The slides from Dr. Gerald Friedman's talk Nov. 19

1. Sustainable Quality Health Care for Pennsylvania
Single Payer is not an Answer, it is the Answer
Gerald Friedman
Professor of Economics
University of Massachusetts at Amherst
November 2013
gfriedma@econs.umass.edu

2. Two reasons why Economists are
unpopular
• If any good could be done, someone would have been done
already.
– George Stigler would not bend down to pick up a $20. If it were real, someone else
would have picked it up already.
• Markets perfectly balance desire and cost
– They assume that health care is “overused” because it is free on the
margin to those with insurance.

3. I am a different type of economist
I will pick up money
In US health care, there is a lot of money lying
around.
Billions upon billions upon billions!

4. Where we are going
• Problems with US (and Pennsylvania) health
care finance
• Waste is no accident but built into private, forprofit health care
• Our solution: the PHCP
• Financing and distributional effects
• Creating jobs

5. The Real Problem:
Private, for-profit, health insurance
With wasteful funding and
fragmented delivery, system
drowning in administrative
expense and monopolistic pricing

6. Pennsylvania past, and future?
500%
450%
400%
Excess
Health
Burden
350%
300%
250%
200%
150%
100%
50%
0%
1997
2002
2007
PC Health Spending
2012
2017
Per capita gross state product
2022

7. Nationally: rising health care burden
on household budgets
4100%
3600%
3100%
2600%
2100%
1600%
Growing burden
of excess health
care costs
1100%
600%
100%
Index of per capita health care spending
Index of SSA average wages
Health care
spending 6%
of average
wage in
1970, 20% in
2010, 24% in
2021

8. Burden of health care on the poor and
middle class
Share of income spent on health care and taxes
to support health care
25%
20%
Progressive federal taxes
raise spending rate for
higher income people.
15%
10%
5%
0%
Bottom 20%
2nd 20%
middle 20%
4th 20%
Next 15%
Income group
Next 4%
Top 1%
Top 400

9. United States
Norway
Switzerland
Netherlands ²
Austria
Canada
Germany
Denmark
Luxembourg
France
Belgium ¹
Sweden
Australia
Ireland
United Kingdom
Finland
Iceland
Japan
New Zealand ¹
Spain
Italy
Portugal
Slovenia
Greece
Israel
Korea
Czech Republic
Slovak Republic
Hungary
Chile
Poland
Estonia
Mexico
Turkey
Per capita spending, around 2011, $US PPP
We spend a lot on health care
9000
8000
7000
6000
5000
4000
3000
2000
1000
0

10. We are not getting our money’s worth
Life Expectancy and Health Care Spending per Person, Nations and
Average Value
84
Hong Kong
y = 2.607ln(x) + 59.03
R² = 0.722
Switz
Italy
France
82
4 years less than
we should have for
our money
Life Expectancy at Birth
UK
80
Cuba
Denmark
78
USA
$6700 more than we
should spend for our
life expectancy
76
74
Turkey
72
$-
$1,000
$2,000
$3,000
$4,000
$5,000
$6,000
$7,000
$8,000
$9,000
Health Care Spending Per Capita ($US at purchasing power parity)
If we had the average OECD life expectancy, we’d have 4 more years of life.
If we had the average OECD expenditures for our life expectancy, we’d be
spending over $6700 less per person.
Source: OECD
$10,000

11. We die young because we lack access to care
And it is getting worse!
45%
40%
35%
30%
25%
2001
20%
2005
15%
2010
10%
5%
0%
Had a medical
problem, did not visit
doctor or clinic
Did not fill a
prescription
Skipped
recommended
test, treatment or
follow-up
Did not get needed
specialist care
Any of the above
access problems

12. US has most restrictive access to
health care, for everyone
Had cost related access problem
70%
60%
50%
40%
Americans have
most
problems, even
those with
insurance!
30%
20%
10%
0%
Source: Commonwealth Fund survey reported in Cathy Schoen, et al., "Access, Affordability, and Insurance Complexity" Health Affairs, Nov. 18, 2013

13. Access is a greater problem for those with lower incomes
Income-gradient of unmet needs for the less affluent is greater in US
Unmet care need* due to costs, by income group, 2007
Note that even
above-average
income
Americans have
unmet health
needs!
* Did not get medical care, missed medical test, treatment or follow-up, did not fill prescription or missed doses.
Source: Commonwealth Fund (2008).

14. Cost drivers in health care
Increase 1980-2005
2500%
2000%
1500%
1000%
500%
0%
Hospital care
Physicians
services
Nursing homes Prescription Administration
and home
drugs
of private
health care
health
insurance
http://www.commonwealthfund.org/usr_doc/Davis_slowinggrowthUShltcareexpenditureswhatar
eoptions_989.pdf
CPI
Wages
Per-capita
income
These are quality controlled price indices from the
Bureau of Labor Statistics.

