Tuesday, January 6, 2015

How Vermont could have made single payer work

Image: Vermont Governor Peter Shumlin signed Vermont's single payer bill into law in 2011, only to scrap the plan in the final days of 2014. (source)

Vermont's attempt to establish a single payer health care system was killed by irrationality, as Sarah Kliff explains:
Another strike against single-payer systems, compared to other American health-care arrangements: they're financed in an unusually transparent way. And arranging that financing, from scratch, often proves impossible.

Right now, most Americans get their health insurance through an employer. That employer, unbeknownst to us, typically puts thousands of dollars into our policy alongside the money we kick in. According to the Kaiser Family Foundation, employers, on average, pay more than 80 percent of an individual worker's premiums. But Americans usually don't notice their employer subsidy for health insurance; it doesn't show up on their paycheck anywhere.

Or take Obamacare, which is funded partially by taxes on the rich, partially by fees on various players in the medical industry, and partially through cuts to Medicare. The cost is spread across many groups, and many government functions.

But by moving all the financing to the government, a single-payer health plan like the one Vermont considered would lay naked the incredible costs of our health care system. Vermonters would certainly notice the 9 percent income tax hike and 11.5 percent payroll tax that the Shumlin administration concluded would be necessary to raise enough funds.
In so many words, single payer is very expensive. But single payer would have been slightly less expensive than the current system in 2015 and far less expensive in the long run. In other words, single payer was killed because of its cost, even though it would have saved money--and it's difficult to overstate the irrationality of this decision. It would be like spending $100 on a hammer because the $90 hammer is too expensive.

As I've written before, societal resistance to new social policy is inevitable. Even the phenomenally popular Social Security program experienced widespread skepticism and resistance when it was first implemented. Social democratic policy was unpopular even in Scandinavia when it was first implemented. Good social policy anticipates societal resistance and finds a way to work with it. Only policies that can win over a skeptical public survive. And Vermont's single payer--despite its many strengths--was unable to win over enough popular support. In a perfect world, PR wouldn't matter. But we don't live in a perfect world, so having the best policy isn't good enough.

Wikipedia has a useful summary of the efforts of single payer advocates. A bill passed in 2010 provided state funding for a commission to study health care reform. This commission made three recommendations: two of the three explicitly demanded single payer, and one suggested a public option. Then, based on this study, a 2011 bill mandated the creation of Green Mountain Care, single payer health care system for Vermont.

The real problem is that Vermont locked itself into a pure single payer system and didn't allow itself any room to maneuver. The goal of single payer advocates isn't a single payer system, but universal health insurance coverage and cost savings through administrative simplicity. Single payer is the most direct way to accomplish these goals, but it's not the only way.

Obtaining single payer's benefits without single payer
I wrote previously about the many administrative strengths of single payer here and here, and don't need to repeat those arguments on this page. However, throughout those pieces, I kept obliquely referencing a "workaround" used by Germany and Japan to get all the benefits of single payer, even though Germany has over 200 payers and Japan over 2000.

In many ways, the employer-based German health insurance system is very similar to that of the United States. Yet with a few simple regulations, the German system is able to attain universal coverage and realize all the savings of a single payer system. Even if it looks very different, the German system is able to attain all the desirable results of single payer.

For the administrative side, four key regulations allow the German system to match the administrative efficiency of single payer. First, the German government sets prices for every type of office visit and procedure. In other words, health care providers are reimbursed the same price no matter the insurer. Second, only one insurance plan can be sold in the entire country. Any insurance company* can sell this plan, but there is only one plan. In other words, people may have different insurers, but everyone has the same same plan. Obviously, this greatly simplifies administration. Third, all insurers must be nonprofit. And finally, the German government ensures that risk is evenly distributed across all insurers by redistributing imbalances in medical loss.

To obtain universal coverage, the Germans rely on two key regulations. As in the United States, many Germans obtain health insurance coverage through their (or a family member's) employer. And--as in the United States--employer-sponsored health insurance premiums are paid for through a mix of employer and employee contributions. As the experience of the United States should make clear, an employer-based system--even one with generous tax incentives--cannot attain universal coverage. So, the German government requires insurers to continue covering enrollees even if they lose their job or stop working for any reason. And, employers are required to contribute to insurance funds and offer all employees insurance.

As of 2014, the individual mandate is the law of the land in the United States; it is officially illegal to be uninsured. Yet millions of Americans remain uninsured. Without an individual mandate, Germany nevertheless attains universal coverage. The regulations of the Japanese health care system are similar to those of Germany.

In summary, the German and Japanese health care systems attain all the strengths of single payer through the strict regulation of the private insurance market, and Vermont could do the same.

Financing of a single payer system was politically impossible in Vermont because--though less expensive--single payer seemed more expensive. Would-be health care reformers in other American states or localities are certain to fail if they cannot find a way preserve the advantages of single payer while maintaining the cost camouflage of employer-based insurance. Obviously, because the German model is employer-based, it perfectly fits the bill; Vermont would not have had to invent and implement an entirely new system as they tried to do with single payer. Rather, they could have preserved the employer-based model--with its requisite cost camouflage--and met all the goals of single payer advocates.

Hear that ding, Governor Shumlin? It's time for round 2
Emulating the German system is not without its drawbacks. A pure single payer system would surely have attained universal coverage sooner, and, in the long run, single payer would probably have had slightly lower overhead as well. But these real (though small) advantages are moot--because--at least for now--a pure single payer system in Vermont is not possible.

Nevertheless, single payer in Vermont is not dead, though it must rise again in a different form, perhaps resembling the German system. It's time to design creative policies that a skeptical public will grudgingly accept at first, then come to love when they experience the benefits for themselves.

Again, new policy is never implemented easily. People naturally fear change and thus reliably fight against their own best interest, at least initially. Like it or not, this irrationality is inevitable and architects of good social policy must find ways to soften the blow for a skeptical, often irrational public. Once people experience for themselves the wisdom of a new policy, it will be impossible to repeal. I hope Governor Shumlin is ready for round 2, because he can achieve all of his health care reform goals without single payer.

I've got a few more thoughts on what meaningful health care reform could look like on a state or local level, but I'll save them for a later post.

*Technically, these are not insurance companies but sickness funds, but the principle is the same. I'm making some simplifications here. As I mentioned above, there is no individual mandate, meaning Germans don't have to participate in a sickness fund if they don't want to. Indeed, a small minority of (mostly wealthy and/or self-employed) Germans actually opt out of the sickness funds and purchase private insurance. Private insurance is independent from the sickness funds and subject to fewer regulations.

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