Analysis of the Costs and Impact of Universal Health Care

Models for the State of Maryland: The Single-Payer and Multi-Payer Models

 Final Report, May 2, 2000

John F. Sheils and Randall A. Haught

The Lewin Group, Inc.

Funded by:

The Aaron Straus and Lillie Straus Foundation, Inc.

The Jacob and Hilda Blaustein Foundation, Inc.

 EXECUTIVE SUMMARY

Contents

Introduction

The Universal Coverage Proposals

Health Spending Under Reform Alternatives

Impact on Employers

Household Impacts

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Executive Summary Introduction

The purpose of this analysis was to explore the expected costs and impacts of two alternative universal health reform plans for Maryland. We analyzed a single-payer model in which all state residents are covered under a single public program funded primarily with an employer payroll tax. The second approach is similar to the single-payer program with the exception that employers have the option of opting-out of the government program and providing coverage to their workforce on their own. We call this second alternative the multi-payer model.

 Our analysis indicates that the single payer model would cover all Marylanders, including the estimated 760,000 uninsured persons in the state, while actually reducing total health spending in Maryland by about $345.8 million (i.e., 1.7 percent). These savings are attributed primarily to the lower cost of administering coverage through a single government program with uniform coverage and payment rules. The multi-employer scenario would achieve less administrative savings because many employers are likely to continue to provide coverage through their own health plans. However, enough administrative savings are realized under this approach that the program would achieve universal coverage with an increase in statewide health spending of only about $207 million (about a 1.1 percent increase in spending) in 2001.

 Both of these reform scenarios would greatly redistribute health care costs across families in various income groups by shifting from today’s premium based system to a tax based system where individual payments for health coverage increase in proportion to income. For example, under the single-payer scenario, families with incomes below $100,000 would on average find that their new tax payments under the program are more than offset by the elimination of premium payments and reductions in out-of-pocket spending under the plan. However, under the tax based system, families with incomes of $100,000 or more will, on average, see a net increase in spending for health care.

 In this report, we present our analyses of the financial impact of these health reform models on various payers for health care including state, local, and federal governments. We also estimate the financial impact of the proposal on employers by industry and firm size. In addition, we estimate the impact of the plan on household health spending by age, income level, and other characteristics.

The Universal Coverage Proposals

The single-payer model is one where all individuals in the state are covered under a single uniform health plan that is administered and funded by the state. The new single-payer system would replace all current public sector insurance systems including: Medicare, Medicaid, CHAMPUS and the Federal Employees Health Benefits Plan (FEHBP). It would also replace private health insurance plans in the state. The program would be financed with: current government health care funding for discontinued programs; and new taxes on employer payroll, tobacco products, alcohol products, and personal income.

The single-payer benefits package would be modeled on the benefits typically provided under employer health plans. The program would cover medically necessary inpatient hospital care, physician services (including preventive care), hospital outpatient care, prescription drugs, lab tests, and mental health services (including substance abuse and tobacco cessation). Chiropractic services would be covered when referred by a physician. The program would cover preventive dental care and vision exams, but it would not cover orthodontia, private rooms, or eyeglasses.

To discourage over-use of services, there would be a $10.00 copayment for ambulatory care services. There would be no deductible. Also, the program would use a primary care provider referral (i.e., gatekeeper) model where patients face increased copayments for visits to specialists without referral. Benefits that are currently provided to Medicaid eligible persons which are not covered under the single-payer model, would be continued for low-income persons who qualify for Medicaid under current eligibility rules.

The multi-payer alternative is similar to the single-payer model in that a tax financed government program is established to cover all Marylanders. However, under the multi-payer approach, employers have the option of opting-out of the government program and provide coverage to their workers and their dependents through an employer-sponsored plan as long as the benefits under the plan are at least as comprehensive as those provided under the single-payer program. If necessary, a risk adjustment process would be used to correct for any employer selection behavior resulting in an accumulation of higher cost individuals in the government plan.

Health Spending Under Reform Alternatives

We estimate that total health spending for Maryland residents under the current system will be $20.8 billion in 2001. This includes spending for all health care services including benefits payments and insurer administration. We estimate that the single-payer program would achieve universal coverage while actually reducing total health spending by about $345.8 million in 2001 (Table ES-1). The primary reason for this is that the single-payer model substantially reduces the cost of administering health insurance coverage resulting in savings that can be used to pay for the care that would be provided to persons who are currently going without coverage.

