Healthcare costs in the U. S. are pointing toward an imminent crisis. In 2004, heathcare spending was up about 8% at $1.6 trillion, which represented 15.4% of U.S. GDP; whereas, other major industrialized countries contributed 6% to 8% of their GDP to healthcare spending. The annual rate of growth in U.S. healthcare spending is anticipated to be in the 7% range through 2014 when it will represent close to 20% of GDP. These statistics do not reveal themselves as real crisis indicators until they are translated to people terms. There are approximately 45 million Americans, or 16% of the population, who are without healthcare insurance – the vast majority because they are unable to afford it and therefore cannot afford healthcare. Due to the rapid annual growth of healthcare insurance costs, employers are being forced to shift these costs to their workers or to drop the benefit entirely. Today, on average, workers pay 36% more for employee-sponsored healthcare benefits than they did 4 years ago, and the percentage of workers enrolled in those programs (45%) is 20% lower than 10 years ago. Increasingly, America’s rank-and-file cannot afford to take advantage of their company healthcare benefits, and a newly published Harvard study found that half of U.S. bankruptcies were due to medical bills or illness.

Why are healthcare costs increasing so rapidly?
This is a provoking question, with much ensuing finger-pointing. The healthcare provider associations firmly attribute the problem to increases in premium rates by the private healthcare insurers (and government regulations of course), while the private healthcare insurer associations maintain that their premium rate increases merely reflect increased provider costs from price inflation and greater per patient utilization (and government regulations again). The truth is (according to the Departments of HHS and Commerce) that over the last 10 years, on the provider side, expenditures for hospital care, physician/clinic care, and prescription drugs have averaged annual increases of 6.9%, 8.9%, and 26.7% respectively for a combined weighted annual average of 9.2%. On the payer side, over the same period, average annual net expenditure (premiums less provider compensation) increases for private healthcare insurance have been 15.4%. To provide some per capita and general price inflation perspective - the U.S. population and prices grew at an average annual rate of 1.2% and 2.2% respectively during the 10 years. More recently, over the last 2 years, expenditures for hospital care, physician/clinic care, and prescription drugs have averaged annual increases of 7.0%, 8.3%, and 12.0% respectively for a combined weighted annual average of 8.2%, and private payer average annual net expenditures grew at 14.1%. Certainly, significant drivers of increased per capita healthcare spending are the new, more expensive, advances in medical technology and pharmacology defining higher levels of minimum acceptable healthcare at higher levels of cost. And a secondary factor is the demographic “aging of America” causing higher per capita utilization where currently about 37 million (9%) of Americans are 65 or older with the number projected to increase to 47 million (14.5% of the population) over the next 10 years (which is a 61% relative cohort increase). However, despite the likelihood of increased per capita utilization, clearly we should consider any strategies that effectively deal with the building crisis of healthcare costs. The primary area of consideration should be those macro level strategies that reduce or preferably eliminate healthcare costs rather than merely slowing cost growth – which brings us to our topic, the healthcare “single-payer” system.

Healthcare Single-Payer System
A healthcare single-payer system (SPS) is not a new concept - it means many different things to people and evokes many different responses when discussed. Generally, when a SPS is proposed as an option to private health insurance it is labeled as “socialized medicine” or the response is “it hasn’t worked in Canada or England” and the subject is dismissed out-of-hand. But a more open-minded view is required today if we are going to seriously tackle healthcare costs. In other words, the a priori intent should not be an advocacy of the status quo nor should private health insurers be condemned for their relative price increases above provider costs, but rather an all inclusive effort to study those options which may better serve America’s healthcare needs should be undertaken. Let us analyze the fundamental purpose of private healthcare insurance and its component costs.

The fundamental purpose of private healthcare insurance is to provide a service whereby the transference of risk is accepted. Simply stated, the probable healthcare costs of an individual or group in a given time period, given a multitude of factors, is actuarially determined, this is combined with an appropriate rate of return for accepting the risk, then costs of operations and a return on that amount must be added to arrive at a “premium” for the individual or group for the relevant period of time. The problem here is that the costs for risk, operations, and return are add-ons to provider costs. Indeed, if Americans in 2004 where able to pay directly for their healthcare provider costs, then about $70 billion, or about 9% of expenditures, would have been saved. But additional costs must be incurred in any third-party payer system, though payer net expenditures can be reduced to claims processing operational costs. Hence, the popularity of organizations moving to self-insured healthcare benefit structures with many discovering that their claims processing function can be sold to other self-insured organizations and the function transforms into a TPA revenue center further reducing healthcare benefit costs.

Single-Payer Options
Several state and national legislative proposals have been put forward recently with the objective of reducing healthcare costs and dealing with the vast amount of Americans who are uninsured or under-insured. These measures need to be discussed and analyzed; however, it is instructive to briefly review the successes and failures of other implemented healthcare systems – specifically those of Canada and the U.K.

