IV.Changes in Aggregate Health Spending Under a Single-Payer Program
As discussed above, we estimate that total spending for health care services would be $20.8 billion in 2001.
This includes total spending for acute care and long-term care services including benefits payments and
administration. In this analysis we estimated the change in overall spending for health services in Maryland
under a single-payer plan over the 2001 through 2010 period. We estimated the change in provider revenues
and insurer administrative costs as well as changes in spending for major payers for health care including
employers, households and governments.

Our analysis of the impact of a single-payer plan on health spending in Maryland is presented in the following
sections:

Changes in Health Spending;
Health Spending by Major Payers for Care; and
Health Spending in Future Years.

A.Changes in Health Spending

We estimate total health spending in Maryland under the single-payer plan in 2001 would be about $345.8
million less than what spending would be under current trends (Table 1). This includes an increase in health
services utilization for newly insured persons which would be more than offset by a net reduction in
administrative costs and other savings.

Table 1
Changes in Health Spending in Maryland under the Single-Payer Proposal in 2001
(in millions) a/
a/Includes spending for acute care. Excludes research, construction long-term care and public health.
b/Assumes that utilization of health services by previously uninsured persons will rise to the levels reported by insured
persons with similar age, sex, income and health status characteristics.
c/Assumes that utilization of newly covered health services for insured persons whose coverage is upgraded
(prescription drugs, etc.) will rise to the levels reported by persons who have such coverage.
d/Total insurer administrative costs are estimated to be $1,232 million in 2001. Insurer administrative costs will drop to
$542.3 million under the single-payer model. We estimated single-payer program administrative costs based upon Medicare
program administrative costs adjusted for the unique features of the single-payer plan.
e/Savings in provider administrative costs result from: uniform billing procedures, elimination of patient billing, for cost
sharing amounts, and the use of hospital capital and operating budgets. For a discussion of the methodology used see:
John F. Sheils et al., “National Health Spending Under a Single Payer System: The Canadian Approach,” Lewin-VHI,
January 8, 1992.
f/Under a universal coverage program, hospitals and physicians will receive payments for care formerly provided as
uncompensated care. We assume that provider payments are adjusted to eliminate provider windfalls for care already paid
for through cost shifting.
g/Assumes a 4.0 percent increase in utilization for persons formerly enrolled in HMOs.
h/Assumes a 17.7 percent rebate on prescription drug expenses covered under the program, which is the same
percentage drug rebate received by the Maryland Medicaid Program. Rebates for privately insured persons under the
current system are assumed to be equal to 8.3 percent.

Source:Lewin Group estimates using the Maryland version of the Health Benefits Simulation Model (HBSM).
1.   Health Services Utilization
Health services utilization in Maryland would increase under a single-payer plan as
comprehensive health care coverage is extended to all individuals. In particular, increased
utilization is expected among the 760,000 persons who otherwise would be uninsured in 2001.

We assume that under a program of universal insurance coverage, use of health services for those
who would otherwise be uninsured will increase to levels reported by insured persons with similar
age, sex, income and self-reported health status characteristics. Based on this assumption, we
estimate that the net increase in health spending for previously uninsured person would be about
$449.4 billion. This is an estimate of the net change in utilization for this group which reflects
reduced hospitalizations for preventable conditions offset by increased utilization of preventive
care and increased use of elective procedures.

There also would be an increase in utilization for previously underinsured persons. Many insured
individuals do not have coverage for some of the services that would be covered under the
uniform benefits package. For example, many plans do not cover prescription drugs, psychiatric
services, and preventive dental care. We assume that utilization of these services would increase
to levels reported by persons who have coverage for these services with similar age, sex, income
and health status characteristics. The net increase in spending for the underinsured would be
$226.5 million in 2001.

2.  Administrative Costs
The single-payer system streamlines health care administration by centralizing the source of payment for all
covered health services under a single governmental program with uniform coverage and reimbursement rules.
The proposal also eliminates patient cost-sharing (i.e., deductibles and coinsurance) for most services, thus,
eliminating the cost of billing patients for amounts that are not covered by insurance. These potential savings are
partly offset by the cost of administering cost controls and other functions performed under the program.

The single-payer system replaces the current system of multiple public and private insurers with a single source of
payment for the full amount of covered services. This eliminates both the complexity of diverse insurer rules and
patient billing for unreimbursed amounts. The single-payer system also replaces hospital billing for individual
patients with annual operating budget which effectively eliminates claims filing functions for Maryland hospitals.
(Claims filing would continue for out-of-state patients.)

