Interest in a universal public option modeled on or linked to Medicare is growing as healthcare costs rise, but some analysts are saying the interest is based on faulty assumptions.
On its surface, the policy sounds appealing—it could expand health insurance access and lower overall healthcare costs. A study released on March 1 by the Kaiser Family Foundation found the eye-catching results that if commercial and individual insurance paid providers at Medicare rates, it would reduce healthcare spending for privately-insured individuals by 41% in 2021, or $350 billion.
But the government's low payment rates are due, in part, to low administrative costs because the fee-for-service system does not manage care for its senior members, according to Kate Baicker, dean of the Harris School of Public Policy at the University of Chicago. This leads to "wild overuse of some kinds of care, wild underuse of other kinds of care, and very different costs of delivering care in different parts of the country," Baicker said. By lowering provider reimbursement to Medicare rates, analysts argue that Medicare for All could actually increase healthcare costs, lower system quality and create a care access crisis.
"I don't think that we should be striving to have the rest of healthcare look just like traditional Medicare because it is not, in fact, the model of efficient and effective high-quality delivery," Baicker said.
Almost every provider across the U.S. accepts Medicare patients. The government program for seniors represents the largest payer in the U.S. Because of its size and authoritative backing, Medicare sets its own prices, reimbursing providers at rates it says an efficient hospital should be able to operate under.
But providers often argue that the federal government does not pay enough to cover the cost of care for their beneficiaries, noting that Medicare members are more likely to suffer from chronic conditions that require more care than individual and commercial patients. The higher prices the commercial industry pays are then necessary to subsidize the Medicare rates, according to Adam Block, a former CMS regulator and principal at the Charm Economics consultancy, at least, so the argument goes.
Private insurers also often lack the incentive to negotiate lower rates, Block said, because a large portion of payers serve as a third-party administrators for self-funded employers. In these instances, insurers act as a middleman to process claims for companies and receive a percentage of each request processed. It can be in their interest for healthcare costs to increase, Block said.
"They have to beat their neighbor, they offer a better discount than their competitors," Block said. "But they don't necessarily have to really press down costs."
Immediately lowering provider reimbursement to Medicare rates would drastically impact hospital revenues, Block said, creating a situation similar to the impact of the COVID-19 pandemic on healthcare systems.
"Many of the hospitals had to figure that out this year because their revenue just went away with all the elective surgeries," Block said. "Look at what they did this year, furloughs, layoffs, and voluntary and involuntary salary reductions, elimination of bonuses. Drastic, drastic stuff."
Cutting payment could also reduce the quality of talent entering the field. Because labor represents the largest expense that hospitals face, providers could immediately slash salaries to balance their bottom lines. This would disproportionaely impact larger hospitals that pay their physicians more, and would vary across specialty, said Karyn Schwartz, principal author of the KFF study. She pointed to a December 2020 working paper by the Congressional Budget Office that found that, while a single-payer system would cut hospital revenue, it would not necessarily result in a lower quality system.
"Hospitals spend a lot of money on things that don't necessarily directly impact the quality of care," Schwartz said.
Indeed, a cut in payments could eliminate some of the creature comforts patients enjoy, like comfortable rooms and gourmet meals, and reduce the amount of new MRIs and other equipment hospitals have in their stockpiles, said Brad Ellis, senior director of insurance at Fitch Ratings.
Ultimately, he said the KFF study imagines a healthcare system similar to the United Kingdom's, a nationalized program that has lower overall costs and similar clinical outcomes to the U.S. But given the size, complexity and fragmentation in the U.S.'s current healthcare system, Ellis said Medicare for All is not the simple fix to rising rising costs that some promise.
"There's a lot of money fighting against it," Ellis said. "But because costs continue to go up, the voices are getting louder."
Clarification: This story has been updated to indicate that the healthcare cost savings predictions reflect spending for privately insured individuals.
