Appendix A
Data and Methods Used in Analysis of the Single-Payer Program for Maryland

Data and Assumptions

 

The Lewin Group developed a model of health spending in Maryland to be used to simulate the impact of
alternative health reform proposals including the single-payer model. This model is designed to estimate the
potential impacts of alternating health reform proposals on insurance coverage and health expenditures in
Maryland over the 2001 through 2010 period. Estimates of the net impact of these reform options on costs
and coverage are determined by comparing estimates under the single-payer plan to our estimates of
spending under current trends. The model presents estimates of total program costs, net changes in total
state health spending, changes in spending by type of service, and changes in administrative costs.
The model is based upon Lewin Group’s “best assumptions on the impact of a single-payer program on
health spending in Maryland. The model provides outputs that show the impact of the single-payer program
on health care expenditures by type of service and type of spending. It also shows changes in spending for
employers by type of firm and for households in various income groups.
 

A.  Baseline Projections

The baseline in this analysis is a projection of the amount of health spending by type of service for each year
between 2001 and 2010 under the existing health care system in Maryland. The Lewin Group first used
estimates health expenditures for Maryland in 1998 developed by the Maryland Health Services Cost
Review Commission. We then inflated these cost estimates to future years based upon estimates of the rate
of growth in health spending developed by the Health Care Financing Administration (HCFA) by type of
service and source of payment.

Estimates of health spending by type of service and source of payment are based upon estimates provided
by the Maryland Health Services Cost Review commission. We adjusted these data to include expenditures
for dental care in “carve-out” plans which are not fully represented in the Commission’s data. Our estimates
of Maryland health spending by type of service and source of payment in 2001 are presented in Table A-1.

Table A-2 presents HCFA estimates of the growth in health spending annually for 1998 through 2010.


Table A-1
Baseline Real Growth In Per Capita Health Care Expenditures
a/Based upon HCFA projected growth rates for the nation adjusted to reflect the historical relationship between health care
cost growth in Maryland and the rate of growth in costs nationwide.
Source: Lewin Group estimates.
Table A-2
Estimated Health Spending in Maryland by Type of Service and Source of Payment in 2001
(in thousands)

B. Single-Payer Assumptions

Under the single-payer program, all Maryland residents would be covered under a single government-
financed insurance program. The benefits package would cover nearly all health care costs except
cosmetic surgery, non-prescription drugs, private hospital rooms and orthodontia. The plan would
require $10 copayments for health services but would not require a deductible.

Hospitals would be placed on annual budgets, which limit the rate of growth in hospital costs. Spending
for other services also would be controlled through global budgets on health spending that cap health
expenditure growth at a predetermined level. We assume that there will be no HMOs in the program.
However, the program would use a primary care referral model (i.e., gatekeeper model) which could
help limit the use of specialists.

The single-payer model would have several impacts on statewide health spending. For example, there
would be an increase in health services utilization as persons who are uninsured or under insured under
the current system become covered. Utilization is also likely to increase due to the fact that HMOs will
not be used in the program. However, these increases in costs would be largely offset by reductions in
administrative costs for insurers and providers. Costs will also fall over-time due to the use of health
spending budgets, which reduce the rate of growth in health spending.

Figure A-1 presents our assumptions on the cost impacts of the various factors affecting utilization and
expenditures under a single-payer system. These are based upon prior Lewin Group analyses of the
impacts of converting from the current system to a single-payer system. These assumptions include:

Figure A-1
Assumptions Concerning the Cost Impacts of a Single-Payer System in Maryland

Insurer Administrative Costs
Single-payer administrative costs as a percentage of benefits: 2.1 percent

Provider Administrative Costs
Hospital administrative costs as a percentage of hospital net revenues: 34.2 percent
Percentage of hospital administrative costs saved under single-payer model: 14.0 percent
Net savings: 4.7 percent
Physician administrative costs as a percentage of physician revenues: 32.0 percent
Percentage of physician administrative costs saved under single-payer model: 19.0 percent
Net savings: 6.1 percent

Utilization for Newly Insured
Utilization increase for newly insured and newly covered services for under insured: 70.1
percent

Increased Utilization For Persons Formerly HMOs
Percentage of Maryland residents in HMOs: 38.4 percent
Percentage increase in utilization: 4.0 percent

Maryland Rebate Prescription Drug Assumptions
Single-payer Negotiated Rebate: 17.7 percent
Insurer Administration
 

Single-Payer Administrative Costs as a Percentage of Benefits: We estimated administrative
costs under a Maryland single-payer system by extrapolating from the administrative costs for the US
Medicare program after adjusting for key differences between the Medicare program and the single-
payer model for Maryland, including the elimination of hospital claims filing (hospital claims are
eliminated under the single-payer by placing hospitals on annual budgets). Based upon these
assumptions, we estimate that administrative costs under the Maryland single-payer program will
equal about 2.1 percent of claims.

