Commentary: Of Course We Can "Afford" Single Payer Healthcare

Single payer healthcare has been implemented in most industrialized countries and many developing nations.  Citizens in those nations enjoy healthier and longer lives, and spend substantially less on care.  On aggregate, their economies also devote fewer resources to the healthcare sector.  Canada spends about 12 percent of GDP on healthcare, the UK about 9.5 percent.  Japan's health system only takes up about 9.3 percent of its economy, a striking fact considering Japan has one of the oldest populations in world.  The median age is 46.1 years (in the US its 38.6 and in Mexico it is 25.8) and diapers for adults outsell diapers for babies.   

The way single payer healthcare systems reduce costs is extraordinarily simple.  The government takes over all healthcare spending and uses its enormous leverage and buying power to push down costs.  That's why an MRI costs $1080 in the USA and $280 in France.


There's a funny thing about free markets.  They work great when consumers are qualified to make rational decisions about their purchases.  You don't need a degree in electrical engineering or computer science to know which smartphone to buy.  Any ten-year-old can tell you that she prefers Coke to Pepsi or vice versa.  But no mother about to give birth, no matter how highly educated, and perhaps even if she herself is a doctor, has the expertise or the wherewithal to make an informed decision about her need for a c-section.  That decision will of course be made by her physician.  The same person who stands to benefit financially by performing that c-section.  Just google "for-profit hospitals c-sections" and you'll get the picture.  It's the same reason why some unscrupulous doctors order so many tests.  I'm all for free markets, but what kind of market can there be if the consumer can't choose treatment A or treatment B, or even realistically say no? 

Additionally, we can't rely on insurance companies to negotiate with providers on our behalf.  Its true that large insurers do negotiate down prices.  But they lack leverage of the government.  Medicare pays about 80 cents on the dollar compared with private insurance, while Medicaid pays only 60.  And its pure bunk that doctors somehow lose money on these patients.  As this article points out, doctors make less money by treating patients on Medicare or Medicaid than when treating patients with private insurance, but it won't bankrupt them.  To the contrary, as the above article explains, the average GP operating a private practice would still earn 137 thousand dollars a year even if she only received Medicaid reimbursement rates.  So when doctors or hospitals claim they might be "forced" to stop seeing or taking patients on Medicare or Medicaid, what they really mean is that they have an ample supply of patients with private insurance and thus face a high opportunity cost of treating patients with public healthcare.  Then again, if everybody had Medicare, doctors would be forced to settle for Medicare reimbursement rates or leave the profession.  
Finding a new line of work may be a possibility for a select few physicians who have lab experience or have engineering backgrounds.  Some doctors near retirement might decide to hang it up early.  But even after taking a substantial pay cut, being a doctor is the most lucrative profession that 99 percent of MDs are qualified for.  Its absurd to think that a reduction in pay would see a wave of doctors, many with children and mortgages, heading back to school to study economics so they could work at Goldman Sachs.  

There's another fatal flaw with health insurance.  Only sick people tend to buy it.  When I get in my car I don't know if I am about to get in an accident.  Nor can I buy insurance immediately before an accident to make sure I'm covered.  But sick people know they are sick, and know when its time to go see a doctor. This simple fact is why the insurance companies refused to cover pre-existing conditions before Obamacare.  People who tend to get sick a lot are also more likely to buy plans with little or no co-pays or low deductibles.  This is why insurance companies charge eye-popping rates for plans with no out of pocket costs. 

This phenomenon is known as adverse selection, and leads to the death spiral.  Mostly sick people but some healthy people buy into an insurance plan.  The insurer starts to lose money, so it raises premiums.  This causes the few healthy people to drop out.  They weren't using the insurance anyway.  This makes the insurer lose even more money, so they raise prices again.  Now the sick people can't afford to the pay the premium, and the plan shuts down.  Indeed, before the ACA, only a tiny individual health insurance market existed, and it was mostly prohibitively expensive. 


Given its power to both control costs and avoid the problem of adverse selection inherent to health insurance, its baffling to most outsiders why the US has not adopted a single payer system like the rest of the world.  Hillary Clinton and Bernie Sanders have sparred over it in countless debates as their campaigns try to woo Democratic primary voters.  As a professional economist, I can say unequivocally that its time for the profession to look in the mirror.  Lots of the confusion and obfuscation over single payer is the due to failure of the economics profession. 

Austan Goolsbee, chairman of the Council of Economic Advisers from 2010 to 2011 said of Sander's health plan, "the numbers don't remotely add up."  Other prominent economists who served in Democratic administrations have slammed Sander's single payer proposal for its supposed fiscal profligacy. But here it is crucial to remember how the economy as a whole differs from individuals or firms. 

For a family or a business, it is very important in that the numbers "add up."  That is, in the long run spending must equal income.  For the economy as a whole however, one man's spending is another man's income.  After all, those trillions of yearly health expenditures are receipts and income for doctors and hospitals.  In financial terms, aggregate healthcare spending is canceled out dollar for dollar by financial income earned by providers of healthcare.  On a economy wide basis, it is silly to think of costs in financial terms.  

In reality, the cost we pay as a society for healthcare is an opportunity cost.  Hospitals take up real estate that could be used for other purposes.  Doctors of course could have devoted their considerable innate talents to another field.  Unnecessary tests are a waste of money for the patient, but more importantly, they are a waste of real resources for economy as a whole.  It generates medical waste, it consumes the labor of a lab technician, labor that could have been put to productive use. 

An unnecessary C-section costs money.  But it also costs the mother time.  She must spend four to five days in the hospital followed by a six week recovery.  That's time that could have been spent back at work or caring for the newborn.       

To drive this point home, I once confessed to a prominent health economist that I believed the solution to the US healthcare crisis was simple.  "Simple?! But it's 17 percent of our economy!" He replied.  That's the point! If we used a single payer system to devote fewer real resources to the healthcare sector without harming health outcomes, think of the tremendous amount of human labor and talent that could be devoted to solving other problems or developing useful products.  

A hoard of number crunchers and budget hawks will use big numbers to claim that we can't "afford" a single pay system.  The reality is that the US economy pays dearly for a bloated and inefficient private system which consumes more real resources and produces worse outcomes than the rest of the world's public systems. On a macro level, the funding mechanism or deficit reduction that comes from a single payer system is irrelevant.  The real promise would come from the the flood of human talent and time freed from the outmoded health sector and released on the world to solve greater problems.  The millions of computers which could be put into failing schools instead of being used for insurance coding.  Or the tonnes of unnecessary medical waste kept out of landfills.     

Let me lay my cards on the table. Single payer healthcare would increase the size of the Federal Government.  It would create winners and losers. All government interventions do. It would also reduce the wealth and income of people who work in the healthcare sectors. Its fair to oppose single payer on ideological grounds because it would put a massive amount of real resources under the command of the Federal Government.  Narrow interest groups like insurance companies, for-profit hospitals, and doctors might oppose reform because it would hit their pocket books. But one unassailable truth remains.  Every other industrialized nation delivers cheaper healthcare and experiences better outcomes either with single payer or massive government interventions in the healthcare market.  Opposition to single payer is religion, not economics.