October 29, 2016

Single-Payer Health Care in Colorado?

This article consists of two blogs I wrote elsewhere last year about the proposal for a single-payer health care system in Colorado. I am republishing them for the convenience of my friends in Colorado. 

Please read this article keeping in mind that the texts were written one year ago.


Regardless of whether one wants more entitlement programs, or would like to do away with the welfare state entirely, one cannot escape economic realities. Opponents of the welfare state tend to ignore the enormous economic instability that would follow if they got their will and could shut down tax-paid entitlement programs overnight.

On the other side of the aisle, supporters of an expanded welfare state ignore real-life fiscal and macroeconomic conditions under which their new programs would come to life. We have probably never been at a worse point in time for any new entitlement program, especially ones that are seriously under-funded. 

Yet just as macroeconomic realities do not work on ivory-tower libertarians, they seem to elude progressives who, e.g., propose a new, universal paid-leave program. 

Or a single-payer, universal health care program. The latest effort on that front is under way in Colorado. And as always seems to be the case with these initiatives, its proponents appear to be completely impervious to economic reality. From the Denver Post:

Colorado voters will decide next year whether this state should be the first to pay for comprehensive health care for residents. Proponents of a single-payer state system gathered enough signatures to put ColoradoCare on the ballot, the secretary of state's office announced Monday. They needed 98,492 valid signatures to put a state-governed health care system to a vote. ... Backers estimate ColoradoCare would raise $25 billion a year for health-care costs through a proposed 10 percent payroll tax. Critics decry it as a massive expansion of government that would double the size of the state budget. 

Where did they get their $25 billion from? In 2014, total employee compensation in Colorado amounted to $167.4 billion, of which ten percent would be $16.74 billion. This is assuming that not a single job is destroyed by the tax. 

On the other side of the equation we have health care costs. According to the Kaiser Family Foundation state data, health care in Colorado cost a total of $30 billion - and that was in 2009. A reasonable estimate for 2014 points to $36 billion. 

In other words, even if the $25-billion revenue number were correct (which it is not) the proponents of ColoradoCare would have to obtain a cost cut equivalent to one third of current health expenditures in the Centennial State. 

Judging from the Denver Post article, the proponents of ColoradoCare have not done their financial homework:
Ivan Miller, executive director of ColoradoCare ... a psychologist and author of a book on health-care reform, contends that if the initiative passes, residents will gain premium health care coverage for $5 billion less than they pay now. ColoradoCare would slash administrative costs of private insurance and negotiate bulk rates for pharmaceuticals. The coverage would extend to "anybody who earns income and lives in Colorado," he said. 
I, too, have written a book on health care reform. There I explain many of the dynamics that American proponents of single-payer health care so often overlook. Among them, the pressure to keep costs down which gets worse over time. A good example: the rate of cost increase in health care in the United States has been about twice the increase in GDP. Critics of a market-based health care system tend to automatically assume that the excess growth rate in health care costs is attributable to inefficiencies and insurance industry bureaucracy. In reality, most of it is a direct result of the early application of, and wide access to, cutting-edge medical technology. Since about the 1980s that has meant access to pharmaceutical products that single-payer countries have to wait for, or in many cases do not get access to at all. 

I have also written a book about the terrible human suffering resulting from health care rationing under the Swedish single-payer system. The rationing, which is the inevitable result of a health care system that promises both to deliver premium care and to keep costs down, has reached horrific proportions in some European countries. I present them in my essay Eugenics and the Welfare State.

It is a safe bet that ColoradoCare would lead to human suffering of the same kind that single-payer systems in Europe subject their patients to. The reason is brutally simple; to find it, let us first do an analysis of Colorado health care expenditures based on the notion that ColoradoCare would cover everyone, including those on Medicare and Medicaid. That is not the case, but this all-inclusive model serves as a good analytical starting point to explain the inevitable, and major, problems facing ColoradoCare. 

With that in mind, consider Figure 1:

Figure 1
The red function shows the actual trajectory of  total health care spending in Colorado, by government as well as private entities. From 1999-2009 it represents data from the Kaiser Family Foundation; for 2010-2014 the trend is calculated based on national accounts data for health care production costs in Colorado. (To control for accuracy, I calculated a trend in those costs for the period 1999-2009, and it tracks the Kaiser numbers very closely. Alas, it is a good proxy for health care costs through 2014.)

The blue function is the trend in health care costs as they would have been if the rate of increase had followed the funding source that ColoradoCare prescribes. In other words, if ColoradoCare had gone into effect in 1999, already by 2004 its funding model would have forced a 20-percent cost reduction in the Colorado health care system. By 2010 the cost gap would have been 30 percent, and remained about there through 2014. 

