How Kenneth Thorpe Led Paul Starr Astray: Thorpe’s Seemingly Clever Analysis Does Not Add Up

By Gerald Friedman

Jerry Friedman

Friedman speaking on Single-Payer in 2013

Paul Starr is wrong about the Sanders Improved Medicare-for-All and wrong about single payer health care because he relies on a flawed analysis by Kenneth Thorpe.[1] 

While Thorpe does not provide enough documentation to make an explicit comparison between his estimates and those provided in detail by the Sanders campaign, we can extract enough to conclude that his analysis relies on fundamentally flawed assumptions.  To conclude that the Sanders health plan will cost $1.1 trillion per year more than estimated, Thorpe is assuming that national health expenditures over the next decade will total $51 trillion (21% of GDP), which is nearly $4 trillion above current projections from the Center for Medicare and Medicaid Services (20% of GDP), and $10 trillion more than projected by Sanders (or 17% of GDP).[2]  Compared with CMS, however, Thorpe’s projection includes at least two areas of savings: he anticipates a 4.7% reduction in spending from reduced administrative waste, and a reduction in provider prices to save a further 1.3% of spending.  With these savings, Thorpe must be assuming an increase in health care spending from increases in real medical services of $6.6 trillion, including $1.3 trillion from covering the uninsured and $5.3 trillion from increasing utilization by Americans freed of copayments and deductibles.  This is an increase of 11% in spending, including an increase of nearly a third for “discretionary” activities, such as doctor visits.[3]

This is a rate of increase inconsistent with the experience of other countries.  When our neighbor Canada, for example, adopted a single-payer program like that proposed here, there was no increase in average doctor visits per capita.[4]   When Taiwan adopted single payer like that proposed here, visits by those previously uninsured increased but there was no increase in utilization by those previously insured.[5]  In both cases, there was a reallocation of visits from higher income to lower income patients, suggesting that with supply constraints in place, physicians were more carefully regulating their activities, reducing unnecessary visits by the affluent well so as to care better for the less affluent sick, a reallocation that will improve health and save lives.

While it is unlikely that utilization will substantially increase under the Sanders plan, in order to allow for unexpected expenses, the financing proposed for the Sanders plan allows for an increase in utilization of over 5%.  The difference in utilization assumptions explains almost a third of the added spending that Thorpe attributed to the Sanders plan.  Much of the rest comes from Thorpe’s curious assumption that administrative costs would be reduced by only 4.7%.  This is only a fifth what he has estimated would be saved in past studies for Massachusetts and for the United States as a whole.[6]  Thorpe is assuming savings less than what would be saved by eliminating the private insurance industry and raising the “Medical Loss Ratio” to the level of Medicare, not to mention the enormous savings from reducing the burden of billing and insurance related activities in provider offices.[7]  Replacing his figure with a very conservative but more realistic estimate of savings explains half of the difference between his spending figure and that in the Sanders plan.

Thorpe also seriously underestimates the savings to be achieved from negotiating drug prices through a national agency.  The Sanders plan assumes that the Medicare-for-All program would negotiate drug prices down to world levels, levels higher than the Veteran’s Administration pays.[8]  This would save an average of $211 billion a year over the next decade.  Unfortunately, in an earlier, hastily prepared memo, I mistakenly told the Sanders campaign a different number, a figure that in no way entered into the estimates of savings for the Sanders plan.  I regret the confusion.

Without the inflated spending figures, the Thorpe claims about the cost and burden of the Sanders program disappear and the plan is shown to be based on relatively cautious and conservative assumptions.[9]  There still remains a vital area of savings from the Sanders health plan, savings recognized by Thorpe in acknowledging that a single-payer plan will “ultimately reduce the growth in per capita spending.”  Health care spending has increased faster in the United States than in countries with single payer plans, and faster for private insurance than for Medicare, not because Americans use more health care but because health care prices have risen faster in the United States than elsewhere.[10]  Over the last 35 years, health care prices in the United States have risen 1.5% a year faster than other prices; in Canada, by contrast, they have risen only 0.2% a year faster.  This difference is enough to account for virtually all the excess growth in health care spending in this country compared to Canada with its single payer system.[11]

Between rising prices to cover a growing administrative burden and rising monopoly prices for drugs and for elite providers, we have been paying more and more for less health care.  Bernie Sanders has a realistic and well thought-out program to fix our health care and save lives.  Now it is time for Paul Starr to join us in supporting it.

 

 

[1] Paul Starr, “The False Lure of the Sanders Single-Payer Plan,” The American Prospect, February 1, 2016, http://prospect.org/article/false-lure-sanders-single-payer-plan.

