Why Not Try 'Medicare for All'? Glad You Asked

Because costs will spiral out of control. Because hospital care will suffer. Because the stakes are too high for a mass experiment.

By Megan McArdle.

"When arguing about national health care in this country, those favoring some sort of government-led system always come back to one argument. “But everyone loves Medicare,” they say. “If Medicare’s so great, why not expand it to everyone?”

Indeed, Alan Grayson, a Democratic congressman from Florida, recently introduced a bill that would allow people of any age to buy into the program.

And what’s wrong with that? After all, if people buy in, it won’t cost the government a dime, right?

I’m so glad you asked.

For one thing, as Obamacare has shown, “people will be paying for it, not the government, so what’s the problem?” is not quite as simple as it sounded when you were saying it in front of a room of cheering supporters. For whom is it likely to be a good deal? Sick people. Medicare can adjust the buy-in premium to take account of this, but then next year, folks are going to be looking at the new higher premiums, and who is likely to opt in at that high price? The sickest folks in the insurance pool. Better adjust those premiums again …

Yes, it’s our old friend, adverse selection, which pops up whenever you build an insurance market without underwriting. Medicare is a government program, so it can’t death spiral out of existence. However, there will be considerable political pressure to set the premiums well below the expected actuarial expenditure on care for beneficiaries. So instead of a death spiral, you get a fiscal crisis in Medicare.

Yet here’s a measure of how badly thought out this idea of expanded Medicare is: Adverse selection isn’t even its biggest problem. A far bigger problem is what this might do to hospital budgets. Why? Because Medicare doesn’t necessarily pay enough to keep those hospitals running.

Deep in the weeds of health wonkdom, a long battle has been going on over whether -- and to what extent -- Medicare controls its costs by offloading them onto private insurers, a phenomenon called cost shifting. Conservatives often promote a somewhat simplistic version of this argument: Medicare pays too little, so hospitals have to charge insurers more to make up the lost reimbursements. As stated, this is probably wrong. The empirical evidence to support it is weak, and even just theoretically, this misunderstands how market actors behave. It treats costs as a budget problem: Companies have to cover certain costs, and if one customer pays less, another customer has to pay more. (Liberals often make this mistake in reverse when talking about drug prices, assuming that if the U.S. cracked down on pharmaceutical reimbursements, European governments would have to raise their reimbursements to make up for the lost cash, thereby ending their free riding on the new drugs produced from U.S.-derived profits.)

In fact, economists generally assume that sellers are charging each buyer as much as they can. Having one customer refuse to pay so much doesn’t make your other customers more willing to pay, so there’s no reason to think that you’ll be able to raise the price you charge them.

However, there remains an undeniable fact: Medicare pays significantly less than private insurers. And this can’t simply be explained by the fact that Medicare covers a huge number of people, because so do Aetna and Humana and Anthem and Blue Cross.

There’s some evidence that Medicare reimbursements don't quite cover the average cost of having a patient in the hospital. The hospital's fixed costs are mostly getting covered by higher reimbursements from private payers. (Though this varies by hospital, and is difficult to tease out, and therefore disputed.)

Note that this isn’t necessarily somehow “cheating.” There are plenty of people flying around the country whose fares don’t cover the average cost of their flight. It still makes good economic sense to sell them tickets at low fares, because the airlines are getting more revenue from a cheap ticket than from an empty seat. Ditto hospitals  deciding whether to have empty beds.

In businesses like this, people often look at the prices paid by marginal-cost consumers, and conclude it would be great if everyone got that price. But someone has to cover those fixed costs, or the seller goes bankrupt.

Data from the Medical Expenditure Panel Survey suggests that people on Medicare account for about a third of all national health expenditures; folks 44 to 65 for another third; and the rest of us for the final third. And those folks are the ones most likely to use hospitals, because they’re more likely to be really sick, not just getting an annual checkup and a few pills.

If we followed Clinton’s plan, and lowered the Medicare eligibility age, one effect would be to take some pressure off Obamacare’s exchanges, by moving the sicker and older patients out of the pool. But that cost has to go somewhere, and where it’s likely to end up is in hospitals, as their patient load shifts dramatically toward lower-reimbursed Medicare patients.

Like the critics of the cost-shifting thesis, I doubt that hospitals could simply turn around and jack up rates to private payers. On the other hand, I do kind of wonder what the hospitals would do to cover the now gaping holes in their budgets. Hospital profit margins are in the low-to-mid single-digits, which is probably not enough to absorb a large loss.

One thing they might do is go bankrupt. Ha! I’m kidding. Hospitals are politically powerful. They’d ask for, and get, a bailout from the government, because no lawmaker is going to let the local hospital close. But that would make this program pretty expensive, because that bailout would most likely involve moving all Medicare reimbursements closer to what private payers pay.

Or they also might refuse to handle so many Medicare patients (a phenomenon you see among doctors, though doctor opt-out is nowhere near as bad as it is with Medicaid, which basically tries to pay doctors in cigar bands). Of course, you can’t turn away someone who’s having a heart attack. But you could, say, decide that you’re only doing so many Medicare-funded knee replacements a year. That would fix the budget problem. But all those folks with bad knees are apt to get pretty cranky while waiting for a hospital bed.

And of course, hospitals could cut costs. There’s evidence that this is what they have done, in response to previous cuts in Medicare reimbursement. Unfortunately, there’s also some evidence that mortality might have gone up as a result, as hospitals cut back on service quality. That may be a tradeoff we’re willing to make for lower health-care costs, but it should be explicitly discussed.

And just because hospitals may have successfully cut costs in response to a previous round of reimbursement cuts, doesn’t mean we can necessarily expect that to work again. Cost cutting is like dieting -- the first few pounds of fat go easy, but getting to that perfect size 10 may never happen. Those hospitals that do get there would probably have to result to draconian measures -- which might result in patient lives lost.

So how you feel about this Representative Grayson's proposal should probably depend on how sure you are that there are vast, easily obtained cost efficiencies to be had in hospital operations. Myself, I’d want to be a lot surer than I am before I started running a mass experiment, for our nation's physical and fiscal health."