The key issue in the emerging national health care debate is the
role of the federal government. While some Members of Congress
favor a "single-payer" national health insurance system-"Medicare
for all"-others, including President Obama, propose a new public
plan, modeled after Medicare, to compete with private health plans
in a national health insurance exchange.
Many independent experts expect a "crowd out" of existing
private options and a rapid evolution toward a single payer system
of national health insurance. In either case, the federal
government would amass greater power over the financing and
delivery of medical services; it would also determine the benefits
and medical procedures that Americans would get and the prices
providers are paid for them. This concentration of government power
over health care would have a profound impact on all Americans,
especially members of the medical profession.
Such government control would:
- Result in substantially lower payments to physicians and other
health care providers compared to a multiple-payer system;
- Reduce the quality of care by limiting the ability of
physicians to invest in advanced medical equipment that takes
advantage of new technology;
- Limit access to care in the near term, as current physicians
and other professionals retire earlier or otherwise leave the
- Limit access to care even more substantially in the long term,
as the prospect of lower lifetime earnings reduces the incentive
for talented people to choose careers in health care; and
- Reduce the rate of medical progress, because fewer talented
people receiving medical training decreases the supply of talented
Many physicians, quite reasonably frustrated by the cost and
hassle of dealing with billing multiple insurance companies-not to
mention the time lost appealing seemingly arbitrary denials of
payment-often conclude that the solution lies in a "single-payer"
system along the lines of a "Medicare for all" concept. A single
payer-a government agency-would at a minimum eliminate the
duplication of effort associated with signing on and maintaining
relationships with multiple private insurance companies. It would
standardize billing processes and coverage rules and perhaps even
establish clearly defined rules to reduce the frequency of
apparently arbitrary "downcoding" and denials of payment.
What many fail to appreciate, however, is the extent to which
the existence of multiple, competing payers prevents government
payers such as Medicare from reducing their payment levels to much
lower levels than prevail now. As it stands, a reduction in
Medicare payment rates can induce physicians to drop Medicare
patients and try to make their living from a higher percentage of
(or even only) privately insured patients. This would inevitably
result in reduced access to care for Medicare patients-and thus
political pressure from those patients for increased Medicare
payments to improve access.
The Medicare Model
If Medicare or something like it were the "single payer"-the
sole purchaser of health care-no such pressure would exist. If the
single payer established lower payment rates, by definition
physicians could not drop out and make their living from other
patients, because there wouldn't be any other patients. The
only alternative for a physician would be to cease the practice of
medicine and either retire or find another profession. While this
would certainly happen to some degree, a large percentage of
physicians-who have invested many dollars and years of training in
their practices-would be unable to find an alternative profession
that is nearly as satisfying or as remunerative. The inevitable
result would be much lower payment rates and lower income for
Patients would suffer as well, especially in the long run.
Because fewer highly talented people would be willing to undergo
the years of training (under difficult working conditions and low
pay) to become physicians, patients would suffer decreased access
to health care and longer wait times. Lower payments would mean
that physicians would invest less in advanced medical equipment and
would likely spend less time with each patient. In addition, with
fewer people undergoing the training necessary to conduct medical
research, new treatments and cures would be developed at a slower
rate, costing many lives.
Medicare Payment Levels
Medicare determines the level of its payments to physicians
based on a complex formula involving crude estimates of the
relative costs of providing different services, annual adjustments
based on estimates of demand for services, and growth in the
Medicare population and the overall economy. The annual adjustment
process is expressed in the "Sustainable Growth Rate" (SGR) rule which
attempts to constrain the growth in Medicare spending and "make up"
for the differences between previous years' estimated and actual
Each year since 1999, the SGR calculation has called for a
reduction in the Medicare payment levels (a "negative update") for
physician services, because actual use outstripped previous
forecasts, and forecasted future utilization outstripped the growth
rate of the Medicare population and gross domestic product (GDP).
And each year, physicians' representatives have gone to Congress to
argue that reducing payments will cause some physicians to drop out
of the Medicare program, reducing elderly Americans' access to
health care. Negative updates were allowed to go into effect in
only three of the last 11 years-in the other eight years, after
intensive lobbying from physician groups, Congress has intervened
and passed legislation either freezing payments or providing a
Competition Among Buyers
The basis for the physicians' now-annual argument to Congress is
that reducing Medicare payments will cause more physicians to drop
Medicare patients and make their living from privately insured and
self-paying patients only. Indeed, anecdotal evidence indicates
that some physicians have already done so, as Medicare payments are
already significantly below those of private insurance by almost 20
percent for physician services overall and by 12 percent for
As if to demonstrate the effects of lower payments, in most
states Medicaid payments are even lower than Medicare's, and far
fewer physicians participate in Medicaid. Not surprisingly, states
with relatively lower Medicaid payments compared to other states
have lower rates of physician participation in Medicaid.