We estimate that insurer administrative costs in Maryland would be $1.3 billion in 2001 under current law. This
includes for administration for private insurance and public programs. The cost of insurance administration
includes the cost of processing claims, research, utilization review, and determining eligibility under government
programs. Administrative overhead for private insurers also includes these costs plus marketing costs, taxes, net
reserve accumulations and profits.

The single-payer program would extend large-group economies of scale throughout the health care system by
covering all individuals under a single insurance mechanism. This would eliminate the costs associated with
underwriting, transition in coverage, and maintaining the administratively cumbersome linkage between employers
and insurers. Overall, statewide insurer administrative costs would be reduced from $1.3 billion under current
policy to $657 million under the single-payer model for a net savings of about $690 million in 2001 (Figure 4).
These savings estimates have been prorated to reflect the fact that about 9.0 percent of Marylanders would
continue to be covered under private insurance (i.e. those with coverage from out-of-state employers).
Figure 4
Changes in Administrative Costs Under the Maryland Single-Payer Program for Insurance
and Health Care Providers: 2001 (in millions)
a/
b/
a/ Insurer administrative costs under current policy are based upon data provided by The Maryland Health Services
Cost Review Commission for 1998 which we projected to 2001 using the Maryland version of the Health Benefits
Simulation Model (HBSM).
b/ Estimates of provider administrative costs and savings are based upon John F. Sheils and Gary J. Young, “National
Health Spending Under a Single payer System”, The Lewin Group, January 8, 1992.
Source: Lewin Group Estimates using the Maryland version of the Health Benefits Simulation Model
(HBSM).

The Lewin Group has conducted analyses of the impact of a single-payer program for the US,
which were based upon a detailed analysis of the data available on physician practice expenses.
In this analysis, we estimated that about 32 percent of physician and other professional revenues
($1.6 billion in 2001) are devoted to administrative functions. Physician administrative costs
include all physician overhead expenditures attributed to activities other than those directly
related to patient care such as business office staff and the value of physician time devoted to
practice management and insurer-related functions.

The single-payer approach would substantially reduce claims-filing costs for physicians by
standardizing the means of reimbursement through a single-payer and by providing full
reimbursement through a single source using a standardized electronic claims-filling process.
Standardization of coverage would also reduce physician costs related to adjudication of claims
and negotiation of selective-contracting arrangements. In a prior Lewin Group analysis of a
single-payer program for the US, we estimated that the single-payer model would reduce
physician administrative costs by about 19 percent under a plan with minimal copayments (e.g.,
$10.00 per visit). However, these estimates of provider administrative savings must be prorated
to reflect the fact that many of those using Maryland hospitals would continue to have coverage
through the current multi-payer system. This includes the 9.0 percent of Maryland residents that
is expected to be covered under private insurance from out-of-state employers and persons
from other states that use Maryland providers. Consequently, we estimate that physician
administrative costs in Maryland would be reduced by about 14 percent ($220.4 billion) in
2001.

We estimate that Maryland hospitals would spend about $2.4 billion (33.4 percent of revenues)
on administration in 1998. This is based upon a Lewin Group analysis of cost data for hospitals,
which was conducted as part of our above-referenced single-payer study. In this analysis, we
define hospital administrative costs to include 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 single-payer model, hospitals
are given an annual operating budget covering all services provided by the hospital. However,
hospitals would still need to submit claims for out-of-state patients. Based upon our prior
analyses of hospital data, we estimate that hospital administrative costs would be reduced by
about 7 percent ($175.3 million) in 2001 under the single-payer model.

3. Changes in Provider Payment
Due to the fact that all Maryland residents would have coverage, uncompensated care costs would be virtually
eliminated for all types of providers including hospitals, physicians and other professionals. We estimate that
provider uncompensated care costs would be reduced by about $506.9 million in 2001 under the single-payer
system (includes savings to hospitals and other providers). As discussed above, we assume that provider
payment rates which currently reflect the cost of uncompensated care, would be reduced so that there is no net
change in provider reimbursement. The global expenditures budget also would be adjusted to reflect the
increase in utilization expected among persons who would have been covered under HMOs under current
policy. This adjustment is assumed to be equal to an increase of about 4.0 percent among these individuals. This
represents an increase in spending of about $230.2 million 2001.