 Table ES-1

Changes in Health Spending in Maryland under the Single-Payer and the

Multi-Payer Universal Coverage Proposals in 2001 (in millions) ^a/

a/     Includes all persons in the state including those with public and private coverage.

b/    Includes an increase in utilization for persons currently covered under HMO plans and an adjustment for higher prescription drug rebates under the government plan.

Source: Lewin Group estimates using the Maryland version of the Health Benefits Simulation Model (HBSM)

We estimate that under current trends, about 760,000 Maryland residents would be without health insurance in 2001. We estimate that their use of health services would increase by $449.4 million if they were to become covered under the benefits package described above. Also, utilization would increase among currently insured persons who currently do not have coverage for certain services such as prescription drugs or preventive dental care by about $226.5 million. Thus, the total increase in utilization of heath services among the uninsured and the under-insured persons would be $675.9 million in 2000. In addition, there would be a net increase in spending of about $63.7 million due to changes in the use of managed care under the program.[1]

The cost of these increases in utilization for uninsured and under-insured persons would be more than offset by reduced administrative costs under the program. The single-payer system replaces the current system of multiple public and private insurers with a single source of payment for all 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 budgets which effectively eliminates claims filing functions for Maryland hospitals. (Claims filing would continue for out-of-state patients.)

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 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.

The single-payer program would also reduce administrative costs for hospitals and physicians. Hospital administrative costs associated with filing claims would be all but eliminated for Maryland patients because under the single-payer model, hospitals are given an annual operating budget covering all services provided by the hospital. (Hospitals would still need to submit claims for out-of-state patients.) The single-payer approach would also 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. Total savings to providers would be about $1.1 billion. We assume that provider payments are reduced by this amount so that these savings accrue to payers.

Under the multi-payer model, we estimate that total health spending in Maryland would increase by $207.2 million under the multi-payer model in 2001. This compares with an actual reduction in spending of $345.8 million under the single-payer model. Thus, health spending under the multi-payer model would be about $553 million higher than under the single-payer plan.

As shown in Table ES-1, the net change in utilization of health services by uninsured and under-insured persons would be the same under both the multi-payer and the single-payer scenarios (i.e., an increase of $675.9 million). This reflects the fact that employers who opt-out are required to provide the same standard benefits package resulting in similar increases in utilization by insured and under-insured persons under the two plans. The higher costs under the multi-payer program are attributed primarily to the fact that administrative cost savings would be less than under the single-payer model. Administrative savings would be $505 million under the multi-payer proposal compared with $1.1 bullion under the single-payer program. This reflects the higher cost of maintaining separate health policies for multiple groups.

Impact on Employers

Health coverage for workers and their dependents under the single-payer model would be financed with a payroll tax, two-thirds of which would be paid by the employer with the rest paid by the worker. There would be no premiums for the benefits provided under the standard benefits package. We estimate that the payroll tax rates required to fully fund benefits for workers and dependents under the single-payer model would be 6.3 percent for employers and 3.2 percent for employees.

Under these tax rates, total employer health spending in Maryland would increase by $406.5 million in 2001. This includes $457.0 million in payments by firms that currently do not offer coverage, which would be partly offset by savings of about $50.5 million among firms that now offer coverage. Much of these savings for currently insuring firms would be attributed to reduced spending for retirees as Medicare beneficiaries are shifted from their current Medicare benefits plan to the more comprehensive benefits package provided under the single-payer model. Employer costs would increase by an average of $1,162 per worker for workers in firms that do not now offer coverage while costs for firms that currently offer coverage would see an average savings of $28 per worker.

Employer costs are higher under the multi-payer plan than they would be under the single-payer model. The primary reason for this is that allowing firms to opt-out of the single-payer plan would eliminate much of the administrative savings that result from moving to a single source of coverage for all Marylanders. However, many employers may decide to continue to provide their own health plan despite the higher costs in the initial years of the program in response to employee and union preferences to maintain their current coverage. We estimate that due to the higher cost of administering multiple plans, employer costs under the multi-employer model would increase by an average of $508 per worker, compared with an average increase of only $187 per worker under the single-payer model.