[2] My estimate of Thorpe’s spending is the sum of projected public spending outside of state Medicaid programs, current Medicaid state spending (under a Maintenance of Effort provision in the Sanders plan), and his estimate of new Federal spending for the Sanders plan.  To favor Thorpe, I assume that he is assuming that the Sanders plan has an actuarial value of 100%, not the 98% that the plan actually assumes.

[3] Freeing patients from copays and deductibles will have no effect on many medical expenses, including spending by Medicaid recipients, as well as health insurance administration.

[4] Philip E. Enterline et al., “The Distribution of Medical Services before and after Free Medical Care — The Quebec Experience,” New England Journal of Medicine 289, no. 22 (November 29, 1973): 1174–78, doi:10.1056/NEJM197311292892206; David Himmelstein, “What One Critic Gets Wrong About The Sanders Health Care Plan,” The Huffington Post, accessed February 1, 2016, http://www.huffingtonpost.com/david-himmelstein/kenneth-thorpe-bernie-sanders-single-payer_b_9113192.html.

[5] S. H. Cheng and T. L. Chiang, “The Effect of Universal Health Insurance on Health Care Utilization in Taiwan. Results from a Natural Experiment,” JAMA 278, no. 2 (July 9, 1997): 89–93; Tsung-Mei Cheng, “Reflections On The 20th Anniversary Of Taiwan’s Single-Payer National Health Insurance System,” Health Affairs 34, no. 3 (March 1, 2015): 502–10, doi:10.1377/hlthaff.2014.1332.

[6] See Thorpe’s analysis at http://masscare.org/wp-content/uploads/2012/11/Thorpe_Action_Dec14.pdf.  Also see his national analysis at file:///C:/Users/New%20Gerald%20Friedman/Downloads/Thorpe%20booklet%20single%20payer%20savings.pdf.

[7] Aliya Jiwani et al., “Billing and Insurance-Related Administrative Costs in United States’ Health Care: Synthesis of Micro-Costing Evidence,” BMC Health Services Research 14, no. 556 (2014), http://www.biomedcentral.com/content/pdf/s12913-014-0556-7.pdf; David Himmelstein, Steffie Woolhandler, and Sidney Wolfe, “Administrative Waste in the U.S. Health Care System in 2003: The Cost to the Nation, the States, and the District of Columbia, with State-Specific Estimates of Potential Savings,” International Journal of Health Services 34, no. 1 (2004): 79–86; David U. Himmelstein et al., “A Comparison Of Hospital Administrative Costs In Eight Nations: US Costs Exceed All Others By Far,” Health Affairs 33, no. 9 (September 1, 2014): 1586–94, doi:10.1377/hlthaff.2013.1327.

[8] McKinsey Global Institute, “Accounting for the Cost of Health Care in the United States,” January 2007, http://www.mckinsey.com/mgi/rp/healthcare/accounting_cost_healthcare.asp; Austin Frakt, Steven D. Pizer, and Roger Feldman, “Should Medicare Adopt the Veterans Health Administration Formulary?,” SSRN Scholarly Paper (Rochester, NY: Social Science Research Network, April 14, 2011), http://papers.ssrn.com/abstract=1809665.

[9] In an earlier work, I outlined a procedure to estimate the financing needs for a single payer program; see “Friedman Analysis of HR 676: Medicare for All Would Save Billions – PNHP’s Official Blog,” accessed January 24, 2014, http://pnhp.org/blog/2013/07/31/friedman-analysis-of-hr-676-medicare-for-all-would-save-billions/.

[10] To be sure, we do use more specialists and technology but those have not been the cost drivers.

[11] Himmelstein DU and Woolhandler S, “Cost Control in a Parallel Universe: Medicare Spending in the United States and Canada,” Archives of Internal Medicine 172, no. 22 (December 10, 2012): 1764–66, doi:10.1001/2013.jamainternmed.272.

2 comments

  • Thanks for the timely comments, Prof Friedman.
    My only question is this:
    When billing expenses go down in clinics and hospitals — and they will, by a lot — how does this save the government any money?
    A single payer plan must have a fee schedule, at least for doctors. Hospitals might someday be on a global budget, but to start with they must also have a fee schedule.
    OK, to use a simple example, the fee schedule pays $300 to orthopedists to set a broken arm.
    The orthopedist then finds after a year or so that he does not need his expensive billing service.

    The Single Payer system keeps on paying $300 I assume. The orthopedists has a little higher profit or can take some time off.

    Is the Single Payer system going to drive down the $300 fee for all orthopedists? That is not easy to do.
    Congress has rarely if ever driven down Medicare fees for doctors.

    • Thanks, Bob! This is a good point. Presumably, the single-payer authority would set a fee schedule that would allow for normal expenses but not the billing costs that currently go with private insurance. This would probably mean rates close to Medicare’s current rates, which is an increase for Medicaid providers but a cut of 15-20% below private insurance because providers will be able to save that much in reduced Billing and Insurance Related expenses!