Finally, we anticipate that the single-payer program would be able to secure increased rebates from prescription
drug companies for prescriptions purchased for Marylanders. We assume that the program would receive the
same percentage rebate that Medicaid receives under the current program which is 17.7 percent. This is more
than double the average rebate typically negotiated by private carriers which we estimate to be about 8.3
percent. We estimate that net rebate savings would be about $166.5 million in 2001.

Table 2 presents our estimates of the net change in provider payments by type of provider under the single-
payer model. Overall, payments to providers would increase by $345 million. This estimate reflects the increase
in utilization for persons who are currently uninsured or under-insured and various adjustments in provider
payments to reflect reduced provider administrative burdens and reduced uncompensated care costs. This net
increase in provider payments would be offset by a reduction in insurer administrative costs of $691 million so
that the net impact of the program would be a reduction in total health spending of $346 million.

Table 2
Changes in Provider Payments and Insurer Administrative Costs Under the Maryland
Single-Payer Program: 2001 (in millions)
a/ See Table 1 for detailed summary of changes in statewide health spending.
Source: Lewin Group estimates using the Maryland version of the Health Benefits Simulation Model (HBSM)

B.Health Spending by Major Payers for Care
A single-payer plan would substantially change aggregate health spending for governments, employers, and
households. As discussed above, we estimate that overall health spending in Maryland would be reduced under
the single-payer model by $345.8 million in 2001 (Table 3). Because the tax rates under the single-payer
program would be set at levels sufficient to fund the program, the state costs of the program would be roughly
offset by revenue collections. We also estimate that there would be no net change in federal health spending.
This is because we assume that the federal government would simply transfer to the program the full amount of
what would have been spent under federal programs (i.e., Medicare, Medicaid, etc.) to the Maryland single-
payer program with no net change in federal expenditures.

Private employers would see a net increase in health spending of $406.5 million. This includes an increase of
$457.0 million for firms that do not now offer insurance. It also includes a $296.0 million increase in spending
for workers and their dependent in firms that currently provide health insurance which means that payroll tax
payments would on average be greater than what would have been paid for benefits under current policy.
However, this increase in costs for workers and dependents for firms that now offer coverage would be more
than offset by reduced spending for retirees. These savings occur because the single-payer program would
cover most of the expenses for services that are now covered by retiree health plans (e.g., prescription drugs,
Medicare copayments, etc.).

Aggregate household spending for health care would be reduced by $717.6 million under the program. Savings
to households would be attributed to the elimination of premium payments ($2.6 billion) and reductions in
household out-of-pocket payments ($2.0 billion). These savings would be largely offset by additional tax
payments of about $3.8 billion resulting in net savings to households of $717.6 million.

Table 3
Changes in Health Spending in Maryland under the Single-Payer Proposal in 2001
(in millions)
a/See Table 1 above for a detailed summary of changes in statewide health spending. Includes changes in wages and
tax revenues.
Source: Lewin Group estimates using the Maryland version of the Health Benefits Simulation Model
(HBSM).
Both economic theory and empirical research indicate that over time most of the increased costs to employers
resulting from the payroll tax would be passed-on to employees in the form of reduced wages. This wage loss
would offset health expenditure savings for households which would reduce net savings to households to about
$161.0 million under the program. We also estimate that the state and federal governments would lose income
tax revenue as wages are reduced. However, savings for retiree coverage would accrue fully to the employer
because these benefits are part of the company’s compensation costs for past employees and should have no
impact on wages for current employees.

The impact of a single-payer plan on major payers for health care is discussed in greater detail in the following
sections.
Table 4
Analysis of Program Costs and Revenues under the Maryland Single-Payer Proposal in
2001
(in millions)

