Medicare for All has dominated the 2020 Democratic presidential campaign.
First popularized by Sen. Bernie Sanders (I-Vt.) in 2016, the issue has been taken up by Sen. Elizabeth Warren (D-Mass.) and others, raising questions about the cost of such a program and its impact on the 156 million Americans covered by employer health insurance plans.
But that may not be the biggest hurdle Medicare for All has to clear, according to Poets&Quants’ Professor of the Week, Craig Garthwaite of the Kellogg School of Management at Northwestern University. A recent paper by him and Kellogg colleagues shows that in fact, labor costs of skilled medical professionals and prices of prescription drugs would probably be bigger obstacles to driving down costs for the notoriously expensive U.S. health care system.
OBSTACLES TO MEDICARE FOR ALL? DRIVING DOWN THE COST OF DOCS & DRUGS
“A single-payer aiming to meaningfully reduce spending would, by necessity,…target the prices paid to healthcare inputs such as medical providers and pharmaceuticals,” Garthwaite and his co-authors write. But cutting compensation for medical professionals and slashing prescription drug prices would present huge economic, not to mention political, problems, according to Garthwaite and another leading Kellogg expert in health care, Professor David Dranove, along with Assistant Professor Jillian Chown and research assistant Jordan Keener.
Their working paper, “The Opportunities and Limitations of Monopsony Power in Healthcare: Evidence from the United States and Canada,” was published in 2019 by the National Bureau of Economic Research. (A monopsony is a market in which there is only one buyer, as in single-payer health care.)
Garthwaite and the researchers compared the U.S. with Canada in which the government is the single-payer but, unlike in the United Kingdom, does not employ doctors or own hospitals. The U.S. spends more than $10,000 per capita on health care, double Canada’s spending, and nearly five times as much on administrative costs as our neighbor to the north does.
LABOR COSTS & DRUG COSTS MAY PROVE RESISTANT TO SIGNIFICANT COST-CUTTING
But, the researchers found, the differences that really matter come from labor costs (60% of health care spending) and prescription drug prices (15%), and they may prove resistant to significant cost-cutting,
Canada, Garthwaite and his colleagues found, pays skilled health professionals like doctors, nurses, and surgeons 26% less than their U.S. counterparts make, and a stunning 54% less for prescription drugs.
So, the solution would seem simple—cut fees to physicians and providers (or reimbursements to medical institutions, like hospitals) and slash the price of U.S. prescription drugs to Canada’s level.
THE DIFFERENCE BETWEEN THE HEALTHCARE SYSTEM IN THE U.S. AND CANADA
But Garthwaite and his co-authors found that “these lower wages primarily reflect differences in earnings for all high-skilled employees across the two countries… For example, income at the 95th percentile is $117,396 in the United States compared to $89,783 in Canada.” That’s about a 24% difference.
And “if the U.S. took steps so that its physicians were paid the same as Canadians, this would move physicians from the second-highest-paid profession in the U.S. to the eighth highest paid profession—situated just above computer engineers, mathematicians and biomedical engineers,” Garthwaite and co-authors write. “This change in relative pay could push many talented young individuals considering medicine into entirely different fields.”
Also, since Canada accounts for less than 3% of global pharmaceutical spending, but the U.S. represents more than 12 times as much—36.9% of drug spending—cutting U.S. pharmaceutical prices to Canada’s levels would likely have a huge long-term impact on drug manufacturers’ revenue, the researchers indicate. Suppression of prices by [a single payer] would meaningfully impact profits and therefore suppress global investments in research and development for new pharmaceuticals,” raising ”concerns about disruptions to long-term drug supply,” Garthwaite and his co-authors write.
WHY MEDICARE FOR ALL WON’T DRIVE HEALTHCARE SPENDING TO CANADIAN LEVELS
So, policymakers may find unexpected limits to the amount of cost savings a single-payer health care system would bring to the U.S. That “should temper the expectations of anyone who believes that Medicare for All will drive U.S. health spending to Canadian levels,” the authors conclude.
Garthwaite, 40, is an associate professor of strategy and the Herman Smith Research Professor in Hospital and Health Services Management and director of Healthcare at Kellogg. His research interests include health economics, the pharmaceutical industry, public finance, and political economy. He is on an advisory panel for the Congressional Budget Office and has testified several times before Congress on health policy.
Garthwaite teaches classes to executive and full-time MBAs on business strategy, health care strategy, and health economics. Having earned bachelor’s and master’s degrees in political science and public policy at the University of Michigan, he got another master’s and Ph.D. in economics from the University of Maryland at College Park. He has taught at Kellogg since 2009.
Howard R. Gold is a contributing writer to Poets and Quants and a columnist for MarketWatch. His writing also has appeared in Forbes, Barron’s, Money and USAToday. Follow him on Twitter @howardrgold. Disclosure: Howard Gold has family members who are medical professionals.