 

Provider Administration

 

Hospital Administrative Cost Savings: We estimate that currently, hospitals spend 34.2 percent
of net revenues on administration, which includes all labor and overhead expenditures attributed to
functions other than those directly related to patient care, such as accounting, credit and collections,
and admitting. The single-payer proposal would all but eliminate hospital administrative costs
associated with filing claims because under the this model, hospitals are given an annual operating
budget covering all services provided by the hospital. Based upon our analysis of the hospital data,
we estimate that hospital administrative costs would be reduced by about 14 percent in 2001 under
the single-payer model: 14 percent of 33.7 percent equals a net saving of 4.7 percent.

 

Physician Administrative Costs Savings: Based upon Lewin Group analyses of physician
practice expenses, we estimate that 32 percent of revenues for all physicians and other professionals
are devoted to administrative functions such as practice management and insurer-related functions
(this includes the cost of physician time devoted to administration). Based upon our earlier research
on the single-payer system, we estimated that physician administrative costs would be reduced by
about 19 percent under the single-payer model: 26 percent of 32 percent equals a net savings of 6.1
percent.

 

Newly Insured

 

Increase in Utilization for Newly Insured Persons. Uninsured persons are expected to increase
their utilization of health services once they become insured under the single-payer program. In prior
studies, we have estimated the increase in health services utilization for the uninsured population by
assuming that utilization for uninsured persons would increase to the levels reported by insured
persons with similar age, sex and health status characteristics. Based upon this analysis, we estimate
that health services utilization among those who are currently without insurance would increase by
70.1 percent. Utilization of Prescription Drugs, Dental Care and Mental Health Services are assumed
to increase in similar proportions for persons who currently are not covered for these services (i. e.,
the under insured).

 

Patient Cost Sharing (Out-of-Pocket Expenses)

 

Change in Utilization Due to Patient Cost Sharing: The single-payer model would include a $10
copayment requirement which is comparable to what many individuals face in their existing health
plans. Consequently, we assume no change in utilization due to cost sharing design.

 

Managed Care

 

Utilization Increase Due to Elimination of HMO Capitation Model: The single-payer system
that we are modeling will be a fee-for-service insurance program. There will be no Health
Maintenance Organizations (HMOs) in the program. However this single-payer program would
feature a primary care referral program (i.e., gatekeeper model) similar to that used in many
preferred provider organizations (PPOs) and point-of-service (POS) plans. This would result in
increased utilization as the utilization controls under HMOs are lifted. About 38.4 percent of
Maryland's residents are now covered under an HMO. Studies have been conducted showing that
HMOs reduce utilization by about four percent (much of the savings in HMOs is associated with
price discounts). In this analysis, we assume that the elimination of managed care would increase
utilization for persons in HMOs to the level observed in PPOs, which translates into a four percent
increase in spending for HMO enrollees.

 

Prescription Drug Rebate Program

 

Rebate Amount: We assume that the program will negotiate rebates with prescription drug
manufacturers equal to what Maryland now receives under their Medicaid Program, which is about
17.7 percent. By comparison, we estimate that average drug manufacturer rebates are about 8.3
percent for currently insured persons who currently have private coverage.

 

C. Global Budgeting Assumptions

Under the single-payer global budgeting system, policymakers set the level of total spending for the
State of Maryland. We assume that the budget for spending in the first year of the program (2001)
would be equal to the amount that would have been spent in that year under current policy with certain
adjustments. For illustrative purposes, we assume that growth in health expenditures over time would be
the same as would occur under current trends, adjusted to reflect the changes in utilization and the
savings in administration that would occur under the system.
11Sheils, John F., Young, Gary J., "National Health Spending under a Single-Payer System: The Canadian
               Approach," Staff Working Paper, The Lewin Group, Inc., January 1992.
12“The Financial Impact of The Health Security Act,” The Lewin Group, Inc., December 9, 1993.
13The Interstudy Competitive Edge: HMO Industry Report.
14Stapleton, David, "New Evidence on Savings from Managed Care," (A report to the Healthcare
                Leadership Council), Washington, DC, May 1994.
Comments?
Previous Section
Next Section
Table of Contents