15. Administrative bloat is overwhelming
American health care
• Administration of health insurers costs $200
billion
• Employers spend $32 b interacting with
insurers
• US doctors spent 4x as much on billing and
insurance as do Ontario doctors, $83,975 per
doctor vs. $22,205
– Staff spend 21 hours interacting with health
plans, 10x as much as in Canada.

16. More office workers than nurses
More managers than doctors

17. Rising tide of administrators

18. Our health-care system is uniquely
difficult
Report difficulties with insurance
60%
50%
40%
30%
20%
10%
0%
All Adults
Primary-care physicians
Source: Commonwealth Fund survey reported in Cathy Schoen, et al., "Access, Affordability, and Insurance Complexity" Health Affairs, Nov. 18, 2013

19. Those with market power exploit the
rest of us
Drug prices 60% higher in the US than
elsewhere.
– Prices fall by 80% when they go off patent

20. $850 Billion spent on Health Insurance
Premiums in 2010
Medical Mutual: US Healthcare Costs, 2010

21. How much waste?
Basis of estimate
Waste share
US excess spending compared with Canada
48.1%
(2008)
US excess spending compared with affluent
52.5%
OECD (2008)
US excess adjusted for life expectancy
75.2%
Excess US spending growth since 1971
44.2%
Excess US spending growth adjusted for
slower growth of life expectancy
59.4%

22. State-level studies all find significant
savings
30%
Single-payer Savings as
Share of State Health Spending
25%
20%
15%
10%
5%
0%
Friedman
Lewin
Gruber-Hsiao
Other

23. Administrative bloat is no accident
Part of insurers’ strategy to drive away claims
and people who file claims.

24. Private insurers raise costs because
they profit from waste
• 70:10 rule –70% of costs go to 10% of people.
– Shoe companies try to sell more. Insurers profit by
selling less.
Find the 10%; drive them out!
Cherry picking and lemon dropping

25. Failure to cheat risks insurance death
spiral
Rising
premiums
Rising
coverage
costs
Good guys fail
10:56
Relatively
healthy opt
out
Pool becomes
more
expensive

26. System works: for insurers and drug
companies
Profits for the ten largest insurance companies
increased 250 percent between 2000-9.
The five largest – WellPoint, UnitedHealth
Group, Cigna, Aetna, and Humana – took in
profits of $12.2 billion, up 56 percent in 2009
over 2008.
This is enough to provide coverage for nearly
500,000 families
http://www.thefiscaltimes.com/~/media/Fiscal-Times/Research-Center/Health-Care/GovernmentPapers/2010/02/18/Insurance%20Companies%20Prosper%20Families%20Suffer.ashx based on SEC 10-K filings.

27. They profit
Without helping a single patient
CEOs of the five largest insurers were
paid $73 million in 2009.
Michael
McCallister, Humana,
$3 million
H.
Edward, Hanway,
Cigna, $29
million
Angela
Braly, WellPoint
, $13 million
Steven
Hemsley, United
Health Group, $9
million
Ronald
Williams, Aetna, $1
9 million.

28. Single payer is the solution
• Limits administrative waste
• Restricts monopolistic pricing of drugs and
medical devices
• Allows effective management of capital
investments
• Allocates burden of cost of health care
according to ability to pay rather than
burdening the sick and disabled

29. Savings estimated by comparison with
single payer system
• Administrative costs by activity of US vs.
Canada, 2003 (Himmelstein et al. “Cost of Health Care Administration in
the United States and Canada”)
• Administrative costs Medicare vs.
Medicaid, and Medicare vs. private insurance
• Pharmaceutical costs in US vs. average of
OECD, from McKinsey Global
(http://www.mckinsey.com/mgi/rp/healthcare/accounting_cost_healthcare.asp)

30. National Savings from HR 676
Provider Administration
$32
$26
Drug purchasing
$221
Private Insurance
Administration
$197
Government Administration
$116
Total savings: $592 billion, or 19% of spending
Employer costs of
administering private health
insurance plans

31. Added costs for implementing HR 676
• CBO estimates of uninsured. Assume that uninsured would spend
80% as much on health care compared with 55% now
– Adds 3.4% of personal health care spending
• Utilization increase without copayments and deductibles
– 3% for hospitalization, physicians, and pharmaceuticals, 22% for
dental, 40% for home health care, 20% for nursing homes
• Medicaid rate equalization
– Medicaid/Medicare rates 66% now; equal under ACA for primary care
• $25 billion for additional government administrative costs
– Medicare rate for expanded system
• $20 billion for purchase of private, for-profit health facilities
• $31 billion for unemployment insurance and retraining of
displaced workers.

