Code Red: Two Economists Examine the U.S. Healthcare System

November 5, 2009

Second thoughts about single payer?

Filed under: Health insurance,Health Reform — David Dranove and Craig Garthwaite (from Oct 11, 2013) @ 4:35 pm

Last week I promised to critique the single payer approach.   There is no shortage of criticisms and you probably know them by heart:  Who sets the budget and what are their priorities?  Do you trust politicians to set the rules and won’t they lead to rationing?  Do you believe the public sector will fight against fraud, abuse, and corruption?

My guess is that if you support single payer, these questions don’t concern you.  And if you oppose single payer, these questions are enough to justify your opposition.  But let me offer two more things to consider.  First, the increment in marginal income tax rates required to fund single payer will have a chilling effect on economic activity.   Second, single payer will almost surely have to rely on reductions in payments for medical technology to be successful.  And like it or not, the entire world free rides off of the profits made by R&D companies here in the U.S.   Cutbacks in U.S. spending could cause cutbacks in R&D, with potentially profound consequences.

My colleagues often say that medical R&D is the most important long run driver of the health system.  I would not support any major overhaul such as single payer without hearing advocates articulate the implications of their proposal for the future of medical R&D.


  1. Do you have empirical data to support your hypothesis that price decreases from a single payer system will reduce medical R&D? Although profits have historically come primarily from the US market, aren’t companies going to look elsewhere for growth opportunities, with increased globalization and a troubled US economy?

    Comment by kreidich — November 9, 2009 @ 11:04 am

    • I don’t know where the profit opportunities will come if not from the U.S.; China and India are growing markets but have their own domestic suppliers (and, for China at least, questionable patent laws.)

      So U.S. profits may be all there is for now. Unfortunately, the empirical evidence on profits and medical R&D is remarkably thin. There are some studies showing that more demand leads to more R&D, but whether the R&D produces breakthroughs or “me-too’s” is hard to say, and “demand” usually means incidence and not necessarily $$$. So I can only speculate as to whether lower U.S. prices will mean lower productivity.

      This is all rather frustrating, as I cannot think of a more important issue for the future of health care here and abroad.

      Comment by dranove — November 9, 2009 @ 11:36 am

  2. The marginal tax rate vs premium issue is not as clear cut as you present it. First off, a single payer system could rely on premiums rather than taxes, or a combination of the two.

    Higher marginal tax rates for a single payer system may preferable than the current system of premiums. It all depends on whether one is in the individual market or the group market, and what one’s income is.

    If you are in the current individual market, your premium will be a function of your age and your health history (or that of your family members). You get older, your premiums rise. You have an illness, your premiums rise. If the experience of others in your risk pool is bad, premiums reflect that. In my case, a 50+ male who has had cancer and is facing heart surgery, my rate would go way the hell up. Yet, in my case, neither of those illnesses are related to lifestyle, weight, self-care or lack thereof.

    In the group market, in most cases, my premium only has to do with the group experience, and I pay the same regardless of my age or health history. So a 23 year old secretary pays the same as the C-suite executive. Sounds quite regressive to me.

    With a tax based system, you pay based on ability to pay, so a 25 year old hot shot of Wall Street pays the same as a 75 year old clipping lots of bond coupons. A minimum wage earner would pay little if anything, as would someone living on Social Security.

    And, while there tax rate (may) go up, the premiums they pay will disappear. So, for some, there may be a marginal increase and for others a decrease.

    On top of that, you eliminate job lock.

    Health insurance is not like car insurance. With car insurance, you pick the kind of car you drive. You make a choice as to the way you drive, how much you drive, and where you drive. You don’t have the same choices with health insurance as much of the risk is outside your control. And we talk about health insurance and health benefit plans interchangeably. I would argue that many companies, with the addition of preventive services, wellness and similar provisions, do not offer insurance in the traditional sense. They are offering a package of benefits to keep people well, on the job, and to minimize disruption in the workplace. However, those plans are described as insurance plans.

    We need to differentiate between the insurance market and the market for health services. You can have single payer or a very regulated insurance market and a competitive provider market. Currently, there really isn’t much competition in the group market at the consumer level – you take what you are given by your employer.

    The CDHP plans and advocates want you to bu health care as if you were buying your car by the piece – 5 bolts, three screws, 5 cubic feet of plastic. Not really very practical.