The Heritage Foundation (a conservative, “free-enterprise” think-tank) as part of its lecture series published “Buyer Beware: The Failure of Single-Payer Health Care.” In this paper the lecturers correctly point out the early successes and later failures of nationalized healthcare in Canada and the U.K. At the outset, in both countries the populace was exceedingly pleased with their respective healthcare systems “where everything is free, where hospitals are brand new, where doctors and patients are absolutely content.” In Canada, as recently as 1991, a “clear majority” rated their healthcare system as excellent or very good; whereas, 10 years later about 80% rated the Canadian healthcare system as being “in crisis.” In both countries the core problem has been not that the government is the sole payer, but rather that it has been essentially the sole provider. Specifically, there has been largely a focus to cover operating costs and capital asset investment management has been absent or misaligned. Indeed, in the U.K. from 1950 to 1963 not a single new hospital was built, and misalignment of capital resource allocation occurred in both counties where investments flowed to areas with political clout rather than to the areas of greatest need. A monopsonist market system where private healthcare providers interact with a single healthcare payer would very likely avoid these supply versus demand political sub-optimization issues – it has worked well for Walmart (and its customers) vis-à-vis its suppliers. However, the Heritage Foundation lecture attempted to cast doubt on any government SPS by outlining the failures of nationalized healthcare provider systems. These types of agenda-driven, conclusion-given, ideological arguments do not serve us well. What is more, the lecture pointed out that the U.K. has been moving to an “NHS as funder” system and the supply of healthcare resources is improving.

In the U.S., about 20 states have had or will have legislative initiatives introduced that fly under the “single-payer” banner. At the national level, the “United States National Health Insurance Act” has been proposed which also has been termed a “single-payer” measure. This federal legislation, though well meaning in attempting to address the crisis situation that common Americans are facing relative to healthcare costs, is largely symbolic and it has as a central tenet the nationalized provider model. The legislation stipulates that as a requirement to qualify as a healthcare provider “no institution may be a participating provider unless it is a public or not-for-profit institution.” Further, it states that “Investor-owned providers of care opting to participate shall be required to convert to not-for-profit status,” and that the “owners of such investor-owned providers shall be compensated for the actual appraised value of converted facilities used in the delivery of care.” Frankly, this is just not viable legislation – it avoids using the strengths of market systems in the supply of healthcare (as in the case of the U.K. and Canada), and it subjects our Treasury to the burden of purchasing (over 15 years) the entire private healthcare industry. More serious measures are being discussed at the state level in Vermont and California. In Vermont, there are actually 4 initiatives being considered, and all attempt to deal with the plight of the uninsured, but only one measure is a true “single-payer” proposal; whereby, healthcare benefits are disconnected from employment and the state pays for healthcare through a “healthcare credit card” system financed with increases in taxes (payroll and other). California has a similar system proposed, the “Health Care For All Californians Act.” The fundamentals of the act are 1) all state citizens (including Medicare/Medicaid recipients) would be completely covered for healthcare provider services (including dental and vision) with no co-payments, 2) all healthcare services currently covered by private healthcare insurers would be paid for by the state, and 3) the system would be financed with current level Medicare/Medicaid funding and by a payroll tax on employers, employees, and the self-employed. For our discussion, the benefit here, relative to the California measure, is that a reputable healthcare consulting firm, the Lewin Group, has undertaken a comparative analysis of the incidence of this proposal over the next 10 years as opposed to maintaining the current healthcare system in the state. The Lewin Group concluded in their analysis findings that, despite the fact that healthcare demand would rise about 20% (largely due to the uninsured and under-insured), in general, employer and employee healthcare costs alike would fall significantly such that average annual healthcare expenditures would drop about $35 billion (savings of about $8 billion the first year and expanding thereafter, resulting in a $350 billion savings over 10 years). This is a mammoth healthcare cost reduction in one state alone. And how are these reductions achieved? In the first year, savings for bulk purchasing mechanisms and administrative costs would be about $5 billion and $20 billion respectively, but this amount ($25 billion) would be discounted by about $17 billion due to increased utilization and the elimination of co-payments.

Is the healthcare single-payer system a viable and beneficial option?
If the Lewin Group analysis and conclusions are generally correct for California, then the answer would very likely be “yes.” Additionally, the state would become relatively more attractive for employers wishing to relocate to achieve lower healthcare benefit costs. This would, in turn, motivate other states to adopt similar measures in order to maintain their employer tax-base. However, the purpose of this discussion cannot not be to make any definitive conclusions about healthcare SPS relative to private healthcare insurance, the objective is merely to point out that we have a growing healthcare cost crisis and that we should consider any effective options regardless of ideology. Who would be the likely winners and losers if a national healthcare SPS was implemented (given it to be a financially viable option)? Certainly, the primary beneficiaries would be the millions of disadvantaged Americans going without healthcare along with the rank-and-file employees (and their employers) struggling to cope with increasing private healthcare insurance costs. Also, with an assumed increase in demand in the range of 20%, other immediate beneficiaries would be the providers, then as capacity utilization and the provider supply grew, healthcare equipment, supply, and service vendors would experience robust increases in demand. Another likely benefit would be that achieving the goal of establishing a national healthcare information network could be achieved much more rapidly and effectively because one standard for electronic claims and electronic medical records would be more easily established. And the losers? Those healthcare suppliers who are currently able to exert significant pricing control in the market would likely lose influence, though the increase in healthcare demand could maintain revenue levels. And, of course, private healthcare insurers would lose a profitable market, though their skills and resources devoted to eligibility, claims, medical records, etc. processing would likely be at least partially needed.

The subject of a healthcare SPS obviously requires more open and balanced discussion and analysis. Those strategies that might significantly reduce or eliminate costs while improving general healthcare should be aggressively studied. A comprehensive free enterprise market system works splendidly in satisfying consumer demand in many situations, though healthcare may not be one of them.

For further information please contact:

Katja Feick
Corporate Communications
+44 (0) 207 915 7856
katja.feick@frost.com

www.medicaldevices.frost.com