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A Health Care Bargain

Don't believe the critics: a new report shows California's single-payer plan is eminently affordable.

Staff at Kaiser Permanente Los Angeles Medical Center. Ted Eytan / Flickr

In a prior post, I wrote about a report from the California Senate Appropriations Committee that estimated the cost of a proposed single-payer system in the state. The report concluded that, under the single-payer plan, health expenditures in the state would be around $400 billion per year, or 15% of California’s GDP.

Although many covered this as a ridiculously high figure, it is actually quite cheap relative to the US as a whole, which currently spends 18% of its GDP on health care. For those not reflexively afraid of large numbers, it is clear that this cost is definitely doable and is quite a bargain for the benefits the single-payer plan is said to provide.

After that report came out, a new, more detailed cost estimate was provided by economists at the University of Massachusetts Amherst. The methods in the UMass paper are mercifully easy to follow.

The cost estimate basically works like this:

  1. Determine the current level of health expenditures in the state using the national health expenditure database. This includes spending on hospitals, physicians/clinics, pharmaceuticals, dental care, nursing homes, home health care, and insurance administration. This figure is $368.5 billion.
  2. From there, they determine how much health care utilization would increase under single payer. They assume that uninsured people would double their health care utilization and that underinsured people would increase their health care utilization by 15%. They inflate the spending of those groups of people by these percentages (adjusted slightly for the age composition of the two groups) and arrive at a new figure for total health expenditures in the state: $404.1 billion.
  3. From there, they determine how much savings a single-payer system could deliver over the current system. They estimate that savings on administrative costs would reduce total spending by 6.7%, that savings on pharmaceutical drugs would reduce total spending by 3.4%, that savings from switching to Medicare reimbursement rates would reduce total spending by 2.9%, and that savings on unnecessary services, inefficiently delivered services, prevention, and fraud would reduce total spending by 5%. In total, then, the cost savings trim 18% off the figure in (2), giving a final estimate of $331 billion, or 12.5% of GDP.

Needless to say, this cost is quite a bit lower than the one estimated previously by the Senate Appropriations Committee. If the costs really would just be 12.5% of GDP, then that means California’s health sector size would shrink to around the OECD average.

If the authors’ estimates are too rosy, it is probably because they underestimate how much utilization would increase.

They estimate that the uninsured would double their utilization based on data showing that uninsured people consume about half as much health care as insured people consume, which seems reasonable enough. Then they estimate that underinsured people are 36% of the insured population and that their utilization would increase by 15%, which was the high-end estimate from a paper about what happens when people are switched from a no-cost-sharing plan to a high-deductible plan. And that’s it. That’s all they did on utilization, which may not have been enough.

But in any case, even if their utilization estimates were massively too low, the plan is still affordable. The authors could be off by 20% and the plan would still be eminently doable.