Physician advocacy groups make the reasonable-and
believable-argument that every reduction in the Medicare payment
rates will result in a further reduction in the number of
physicians who find it worthwhile to take Medicare patients and
instead try to make their living from patients with private payers.
A survey found that in response to a proposed 10 percent cut in
Medicare rates, 28 percent of physicians would stop accepting new
Medicare patients, 8 percent would stop treating Medicare patients
already under their care, and much higher percentages would
discontinue nursing home visits, reduce available hours, or defer
investment in medical and health IT equipment.
Obviously, this would not affect physicians in all specialties
equally. Most pediatricians have very few if any Medicare
patients and would hardly be affected at all, but
cardiologists and oncologists, for example, would be hit hard,
since a large percentage of their potential patients are over age
65. The impact on nephrologists would be especially severe, because
anyone with end-state renal disease is covered by Medicare
regardless of age. Yet for every reduction in the payment level, a
few more physicians would find it better to drop Medicare than to
The absence of other payers would give the "single payer" the
freedom to reduce payments far more than Medicare can in the
presence of a large percentage of privately insured patients. The
result would be substantially lower payments-the "single payer"
would be a "stingy payer." Physicians' income would be
substantially reduced. Indeed, in countries with single-payer
health systems, the average income of physicians is substantially
lower than in the United States. For example, physicians in the
Britain and Canada have incomes more than 30 percent lower than
their U.S. counterparts.
The existence of multiple private payers limits not only the
ability of Medicare but also that of private payers themselves to
reduce payment levels. Although physicians usually face "take it or
leave it" contracts from insurance companies, and most physicians
have little ability to actually negotiate, a health plan that sets
payment rates too low will find that many physicians choose to
"leave it." When enough physicians leave, patients have difficulty
obtaining access to care and eventually leave the health plan.
In order to continue to sell the health plan (either to
individuals or to employers), the insurance company will have to
increase payments to induce physicians to join. While this process
is slow and imperfect compared to market mechanisms in other
industries, it does limit the ability of plans to set arbitrarily
low payment rates.
"Stingy Payer" Damages Future Generations as Well
The establishment of a "single payer" health care system would
inevitably result in lower payments for physician and other health
care providers. The immediate effect of having a single ("stingy")
payer would be lower incomes for physicians and a reduction in the
supply of active physicians, thereby impairing access to health
care for all patients. However, the result of "single/stingy payer"
health care will not only be lower incomes for physicians now but
reduced access and lower quality health care for future generations
Robert A. Book, Ph.D., is Senior
Research Fellow in Health Economics in the Center for Data Analysis
at The Heritage Foundation.
patients were allowed to pay on their own, a small percentage of
physicians could service this market. This occurs in the UK, for
example. But in a stricter "single-payer" system like Canada's,
this would not be possible.
some advocates of single-payer systems, this is viewed as one of
the benefits, since it could reduce health care spending.
These relative "costs" are collectively known
as the Resource-Based Relative Value Scale (RBRVS). The cost of
each service is measured in "Relative Value Units" (RVU). The
process through which specific RVU numbers are assigned to each
service is described in American Medical Association, "RVS Update
Process," 2007, at http://www.ama-assn.org/ama1/pub/upload/mm/380/
rvs_booklet_07.pdf (April 3, 2009).
Section 1848(f) of the Social Security Act, as amended by section
4503 of the Balanced Budget Act of 1997, Pub. L. 105-33.
Kent Clemens, "Estimated Sustainable Growth Rate and Conversion
Factor, for Medicare Payments to Physicians," Centers for Medicare
and Medicaid Services, various years.
A very small number of children are covered
by Medicare due to disability or end-state renal disease.
OCED Health Data 2008 (December 2008
We normally think of competition as a process
that reduces prices, because we normally think of competition as
occurring between providers of a good or service. But for a given
level of suppliers, competition between payer serves to increases
prices. Just as a monopoly (sole provider) can extract high prices
from buyers, a monopsony (sole buyer) can extract low prices from