanism would eliminate the competition needed to provide lower costs and higher quality over time.

Advertising and profit are also crucial elements of any functioning market. They are hardly "wasteful costs" as advocates of single payer claim. Advertising gets crucial information to consumers and, perhaps more importantly, forces sellers to essentially figure out how their product benefits consumers (so they can advertise on that basis). Profit, for its part, is important for the signals it sends to producers and the reinvestment made possible by it.

There is a popular view that profit and advertising are somehow wasteful expenses. In fact, any system with true competition, by definition, must have a profit motive present and advertising. They are quite small expenses compared to the benefits (including cost savings) brought about by competition.

There is also the point pertaining to life expectancy. As I have pointed out in a recent post, life expectancy has little to do with the model of health care financing a country chooses. The simple fact of the matter is that health care systems don't have nearly as much effect on public as people like to believe.

When it comes to cost, single payer systems do all have lower costs levels than the extremely dysfunctional USA system. Still, somehow the British socialized medical system found a way to have higher cost growth over the last decade than even the USA. Canada, for its part, has had roughly the same amount of cost growth as the USA over the same period.

Indeed, most of the difference in health spending levels between the USA and other developed nations is a result of our excessive cost growth in the 1980s. There are competing explanations for this reality, but lack of single payer health care is not a particularly feasible one.

If anything, single payer systems should at least be much more equitable than non single payer systems. Even here, though, the evidence is not so clear. Canada, with its single payer system, actually has a steeper health-income gradient than the USA. The UK also has inequities in its (socialized) health care system.

This may seem odd at first, but one must only think of the public school system in the USA. Despite being state owned, public schools in wealthier areas are still far superior to those in less wealthy areas. There's a lot of reasons for this. Wealthier people are more sensitive to both taxes and the quality of the public sector. They are also more politically active and more willing (and able) to contribute to political candidates and are thus more politically powerful. The lesson here is that allowing the government to run industry won't end inequities within that industry. Instead, it will shift resources from economically powerful to politically powerful, and there is a lot of overlap between those two groups.

Of course, there are also the standard problems with single payer. The one size fits all model makes innovation in medicine very difficult. For all its dysfunction, our system is relatively innovative.

There are also the problems with quality that plague virtually all types of public health coverage. There are long waiting times and shortages of medical technology. The UK also has unusually bad cancer survival rates (this is also one of the few areas where we do quite well).

Our USA system is deeply dysfunctional. I'm not even necessarily arguing that our system is superior to Canada's or the UK's. I am arguing that we would be unwise to emulate these models.

Regardless of how they compare to the USA, it should be clear that they are quite dysfunctional. One of the main problems in the health care debate is the refusal by both sides to acknowledge how badly the entire developed world has handled health care.

Instead of trying to decide which health care system is the least dysfunctional, we should be asking why virtually all of the health care systems in the first world are so dysfunctional compared to other sectors in their respective economies.

Perhaps the problem is the idea that health care is "different" from other industries. Health care is different. However, the laws of economics still apply. Incentives still matter. Just like any other market, even the most intelligent central planners are not able to fix prices and allocate resources in an efficient manner. And, also just like any other market, only a decentralized, competitive system is capable of allowing the type of innovation that will ultimately lower costs and improve quality.

A single payer system would move our system in the wrong direction on all of these counts. The problems with our current system largely stem from the perverse incentives inherent to any system with as many distortions as our current system has. Implementing single payer would essentially be doubling down on the very mistakes that has brought our system to the dire state it is in today.

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