Medicare for All Would Improve Hospital Financing

“Hospitals account for more than one trillion dollars of health expenditures annually, and analysts have raised concerns that a shift to single payer, or Medicare for All, might adversely affect hospital care. A common narrative has emerged in the popular press and in medical journals, suggesting that Medicare for All would decrease reimbursements and force hospitals, particularly rural hospitals, to cut back on much needed services or even close altogether. These concerns have received increased attention with Elizabeth Warren’s recently released financial proposal for Medicare for All. Understandably, these points have raised concern about the feasibility of Medicare for All. But is this narrative evidence based?

For background, two current bills, H.R.1384 and S.1129, would implement a single-payer, Medicare for All reform. Those bills would cover all US residents for a comprehensive range of benefits, with a government-run insurer replacing private insurance as well as Medicaid and Medicare. Proponents of such reform project that administrative savings would offset the increased costs of expanding and improving coverage.

These bills would change the way we pay for hospital care but not in the way that has been popularly portrayed. Let’s review the status quo. Currently, private insurers pay 1.4 times the average hospital’s operating costs, while Medicaid pays 0.868 and Medicare 0.881 times operating costs. Not surprisingly, hospitals try to preferentially recruit privately insured patients and worry about subsisting on Medicare-level payments. As one prominent hospital administrator told me, “If Medicare for all were passed, we would have to close our doors in a month.” Some also suggest that Medicare reimbursement rates would encourage hospitals to shift to higher-margin, procedure-intensive care, undercutting the projected savings of a single-payer reform and further skewing our health care system away from cognitive and preventive care.

Medicare For All Proposals For Hospital Financing

These projections assume that hospitals will continue to be paid on a per-patient basis under single payer, with reimbursement rates plummeting to Medicare levels. However, Elizabeth Warren’s financing proposal keeps per-patient billing but raises reimbursements to 110 percent of Medicare levels, which would approximate operating costs of hospitals.

Congressional bills go further. The House bill would abandon per-patient payments and instead fund hospitals through “global budgets.” (The Senate version also calls for global budgets for hospitals but suggests that some elements of Medicare’s current payment approach might persist.) Under global budgeting, hospitals would receive an annual lump sum, distributed in monthly installments, similar to how US fire departments or hospitals in Canada are financed. Under this system, hospitals would receive extra funding in the case of unexpected deficits and would not keep surpluses for themselves. At present, surpluses (or the expectation of future surpluses available to pay back loans or bonds) is the main source of funding for hospital upgrades or expansion.

Per-Patient Billing Leads To Wasteful Spending

Currently, hospitals have incentives to invest their surpluses in capital projects that will maximize future profits/surpluses, for example, operating rooms or other facilities serving mostly privately insured orthopedic patients. Reflecting those incentives, the number of knee and hip replacements at small rural hospitals increased 42 percent between 2008 and 2013. Yet, such capital investments may not fit communities’ most urgent needs or be appropriate at all: Thirty-day mortality for elective surgeries in small rural hospitals can be twice as high as in other hospitals, likely due to low patient volume .

The race to expand lucrative services has led to a self-reinforcing cycle of rising hospital costs. As recently as 2000, Medicare level reimbursements were sufficient to cover hospital operating expenses but since then a wasteful cycle has emerged. Rising costs—driven, in part, by hospitals’ investments in expensive development projects—have increased incentives to court privately insured patients, leading to increased costs and an even greater need to court the privately insured

Our current financing system incentivizes hospitals to engage in other wasteful behaviors. To handle bills from multiple payers, hospitals have created massive administrative apparatuses for billing: Currently, administrative costs consume 25.3 percent of total US hospital expenditures, roughly double that of Scotland or Canada, which operate under single-payer global budget systems. Hospitals have attempted to become more profitable primarily by increasing prices, investing in technology, or taking fewer publicly insured patients, rather than becoming more efficient or cutting expenses. Roughly a quarter of US health care spending is wasteful, with inefficient administration the greatest contributor, but no incremental interventions have been proven to substantially reduce administrative inefficiency. Global budgeting would address these inefficiencies by streamlining payment, leading to $150 billion in annual savings.

Hospitals deserve an appropriate amount of funds to meet the growing needs of their communities. But the current system is geared to maximizing profits rather than serving the public health. In San Francisco, for example, a dozen hospital systems compete for privately insured obstetric patients, yet nearly half of rural nearby counties lack an obstetrics service altogether. Since 2010, 160 rural hospitals across the nation have closed, and the rate is accelerating. Some rural hospital closures are driven by low volume, and in such cases, closure of inpatient services might be reasonable. However, many jeopardized rural hospitals serve a high volume of patients, yet still face financial challenges because fewer rural patients have the private insurance that brings high payment rates.

Hospitals would still grow under a global budget payment strategy; the single payer would fund new capital investments through grants, similar to the federal government’s Hill Burton grants that fueled hospital expansion in the post-World War II era. But grants would go to hospitals in need, instead of funding new hospital atriums or luxurious nonclinical projects. Safety-net hospitals would see an increase in operating budgets because payment would be adjusted to meet hospital needs, not determined by the patients’ payer mix. 

A Better Hospital Financing System

Given the magnitude of this proposed reform, it’s understandable some are concerned that Medicare for All would be too disruptive. Yet, patients and doctors would experience little, if any disruption. Our current system limits choice through high deductibles, tiered hospitals, and unaffordable prices. Under single payer, patients could choose any doctor and hospital, everyone would be insured, and bureaucratic burdens would be greatly diminished. Furthermore, under global budgeting, payment levels would be monitored and adjusted over time by a panel of health care experts. 

Any bill proposing to reform US hospital financing needs to be thoroughly critiqued and evaluated. Yet, the current dialogue does not accurately reflect the actually proposed single-payer plans. Senator Warren’s plan covers operating costs of hospitals by preserving per-patient payments and increasing reimbursements to 110 percent of Medicare levels. Both congressional bills go a step further via global budgeting, which would better match funding to need and streamline the bureaucracy necessitated by the current hospital payment approach. Under these bills, needed hospitals, particularly rural and safety net, could thrive, and unnecessary hospitals would close. That is a more just financing system, one that would reward judicious hospital stewardship and care for the underserved, rather than court privately insured patients.”

“Medicare For All Would Improve Hospital Financing, ” Health Affairs Blog, December 9, 2019.DOI: 10.1377/hblog20191205.239679

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