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More than 24 million people require hospitalization annually in the United States, and many more see their doctors or other providers, or have tests and procedures, in these institutions. Yet as the health care reform debate heats up, some have painted a grim picture of how hospitals would fare under Medicare for All — predicting slashed budgets, shuttered wards, service cuts, and mass layoffs. Especially for those who rely on hospital care, such claims may sound an alarm. A recent commentary in the Journal of the American Medical Association predicted that Medicare for All would put hospitals deep in the red, forcing them to shed up to 1.5 million jobs. An article in the New York Times last month gave voice to similar concerns that hospitals, especially vulnerable ones, would close “virtually overnight” under Medicare for All, or would abandon “lower-paying services like mental health” altogether. An editorial from the Washington Post warned that single payer could “shutter smaller or regional facilities whose margins are already low.” Even some progressives have given credence to such claims, predicting — or even calling for — deep reductions in “prices,” i.e., insurance payments to hospitals, under Medicare for All, or under other reforms. These claims have a common, flawed underpinning. For one thing, they fail to appreciate a key cost baked into the “prices” paid by insurers today: the billing-related cost forced on hospitals by our dysfunctional multi-payer system, and so they discount the potential savings for hospitals under Medicare for All. More fundamentally, however, the focus on hospital “prices” fails to recognize that a properly structured single-payer reform would not merely change what hospitals are paid, but how they are paid. Indeed, it could move us away from a system where hospitals have prices at all.

Savings in the Short-Run: Covering the Cost of Universalism Imagine if we funded public schools the way we funded hospitals. Instead of giving schools a lump sum “global” budget to take care of all their students, we required them to issue per-student bills that were to reflect each student’s unique educational needs, and the precise mix of services they received. Assume also that teachers had to issue bills for every episode of instruction provided to each pupil daily, using a complex fee schedule incorporating the length, complexity, and/or intensity of every interaction. Finally, imagine that the tsunami of resultant bills went not just to the local government, but to a welter of different “educational insurance” plans, with varying rules and requirements; that these insurers frequently contested the charges; and that schools were required to collect co-pays and deductibles from parents, which varied depending on how much education a child “consumed” and their particular insurance plan. Among other issues, the waste would be colossal: large bureaucracies would be needed to issue and process the bills, and the paperwork would suck up large amounts of teachers’ time, taking them away from, say, teaching. That’s exactly what plays out in hospitals. At one large academic medical center, 25 percent of all payments to the hospital for an ER visit were consumed simply by the cost of processing the bill. Overall, approximately one-quarter of American hospitals’ total revenues is consumed by administrative and billing expenses. In contrast, Canadian and Scottish hospitals receive global lump sum budgets, similar to public schools, which allows them to eschew “per patient” billing altogether, and spend only 12 percent of revenue on administration. Single payer, in other words, could cut US hospitals’ administrative spending by half, an enormous saving since hospital spending accounts for about one-third of our $3.5 trillion health bill. This has two implications. Because hospitals’ wasteful administrative costs are baked into prices, single payer would allow us to reduce payments to providers without shrinking the resources they have available to take care of patients. More likely, as demand for care rises once everyone is covered and financial barriers to care like co-pays and deductibles are eliminated, hospitals could increase the amount of care they provide within their existing budgets. Single-payer financing, in other words, can cover the cost of true health care universalism in the short run. And in the long run, it provides a second critical tool to control hospital cost growth.

Savings in the Long Run: Controlled and Equitable Capital Expansion Let’s return to the public school analogy for a moment. Assume that once schools were done billing, they could retain revenues that exceeded their costs, i.e., they could turn a profit, even if they remained legally not-for-profit. And let’s say that these profits were the source of funds for capital projects: schools could use them (together with private debt) to upgrade their facilities, construct new wings, acquire new technology, or even build whole new schools. Finally, assume that schools competed for students — especially from well-off families — and that some avoided the poor kids. In this scenario, highly profitable school systems would, predictably, enter a self-perpetuating cycle of expansion, upgrades, more business, more profits, more growth, hence rising operating costs. In contrast, unprofitable schools would fall behind, and could even go bankrupt, resulting in entire districts (especially poor ones) being left without a single school. (Obviously, large inequities exist among schools today — but they would be massively exacerbated by this financing system). This is, again, a reasonable description of how hospitals are paid. As Public Citizens’ Sidney Wolfe and Physicians for a National Health Program co-founders (and colleagues) Steffie Woolhandler and David Himmelstein argued last year, hospitals’ profits are the source of funds for capital expenditures, like new wings, major new equipment, sumptuous atrium lobbies, or even the construction of new hospitals. Over the long term, this cycle of profit- and debt-funded capital expansion leads to rapidly escalating operating costs, and hence overall health spending, a key reason why US health care spending diverged so sharply from those of other nations in the second half of the twentieth century. In the 1970s, for instance, hospital spending soared, not because people used the hospital more, but because of an enormous expansion in hospital capital. The problem is not capital expansion per se (nobody wants dilapidated hospitals), but inequitable and unregulated capital expansion tethered to profitability, rather than community health needs. Today, hospitals in well-served areas often relentlessly expand and upgrade, even as needed hospitals shutter in poorer areas, as seen with the recent epidemic of rural hospital closures. This system of hospital capital financing leads to what British general practitioner and epidemiologist Julian Tudor Hart called the “inverse care law,”: the “availability of good medical care,” as he put it, “tends to vary inversely with the need for it in the population served.” Moreover, unconstrained capital investments can sometimes actually lead to worse care. For complex procedures like transplants, hospitals that treat only a small number of patients cannot develop (or maintain) the expertise needed to achieve the best outcomes. Bloated costs, in other words, go hand in hand with inequity, and can even compromise quality. The solution is simple. Under Physicians for a National Health Program’s single-payer proposal, similar to the House Medicare for All bill recently launched by Representative Pramila Jayapal, hospitals’ global budgets could only be spent on operating costs. None of the budget could be retained as “operating margins” (i.e., profits), or spent on expansion. Instead, a separate, dedicated stream of federal funds would pay for hospital capital expansion, based on community need and not profitability, as is done in many countries. Such policy tools are essential to control costs and ensure an equitable and efficient distribution of health care resources moving forward. Achieving this, though, means a paradigm shift in our conceptualization of health care “prices.”