32. Program Improvements with HR
676, 2014
$20
Increased utilization
$31
$144
Cost of expanded coverage and
additional government
administration
Cost of Medicaid rate adjustment
$89
Transition cost of unemployment
insurance and retraining for
displaced workers
$110
Transition cost of capital buy-out
of private health care facilities

33. Until we get national single payer
Pennsylvania Health Care Plan
• All in, no one out
• Single payer allows
– administrative savings
– Effective bargaining with monopolistic drug
companies and medical device makers
• Financing reduces penalty for being sick and
disabled, and the burden on business

34. Pennsylvania single payer produces
large savings
$956 $1,464
$3,369
Employer administrative costs for
health insurance $1,464
Administration in provider offices
$12,815
$12,815
$7,983
Administration of private insurance
system $6,167
Reduced drug prices $7,983
Fraud reduction $3,369
Administration of government
programs $956
$6,167
Total savings of $32.8
billion!

35. Savings finance program improvements
Cost of System Improvements with PHCP
$1,398
$4,616
Net costs of health coverage
for the uninsured
Medicaid rates
Increased utilization of health
care services
$9,807

36. Net savings: $17 billion in reduced
spending in first year
Spending under ACA including cost of
administration of health insurance system, 2014
Total savings from ACA spending
Net spending after savings, before coverage
expansion
$
144,736
$
32,754
$
111,982
Added spending with PHCP
Net costs of health coverage for the uninsured
$
1,398
Medicaid rates
$
9,807
Increased utilization of health care services
$
4,616
Total added spending
$
15,820
Spending under PHCP
$
127,802

37. Savings increase over time because single
payer allows more efficiency
• Savings from fraud reduction and
duplicate billing
• Coordinated investment allows
savings on equipment and
facilities
• Coordinated electronic medical
records
• Eliminates excessive growth of
administrative burden and drug
and equipment prices

38. Single Payer makes health care sustainable
by establishing universal coverage and
eliminating private insurance and profit
Health Care Spending of State Income
25%
24%
Single payer
savings grow
over time
23%
22%
21%
20%
19%
2012
2013
2014
2015
2016
Without ACA
2017
2018
With ACA
2019
2020
Single Payer
2021
2022
2023
2024

39. Fairness
• Insurance means the sick are not to be
victimized by the payment system
• Health care costs will be borne according to
ability to pay, not by luck of good health.

40. Financing with existing revenues and
payroll and income taxes replacing
current health-insurance premiums
Needed revenue
Spending 2014
Existing spending sources
Medicare
Medicaid (Fed and State)
Medicaid adjustments (Federal)
VA
State other than Medicaid
Exchange subsidies
Employer subsidies
Workers' Compensation
20% of out-of-pocket spending
10% payroll
3% income tax
Net surplus
$
127,802
$
$
$
$
$
$
$
$
$
31,527
27,591
9,807
2,371
332
1,005
251
1,060
5,073
$
$
$
30,813
19,075
1,102

41. Shift in funding: less spending but
more Federal
$70,000
Extra federal spending for additional
coverage and higher Medicaid rates.
Employers (including public sector) and
households save.
$60,000
Spending in $millions
$50,000
$40,000
ACA
$30,000
PHCP
$20,000
$10,000
$-
Federal
State and local
government
Business
Households

42. Single payer can shift cost of care from the
unlucky sick to the relatively fortunate
16
14
Percentage change in net income
12
10
8
6
4
2
0
$15,136
$36,248
$57,058
$85,025
-2
-4
-6
Income
$135,977
$222,366
$1,586,767

43. Single payer creates jobs
• Lower cost of health care will allow more
consumer spending on other things
• Increased coverage brings federal money
• Lower labor costs (3% of payroll) allows
– Pennsylvania businesses to undersell competitors
– investment to Pennsylvania
– Use of more labor-intensive technology
Over 200,000 new jobs lowers unemployment
rate by over 3%

44. Single Payer lowers local taxes
Total local government savings from PHCP, 2014, selected counties
$700,000,000
$600,000,000
$500,000,000
$400,000,000
$300,000,000
$200,000,000
$100,000,000
$0
Total savings of $3.3 billion for
local governments in 2014 plus
$581 billion for state.

45. Single Payer savings and improvements in
health care from eliminating private
insurance and profit
Profit motive is inimical to efficient, quality care
The best way to make profits is to drive away the sick
and needy, adverse selection
Coverage restrictions invite other insurance in, bringing
billing waste and all the evils of the current regime

46. All of us have right to health care.
You can make it happen.