ColoradoCare advocates say they could accomplish a 17-percent reduction ($5bn out of what they say are the current costs of $30bn) in costs by eliminating insurance-related bureaucracy and bulk-purchasing pharmaceutical products. These drugs, including prescription drugs, and related retail medical products that could be bulk-purchased account for about 12 percent of total health care expenditures. Prescription drugs represent nine percent of total health expenditures. In other words, even if ColoradoCare managed to get producers of retail medical products to give them away to the state of Colorado, they would only be able to cut away 9-12 percent of total health care costs.

The rest would have to come from reductions in administration. Since it is unlikely that anyone will give their retail medical products to Colorado for free, the part of the 17 percent that they would have to obtain by means of administrative cost cuts suddenly becomes much larger. 

There are a lot of myths about private-insurance administrative costs. When proponents of single-payer systems present their case it is almost as if administration costs would vanish if they had it their way. 

Administration costs are almost entirely a matter of staff costs. Of all the 11.8 million people who work in medical and health care support professions in the United States, about 12 percent fall into categories that can be characterized as purely administrative. Their earnings, including all compensation, represent about six percent of the total earnings of all medical and health care support workers.

Assuming that Colorado has about the same health-care staff structure as the national average, this means that the cost of all administrative staff would represent something to the effect of 1.6 percent of all health care costs in Colorado. (Remember that we are still counting Medicare and Medicaid into that total.) In other words, if ColoradoCare did away with all administrative positions and if they got all prescription drugs and other retail medical products for free, their total cost savings would be, generously, 14 percent. 

In reality, if ColoradoCare wants to secure "premium care" they cannot expect to negotiate down the costs of retail medical products anywhere near enough to make a significant contribution toward their expected savings. Moreover, how are they going to run a health care system without medical equipment preparers? Should nurses do that? That takes time away from their bedside time. Can you do without medical transcriptionists? The blunt answer is no: if you want to have even the remotest idea of how money is being spent in a government-funded health care system you are going to have to have someone who keeps track of all activities in every clinic, every physician's office, every nursing home, etc. Someone is going to have to keep track of every procedure a physician orders, so that the hospital can get its money from government. You will still need pharmacy aides to help run the supply of prescription drugs; or should pharmacists do their job on top of what they do normally?

Not to mention the category known as "medical assistants", whose job function the Bureau of Labor Statistics describes as:
Perform administrative and certain clinical duties under the direction of a physician. Administrative duties may include scheduling appointments, maintaining medical records, billing, and coding information for insurance purposes. Clinical duties may include taking and recording vital signs and medical histories, preparing patients for examination, drawing blood, and administering medications as directed by physician.
These workers are essential to any kind of effort at keeping track of costs in a health care system. Even if you could cut the number of medical assistants by half, you would only save 1.3 percent of systemwide staff costs. Or something like 0.3 percent of total health care costs.

But what happens if we cut out Medicaid and Medicare from the system? Does not that tip thge scale to the advantage of ColoradoCare? 

Based on Kaiser Family Foundation estimates, Medicaid and Medicare account for one third of total health care costs in Colorado. This means that if we exclude Medicaid and Medicare we can deduct $12bn from the total amount of $36bn estimated total health care expenditures. All of a sudden the total cost of ColoradoCare falls to $24bn. Adding "premium care" for the 12 percent who are uninsured brings that up to $26.9bn.

Looks fairly close to the $25bn in revenue that ColoradoCare said they would take in, right? Does that mean the program is actually fiscally sound?

No. There are two reasons for this. First, the $25 billion is a pie-in-the-sky number. As mentioned above, ten percent of total employee compensation in Colorado would, under entirely static assumptions, bring in $16.7 billion. Even with a total cost for the program of $26.9bn they still have a $10.2 billion funding gap to cover. And this does not even account for the loss of jobs as a result of the tax.

Secondly, even if the $25 billion number were correct (which, again, it is not) ColoradoCare cannot escape the budget gap reported in Figure 1. To be blunt: the cost of the health care promises that ColoradoCare wants to make will always grow independently of the tax base that ColoradoCare intends to use to pay for those promises. The 15-year long trend in Figure 1 is not an anomaly - it is representative of how health care costs and all sorts of suggested single-payer tax bases have developed differently over the past 60 years. 

All in all: the dream of a single-payer health care system in Colorado will inevitably turn into a nightmare of runaway costs, inhumane rationing and bureaucracy. 

But don't take my word for it. Listen to what the Boston Globe has to say about the failure of the Vermont single-payer health care system. 


