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Editorials on Capitalism in Medicine

September 21, 2007 by Jared M. Rhoads

Most people believe that the main reason why countries with single-payer health insurance systems have lower per capita expenditures is because such systems have lower administrative costs. Researchers report that single-payer systems simplify paperwork, standardize billing procedures, and consolidate claims-processing activities¹, and proponents argue that key business functions such as marketing and sales are wasteful and add no value. Estimates generally place total healthcare expenditures at about $5,600 per person in the United States, versus just $3,000 per person in Canada. The thought is that, by emulating Canada, we could each save several thousand dollars every year without forgoing anything of critical importance.

Single-payer systems, however, do not reduce costs primarily through operational efficiency; they limit spending through the withholding of care. These two things are not the same.

Consider how Canada achieves most of its savings. Canada uses a global budget system in which hospitals negotiate with government officials to find out how much they will be allowed to spend in a given year. These figures are revised annually based on patient volume, input costs, clinical performance, and other factors. The result is a lump-sum payment (or schedule of fixed payments) that the hospital must draw down carefully until the next budget cycle. When money runs out, care slows to a crawl. Hospitals put patients on long waiting lists or substitute lower quality services (e.g. x-rays or ultrasounds in lieu of higher-resolution MRIs) in order to keep expenditures low. And if the hospital withholds care long enough, patients may give up and make trips over the border for their diagnostic tests, surgeries, and other procedures—at their own expense, not the hospital's.

Canada could raise hospital budgets to ensure that quality and access to care do not suffer, but that would raise costs at the expense of taxpayers. Such a move would be, among other things, a major admission of the current system's inadequacy.

Setting aside the issue of whether government administration of healthcare is in conflict with individual rights, how much savings does this type of single-payer system achieve, anyway? A peer-reviewed study from 2003 estimated the share of administrative costs to be about $1,000 per capita in the United States versus about $300 per person in Canada, for a savings of about $700 per person per year.² A non-academic but more recent estimate published this month places the figure even lower, at about $560 of potential savings per person per year.³ Administrative savings, it appears, may only account for about a quarter of the total difference in per capita spending between the two countries.

Cost and utilization of care—not administration—account for the lion's share of the difference in expenditures between the Canada and the United States. Single-payer achieve what little operational efficiency they get not through genuine business process innovations or the use of information technology, but rather through the use of restrictive, top-down budgeting. As the United States is drawn further toward the single-payer model with the promise of administrative efficiency, individuals should not lose sight of the hidden costs of such a system.

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¹ Thorpe, K. "Inside the Black Box of Administrative Costs." Health Affairs 11(2):41-55, 1992.

² Woolhandler, et al "Costs of Health Administration in the U.S. and Canada," NEJM 349(8) Sept. 21, 2003

³ Halverson, G. "Understanding the Trade-Offs of the Canadian Health System" Healthcare Financial Management, Oct. 2007 82-84

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