Medicare for All Would Also Be Expensive for All

(Bloomberg Opinion) -- Medicare for All gets its very own hearing in the U.S. House of Representatives today, but congressional leaders are only beginning to come to grips with the true costs of the proposal — or, for that matter, the battle that lies ahead.

Most of the Democrats’ proposals claim that they can reduce costs, but they cannot do so unless they take on two of the most sympathetic and powerful actors in the U.S. health care system: hospitals and physicians. Both of them are more likely to co-opt Medicare for All than to allow it to harm their interests.

To get a sense of their influence, consider that only about 21 percent of U.S. health care costs are attributable to drug and insurance companies. The bulk of the rest comes from providers, mostly hospitals and doctors’ offices. And Medicare reimburses at a lower rate than private insurance.

Medicare for All Would Also Be Expensive for All
Medicare for All proposals, such as the one introduced by Senator Bernie Sanders, would apply the lower Medicare reimbursement rate across the board. That would cut into what providers earn. Advocates of the plan might say that’s the whole idea, or least part of it. Hospitals and physicians in the U.S. charge far more than their counterparts in the rest of the world, they rightly point out, for results that are frequently no better.

But it’s worth examining why costs are so high, and whether a Medicare for All plan would do anything about them.

One reason for the high costs is that smart college graduates in the U.S. have more options than their peers in the rest of the world. They can make a lot of money relatively quickly on Wall Street or in Silicon Valley rather than subject themselves to the many years and long hours of medical residency. Correspondingly, physicians’ salaries have to be high in the U.S. order to supply the number of doctors the system demands.

So cutting the reimbursement rate without taking steps to otherwise increase the number of physicians would make the current shortage worse. Instead, the U.S. could take steps to increase the number of immigrant physicians, or pressure medical schools to admit more students or lessen the demands they put on young residents. Such steps would be controversial and face public opposition. Yet they may be necessary regardless of whether Medicare for All actually comes to pass.

Another reason for the high costs is that hospitals in the U.S. face very little competition on costs. One recent study examined health care mergers and acquisitions between 2007 and 2013. It found that, once a doctor’s practice was acquired by a new owner, prices rose nearly 14 percent. Some of these higher costs reflect a greater emphasis on patient comfort; U.S. hospitals have more private rooms than those in the U.K. or Canada. But some seem to be the result of simple monopoly power.

Working to break the monopoly power of U.S. hospitals is worthwhile goal — one that advocates of Medicare for All may even share. But the history of U.S. health care policy is one of hospitals steadily gaining more power, not less. For example, 35 states require a potential hospital to obtain a “Certificate of Need” before it can open a new facility, and the Affordable Care Act has made it more difficult for physicians to open competing hospitals.

These policies are specifically designed to limit competition and are demanded by large hospitals, which fear that expanding coverage would saddle them with more low-income patients who use Medicaid — which, like Medicare, reimburses at a lower rate than private insurance.

If coverage is expanded through Medicare for All, then the demands for this type of protection would only increase. That would mean less competition and higher prices. Surely even supporters of Medicare for All would agree that this would not qualify as an improvement to the U.S. health care system.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Karl W. Smith is a former assistant professor of economics at the University of North Carolina's school of government and founder of the blog Modeled Behavior.

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