    As far as the questions you ask at the beginning of your post, is it better, or worse, to have politicians making those decisions than your employer or your health plan? The political process is a lot more open (don’t start laughing) than the offices and boardrooms of our employers. And fighting fraud and abuse…perhaps a simpler system will be a lot tougher to game than Medicare with its 144,000 pages of regulations. (And what about Medicaid, Blue Cross, Aetna, etc.)

    (Hope this didn’t turn into a rant. I apologize if it reads that way.)

    Comment by Alan — November 11, 2009 @ 3:07 pm

    • Alan,

      The fact remains that with an employer based system, you do not pay more towards insurance as you earn higher income, but in a government funded system you almost certainly do. Thus, a government funded system will effectively increase income tax rates. I don’t deny the benefits of a government funded system that you enumerate. I can’t ignore the the problems of the existing system that you enumerate. These points seem to be well understood by those involved in the current debate. But the increase in marginal income tax rates, and the resulting effect on economic productivity, has been largely overlooked. We already pay about 5% higher effective income taxes to fund Medicare. That is just the tip of the iceberg.

      Comment by dranove — November 11, 2009 @ 4:14 pm

  3. David

    Isn’t part of the problem in this argument that we don’t have, in the non-governmental market, only an employer-based system. The individual market is structured very differently and the effects of taxation would be very different on an individual policyholder than an employee that is part of a group. And many of those in the individual market are themselves employed or self-employed?

    Could the tax on a self-employed person with individual insurance actually be less than the premium he or she is paying for similar levels of coverage?

    Comment by Alan — November 11, 2009 @ 4:44 pm

  4. From Ezra Klein’s blog at the Washington Post:

    I posed a similar question to [MIT Health economist] Finkelstein. If she had billions of dollars and wanted to supercharge innovation, how would she do it? Would she simply increase reimbursement rates for drugs? Would she give it to pharmaceutical companies? What’s the most efficient engine for medical innovation?

    In reply, she pointed me to the work of Harvard’s Michael Kremer (another expert, sadly). “The two main things that people talk about,” she said, “are funding a lot of basic research — push strategies — and then pull strategies, where governments get together and define a prize for innovation on a particular disease.” In other words, funding innovation and scientific discovery in a direct and targeted fashion.


    And with regard to “the increment in marginal income tax rates required to fund single payer will have a chilling effect on economic activity.”:

    Any cyclical decrease in the economy from a tax increase will be outweighed by the pure, rather than left-over, demand increasing effect of the increased government spending. Moreover, we are rarely at the zero lower bound, so that the fed can normally fully counteract any demand decrease from a tax increase by cutting rates. What happened when Clinton increased taxes greatly? Was there an economic chilling, a disaster? No, there was a giant boom.

    For the longer term, I would hope you have heard of the income and substitution effects and the backward bending labor supply curve, which the empirical research shows bends back at about the upper middle class level. Moreover, the empirical research shows a weak relationship between tax rates and hours worked (and, in any case, with extremely strong positional/prestige externalities, it’s far from clear that people are better off working more hours).

    I’ll refer you to three articles:

    Comment by Richard H. Serlin — November 28, 2009 @ 10:54 pm

    • Richard,

      On the latter point: I am not a tax expert but I will accept for argument’s sake the possibility that increasing marginal tax rates above current levels will have at most a small negative economic impact. (Regarding the Clinton years, it is a bit unfair to assign causality to one policy change among the many that occurred.) In any event, I see this as the tip of the iceberg. I see marginal tax rates increasing across the states (with proposals to double Illinois’ rate, for example.) Democrats have all sorts of designs on increasing marginal tax rates at the federal level. We are not talking about incremental changes, here. Folks who currently face 25% marginal tax rates could see rates of 35-40% or higher. (The effective tax increase from the purchase mandate could near 10%.) The additional unintended increase in marginal tax rates associated with the purchase mandate leaves that much less wiggle room for policy makers who want to tinker with the tax code in other ways.

      As for innovation, one can hardly argue against curing another disease. But a few billion dollars is not enough to make a difference there, as the “prize” for breakthrough R&D is already in this range. I would spend the money where there has been market failure — implementing uniform electronic health records. I would take a community and give every provider the same hardware and software. I would make sure the software facilitated management processes as well as medical decision making. If I am right, we would see all kinds of innovations in how care is organized and delivered and how quality is measured and rewarded. I see this as holding the biggest promise for improving free market healthcare.


      Comment by dranove — November 29, 2009 @ 9:11 am

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