Two weeks ago I warned about the efforts in Colorado to create a single-payer health care system in the Centennial State. I explained how the cost calculations behind the program are little more than pure fantasy, especially since the somewhat over-enthusiastic proponents of the reform - called ColoradoCare - promise every resident of the state "premium care". 

In addition to monumental cost miscalculations, the single-payer activists have also failed to provide an explanation of what, exactly, "premium care" means. More than likely, it will not include expensive, life-saving medical drugs. As I reported in my book Remaking America back in 2010, patients living under a single-payer system have very limited, if any, access to cutting-edge medicine. (For more on the true nature of life under single-payer systems, see my essay Eugenics and the Welfare State.)

As a test for the proponents of ColoradoCare, consider the cost of a new drug that vastly improves life for patients with cystic fibrosis. Would their program cover this drug? From FoxNews Health:

A newly approved drug is being hailed as a major advance in treatment of cystic fibrosis, a life-threatening genetic disease that clogs the lungs with mucus and forces patients to struggle to breathe. But it comes with a punishing price tag - about $710 per patient per day. The treatment takes a bite out of Medicaid programs that are already facing big budget problems, and a small state like Vermont will be on the hook next year for $3.6 million for a drug expected to treat only 40 people.
The annual cost per patient is $259,000. However, FoxNews explains:
A spokesman for the Boston-based firm, Zach Barber, defended the retail price ... which is reduced with Medicaid rebates to about $200,000 per patient. Barber said Orkambi resulted from more than 15 years of research costing billions of dollars. "We have a tremendous amount of work still to do to help the patients who don't have a medicine today to treat the cause of their disease," Barber said. "And that work's going to take a very long time, measured in years. It's going to take a very significant amount of money that's measured in billions."
Yet they are willing to make that investment, because they are confident that they can recover the money in the other end, i.e., on the retail market. 

The cost of this medicine to the Vermont Medicaid system is $200,000 per patient, times 40 patients, adding up to $8 million per year. That, explains FoxNews Health, is...
nearly 7 percent of Vermont's estimated $54 million Medicaid budget deficit next fiscal year. "States that have small budgets in their Medicaid also can't afford ... to pay for 40 people in their state when they've got many others who need diabetes drugs and whatever other drugs," said Dr. Brian O'Sullivan, who specializes in childhood lung disorders at the Dartmouth-Hitchcock Medical Center in New Hampshire and has written on drug pricing. "So yes there is a breaking point. As more and more expensive drugs come out, we're reaching that breaking point."
That is a very good point. Some 25 years ago the average time to develop a medical drug was seven yeras. Today, it often takes more than ten years of research - in this particular case 15 years - to create a new medical drug. After that awaits a dicey government approval process with enormous liability and regulatory hurdles to overcome. 

In a nutshell, it is not possible to produce modern, advanced medical drugs any other way. America's predominantly private health care system has been an excellent market for pharmaceutical companies to recover investment costs; as the role of government grows in our health care system, the opportunity for cost recovery shrinks.

At the other end of the system, patients suffer because they do not get access to cutting-edge drugs. More seriously, down the road it is entirely possible that pharmaceutical research scales back altogether and the development of new drugs becomes the matter of a government bureaucracy.

That may be appealing in theory; however, anyone considering that as an alternative to private research should ask themselves why the Soviet Bloc countries never could match Western nations in health care provision, research and product development. 

Moving closer to home, the advocates of the ColoradoCare system must take a stand on whether or not their system should fund cutting-edge drugs like Orkambi, this new treatment for cystic fibrosis. The question is highly relevant given the cost of the drug. 

One of the selling points of ColoradoCare is that they would be able to negotiate bulk-purchase prices on medicine. It is fair to say that the Medicaid price for Orkambi, $200,000 per patient, is a bulk sales price. Therefore, let us use that and calculate the cost to a single-payer system in Colorado:
  • The Vermont Medicaid system has 40 patients who will get this drug;
  • That equals one per 4,000 Medicaid enrollees in Vermont;
  • We assume that this density of eligible cystic fibrosis patients applies to the general population; 
  • ColoradoCare would cover everyone in the state who is not on Medicare, Medicaid or government insurance, meaning 3,672,000 on private insurance plus 543,000 uninsured;
  • Out of a total insurance population of 4,215,000 there should then be approximately 1,000 patients in need of this new cystic fibrosis drug. 

The total cost? $200 million per year, and that is at the bulk-rate Medicaid price. 

Would ColoradoCare pay for that drug for those patients, or would the government-run system leave them without a life-changing drug?

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