However, economic theory and research indicates that over time increases in employer costs for health and other benefits are typically passed on to workers in the form of reduced wage growth. Thus, we assume that over the long-term, all of the changes in employer costs for workers under either of these plans will be passed on to workers in their wages as labor markets adjust to reflect changes in total employee compensation costs under health reform. However, employers are expected to retain any savings in benefits costs for retirees. This is because these savings are attributed to compensation packages for prior workers, which does not affect the labor market for current workers. Overall, private employers would save about $346.5 million in retiree costs under either the single-payer or multi-payer models.

Table ES-2

Change in Employer Costs Under the Single-payer and Multi-Payer Models In Maryland in 2001

 a/  Employers are assumed to pass-on the savings and/or increases in cost under the health reforms to workers in the form of changes in wages as labor markets adjust to these changes in employee compensation.

Source: Lewin Group Estimates using the Maryland version of the Health Benefits Simulation Model (HBSM).

Household Impacts

Under a single-payer program, Marylanders would no longer pay health insurance premiums for the basic benefits package and would face only $10.00 copayments for health services. Instead, households would pay taxes on earnings, tobacco, alcohol and total personal income. In addition, household incomes would be affected by wage adjustments resulting from increased employer spending for health care (i.e., the employer payroll tax). These changes in the way in which care is financed would substantially alter the distribution of health care costs across households of various age and income groups.

We estimate that household health spending would decline by $161.0 million under the single-payer program. This includes the elimination of household premium payments for private health insurance ($2.5 billion); and reduced household out-of-pocket payments for health services ($2.0 billion). These savings would be offset by increased tax payments of $3.8 billion. In addition, we estimate a loss of wages to households (after tax offsets) of about $556.6 million as employers pass-on the increased cost of complying with the payroll tax to workers in the form of reduced wages.

Overall, we estimate that households would see health spending decrease by an average of about $261 per family under the single-payer model in 2001 (Table ES-3). In general, the single-payer plan would tend to reduce health care costs for lower- and middle-income families. For example, families with under $100,000 in annual income would, on average, see savings. However, health spending for families with $150,000 or more in income would increase by about $4,195 per family. This reflects the fact that the program shifts Marylanders away from a premium financed system, to a tax financed system where total health spending would be in proportion to family earnings.

On average, families would spend more for health care under the multi-payer model than under the single-payer plan at all income levels. Family health spending would increase by an average of $57 per family under the multi-payer model compared with savings of ($261) per family under the single-payer program. Family costs under the multi-payer model would be higher than under the single-payer model for all income groups except those with incomes of $150,000 or more. This is because these high-income families are expected to benefit the most from the lower payroll tax under the multi-payer program.

Table ES-3

Change in Average Household Health Spending in Maryland Under the

Single-Payer Model and the Multi-Payer Model in 2001:  After Wage Effects ^{a/ b/}

 a/     Excludes institutionalized persons.

b/  Includes changes in premiums, out-of-pocket expenses, taxes earmarked to fund health reform, and after-tax wage effects.

Source: Lewin Group Estimates using the Maryland version of the Health Benefits Simulation Model (HBSM).

Savings under both the single-payer and multi-payer plans would tend to be greatest for older individuals. For example, under the single-payer plan, families headed by an individual age 65 or older would save about $2,251 per family (Table ES-4). By contrast, average health spending would increase by up to $685 per family for younger age groups. On average, household savings would be greatest for married couples and individuals facing high out-of-pocket costs under current policy.

Table ES-4
Change in Average Family Spending on Health Care in Maryland Under the Single-Payer Proposal and

the Multi-Payer Model in 2001 by Family Income and Age of Household Head:  After Wage Effects ^{a/ b/}

a/     Excludes institutionalized persons.

b/    Includes changes in premiums, out-of-pocket expenses, taxes earmarked to fund health reform, and after tax wage effects.

        Source: Lewin Group estimates using the Maryland version of the Health Benefits Simulation Model (HBSM).

[1] Includes an increase in utilization for persons currently covered under HMO plans and an adjustment for higher prescription drug rebates under the government plan.

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