Why A Government-Run, Single-Payer Healthcare Approach Is Doomed To Fail

It sounds great, almost too good to be true: Coverage for all with lower costs, a broad choice of providers, and minimal paper work. 

The problem is that it won’t work. 

For more than half a century, advocates for a government-run, single-payer approach to health care coverage have touted its potential. With debate over the Affordable Care Act heating up by the day, progressives, both at the state and federal levels are now pushing anew to move to some form of this system. Most recently, the California Legislature introduced a bill to accomplish this, although without any details of how it would work. 

On the surface, the arguments sound reasonable. Cut out the middleman—the insurance company—and use the savings to provide universal coverage at lower cost. Yet all attempts in the United States to implement this concept have failed. For example, Vermont made a serious run at a state-based, single-payer system—only to see it abandoned after only three years, due to major cost increases and the need to dramatically raise taxes to fund the expense. 

In practice, a single-payer system would cost more than the most efficient and effective programs that exist today, all while compromising access and, over time, quality.  

Let's look at three of the myths around this approach and why, if tried, it would be doomed to fail. 

Myth 1: It Would Lower Administrative Costs 

Supporters claim a single-payer system would siphon out billions of dollars in administrative overhead. How they reach this conclusion varies by the source but in each case, a deeper analysis reveals oversimplification and fallacious assumptions. 

One line of reasoning is based on the lower cost of health care in other countries with a government-run system. But the reduced costs in other nations reflect other factors—their cheaper drug prices, lower wages, and a higher number of primary care physicians compared to specialists—rather than lower administrative overhead.  

A second comparison drawn is between Medicare and commercial insurance in the United States. Here cost is confused with price, and vice versa. The federal government has a unilateral ability to set prices, and often does so at levels below the actual cost of care delivery. When it does this, hospitals and doctors offset the reduced payments they receive from the government by raising prices elsewhere. Published economic analyses indicate that only 90% of cost is reimbursed through Medicare today and that, as a consequence, commercial insurers pay, on average, approximately 120% of the Medicare rates to doctors and hospitals. 

Finally, some backers of a single-payer system look at the Medical Loss Ratio (percentage of health care premium spent on direct patient care) of some of the publicly traded insurance companies and note that, for some, nearly 20% of their revenues are used for administrative purposes. What is left unsaid is that there are already several not-for-profit insurance programs that spend more than 90% of their revenue on patient care—and as such, little savings would be achieved.

The idea that a government-run plan could function without incurring major administrative costs is naive, especially if fee-for-service is the method of provider reimbursement. In such a system, doctors and hospitals would still need to complete claims forms. Government employees would, in turn, be required to sort through them, make certain they’re appropriate, question coding, and pay the providers accordingly. There is little evidence, whether we look at the U.S. Postal Service or the Department of Motor Vehicles, that the government is particularly efficient at these types of administrative tasks.

Myth 2: It Would Reduce The Cost of Coverage

The basis for this claim is that other countries spend a lower percentage of GDP on healthcare—and the assumption that if the government takes over healthcare, the same would happen in the U.S. But as we saw in Vermont, the opposite is likely to happen.

The cost of healthcare is a combination of how many services are performed and how much each costs. When the government can set prices, it can decrease what it pays for each service, but that does not mean overall costs decline. Instead, as has happened around the globe, private insurers enter the market. In response to the higher payments offered, doctors and hospitals put these privately insured patients at the front of the line. And those physicians who continue to accept the governmental rates start doing more to make up for the lost income.  

We saw this approach fail when the federal government enacted the Balanced Budget Act of 1997. This legislation required healthcare inflation to rise no faster than GDP. To accomplish this, payments to doctors were theoretically reduced proportionately through the Sustainable Growth Rate calculation (SGR). But each year, the reductions were not applied due to the political backlash. By the time the requirement was lifted, the gap between what was paid and what would be required to match inflation exceeded 20%. 

Myth 3: It Would Provide Insurance Coverage to All

Champions of a single-payer emphasize that even with implementation of the Affordable Care Act, millions of Americans still lack health coverage—and they see single-payer as a solution. They argue that if the government created a single payer option, similar to what Medicare today provides to people over the age of 65, all eligible Americans would have an insurance card. But the question is, What would be the value of that coverage in the future? 

Healthcare costs are rising faster than our ability to pay and, as a result, prices are increasing in parallel at an accelerated rate. This is a fundamental business truism. Over time, price and cost must parallel each other. The drivers of cost inflation are drug prices rising at double-digit rates, new medical technology increasing expenditures on procedures, wages going up in response to labor shortages, and expensive regulatory requirements. Price controls in this environment can’t work.

Soon after implementation of a government-run, single-payer system, Congress would have to progressively increase taxes, reduce payments to doctors and hospitals, or do both. The former won’t be palatable to the American people or the current Congress, and the latter will result in a two-tier system, with prolonged delays in access for those without added private coverage. This is what exists today in most countries that have implemented a government-run, single-payer system. We can get a glimpse of this by looking at the difference in care provided to the poor through Medicaid. Over time, if our nation tried this approach more broadly, that would become the experience of the middle class as well.

What’s The Right Answer? 

Rather than try to move insurance to the government, an uphill battle unlikely to succeed, our nation would be better served addressing what is most broken in healthcare today. Increasing competition among organizations—based on the quality outcomes achieved, the access and service provided, and the true cost of delivering care—is a first step. In addition, Congress and the president will need to take steps to combat the dysfunction created by monopolistic pricing of drugs beyond the value they create, continue the shift from pay-for-volume to pay-for-superior-clinical-outcomes, and accelerate the implementation of 21st century technology, including both comprehensive EHRs and mobile tools like secure messaging and video. 

The combination of all of these steps offers the potential for our nation to begin to address the increasing incidence of chronic disease, minimize the complications that ensue, and reduce medical error. 

How insurance is structured matters, but whether it’s funded through taxes or paid by employers does not. What is essential is to avoid the historical gaming that insurers used in the past to maximize profits through "slicing and dicing" the risk pool and trying to attract only the relatively healthy. And that means common benefits and risk adjustment. 

To put it bluntly, for our country to embrace a government-run, single-payer system would be analogous to walking towards a cliff. Everything goes great until you reach the edge. With enough funding, it could work in year one and year two. But as taxes need to be raised annually to cover the added costs, and as delays for care become common, the failures of the model will become evident and discontent will grow. Already, states are finding it difficult to fund Medicaid without major federal assistance, and Medicare is approaching the point where it is spending more than it is collecting. Add on a government-run, single-payer system and our nation could rapidly fall from the edge to the ground below.