a/Includes provider payments for acute care health services that are covered under the program. Provider payments are
estimated based upon overall average provider payment levels under current programs. Excludes patient copayments and
spending for non-covered services.
b/We assume that provider payment rates are reduced to reflect reduced uncompensated care expenses and savings in
provider administrative costs.
c/Reflects the net change in state and local employee benefits expenditures as a result of shifting from employer-based
health coverage to the payroll tax.
d/Includes the cost of administering benefits under the single-payer program. Estimates based upon the cost of
administering benefits under the Medicare program.
e/The program will be reimbursed for services provided to persons who are covered under the CHAMPUS program.
f/Federal Medicare program funding for Maryland residents would be transferred to the Maryland single-payer program.
This includes federal funding for Part-A and the federal share of funding for Part-B.
g/The state share of funding for the Medicaid program is transferred to the single-payer program. Estimates exclude the
state share of funding for disproportionate share hospital payments.
h/The federal share of funding for the Medicaid acute care program would be transferred to the single-payer program.
Includes benefits payments, administration and the federal share of disproportionate share hospital payments.
i/Current state and local funding for mental health and various indigent care program would be transferred to the single-
payer program. Includes funding only for state health programs, which are not also included under the state share of the
Medicaid program.
j/The program imposes a payroll tax on employers of 6.3 percent and employees of 3.2 percent.
k/Assumes a net increase in revenues from the Maryland alcohol tax rates to the national average ($28.5 million ) and a
increase in the tobacco tax to $1.25 per pack of cigarettes ($172.1 million).
l/The bill imposes a personal income tax equal to 11.0 percent of state income tax done on a progressive scale.
m/Employers are assumed to pass-on the change in employer health care costs under the program as a change in wages
resulting in corresponding changes in state personal income tax revenues.
Source: Lewin Group estimates using the Maryland version of the Health Benefits Simulation Model (HBSM).
C.Health Spending in Future Years
Under the single-payer model, the state would effectively determine the level of spending for health care in
Maryland. This is because the single-payer program would set hospital spending levels through explicit budgets
for each hospital and would determine the levels of reimbursement for individual health services. Consequently,
the state will need to develop a forum for determining the allowable rates of growth in spending under the
program. Indeed, the budgeting process for the single-payer program is likely to emerge as a powerful cost
containment tool.

For example, the Health Care Financing Administration (HCFA) projects that real per-capita health spending
(i.e., cost growth in excess of population growth and general price inflation) will grow at a rate of 3.1 percent per
year through 2010. This is about 1.2 percentage points faster than the projected rate of growth in income as
measured by the real per-capita rate of growth in the GDP (expected to be about 1.9 percent). However, if costs
are permitted to grow at the current rate, health spending in Maryland would increase from $20.7 billion in 2001
to $39.5 billion by 2010 (Figure 5). However, because health care costs are projected to grow faster than GDP
(i.e., statewide income), the tax rates required to fully fund the program would increase each year. Under current
cost growth assumptions, the payroll tax required to fund the single-payer model would increase from our
estimate of 9.5 percent in 2001 to 10.6 percent by 2010. However, employer health insurance costs are
projected to grow at the same rate under current law.
Figure 5
Health Spending in Maryland Under Alternative Cost Growth Scenarios
a/Assumes current cost growth forecasts of real per-capita cost growth of 3.1 percent per year.
b/Excludes spending for research and construction, public health and long-term care.
c/ Assumes that the rate of growth in health spending is constrained so that it does not exceed the rate of growth in real per-capita
GDP (1.9 percent per year).
Source: Lewin Group estimates using the Maryland version of the Health Benefits Simulation Model (HBSM).
To prevent this increase in tax rates, the state could set limits on provider reimbursement levels which slow the rate of
growth in health spending. For example, reimbursement amounts could be set at levels where real per-capita state health
spending grows no faster than the growth in real per-capita GDP (i.e., 1.9 percent per year). Under this scenario, health
spending in Maryland in 2010 would be about $4.2 billion less than currently projected. At this slower rate of growth, the
payroll tax rate would remain at 9.5 percent throughout the next decade.

However, it is unclear whether $4.2 billion can be removed from the health sector without slowing the adoption of medical
technology or otherwise compromising the quality of care. Thus, the state will need to balance the need to control costs
against the need to assure high quality health care in Maryland. This will require establishing a process for monitoring health
care quality and a forum for discussing and adopting the appropriate levels of cost growth.
4 For a detailed discussion of the methods used in this analysis see: Sheils, et al., “O Canada: Do We Expect Too
Much From Its Health System”, Health Affairs, Spring 1992; and Sheils, et al., “National Health Spending Under a
Single-Payer System: The Canadian Approach: Staff Working Paper”, The Lewin Group, January 1992.
5 We assume that wages are reduced for all private sector employees but that there would be no change in wages
for government workers.
Comments?
Previous Section
Next Section
Table of Contents