State-Based Single-Payer Health Care

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n engl j med 364;13 nejm.org march 31, 20111188

State-Based Single-Payer Health Care A Solutionfor the United States?William C. Hsiao, Ph.D.

State-Based Single-Payer Health Care

The United States faces two

major problems in the healthcare arena: the swelling ranksof the uninsured and soaringcosts. The Patient Protection andAffordable Care Act (ACA) makesgreat strides in addressing theformer problem but offers onlymodest pilot efforts to addressthe latter. Experience in coun-tries such as Taiwan and Canadashows that single-payer healthcare systems can achieve univer-

sal coverage and control infla-tion of health care costs. Becauseof strong political opposition,however, the U.S. Congress neverseriously considered a single-payerapproach during the recent reformdebate. Now Vermont, wishingto solve the intertwined prob-lems of costs and access throughsystemic reform, is turning inthat direction. Vermont GovernorPeter Shumlin campaigned on aplatform of single-payer healthcare, and Democratic legislativeleaders are committed to thisapproach.

In Vermont, the status quo inhealth care has become unten-able. Despite numerous reformsover the past 15 years, Vermontshealth care costs are escalatingrapidly, straining the state bud-get, household incomes, and em-

ployers bottom lines. More than7% of Vermonters are uninsured,and another 15% have inade-quate insurance.

The Vermont Legislature passedAct 128 in May 2010 authorizinga study to find the most viableand practical systemic solutionsto these problems.1 The goals

are clear and ambitious: Vermont

wants to achieve universal cov-erage, reduce the rate of cost in-creases, and create a primarycarefocused, integrated deliverysystem. The question is how toachieve those goals. My team ofhealth system analysts at theHarvard School of Public Healthwas commissioned by the Ver-mont Legislature to develop andevaluate three options for healthsystem reform and determine

which option would best achievethe stated goals.

We conducted extensive fiscal,legal, institutional, and stake-holder analyses in Vermont togain an in-depth understandingof the hurdles confronting anysuch plan and to design ways ofovercoming or navigating aroundthem. Our findings presented astriking picture. Vermont faces a$150 million budget shortfall.Employers argue that health carecosts jeopardize their businessesfinancial viability, while familiesstruggle to pay out-of-pockethealth care costs. Vermont busi-nesses and workers are unwillingto spend more for health care.

On the other hand, Vermont-ers are also largely unwilling toreduce their level of benefits.Our analysis found that, on aver-

age, Vermonters have rich insur-ance benefits approaching theACAs platinum standard. Sim-ilarly, physicians and hospitalsare unwilling to accept reduc-tions in their net incomes.

Our analyses led us to adoptseveral design principles thatshaped our recommended design.

First, we wanted to design a sys-

tem capable of achieving univer-sal coverage and reducing thecost inflation rate. Any increasesin spending to cover the unin-sured and underinsured wouldhave to come from savings gen-erated by systemic reforms. Anyfinancing mechanism should notincrease the costs to the state,businesses, and households. Sec-ond, we aimed to maintain Ver-monters current average benefits.

Third, we sought to maximizefederal revenues from all sources.Fourth, we would not reduceoverall net income of physicians,hospitals, or other providers. Fi-nally, we sought to eliminate theperverse incentives inherent in thefee-for-service system, throughrisk-adjusted capitation paymentplus performance bonuses, to pro-vide incentives for the formationof accountable care organizationsand care integration.

We found that the system ca-pable of producing the greatestpotential savings and achievinguniversal coverage was a single-payer system one insurancefund that covers everyone with astandard benefit package, payinguniform rates to all providersthrough a single payment mech-anism and claims-processing sys-

tem. Our analysis showed thatVermont could quickly save al-most 8% in health care expendi-tures through administrative sim-plification and consolidation, plusanother 5% by reducing fraudand abuse.

We recommended that thesingle payer be a publicprivate

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partnership. An independent boardwith representation from both themajor health care payers (em-ployers, the state, and workers)and the major beneficiaries andrecipients of payment (providersand consumers) would negotiateupdates to the benefit packageand payment rates. We also pro-posed contracting out claims ad-ministration through a competi-tive bid to create incentives todevelop more efficient systems.

This system reduces the rate ofcost increases over time by insu-lating major decisions about healthcare spending from politics, aswell as by paying providersthrough capitation rather than feefor service, promoting delivery-system integration, and reducingthe practice of defensive medi-cine by implementing a no-fault

medical malpractice system. Alltold, we estimated that Vermontcould save 25% in health care ex-penditures over 10 years (estimat-ed savings for the first 5 yearsare shown in the table).

Eligibility for coverage in thesystem would be based solely onproof of Vermont residency, the

same requirement currently usedby Vermont Medicaid; this ap-proach effectively divorces healthbenefits from employment. How-ever, we proposed to finance thesystem through a payroll contri-bution on all Vermont wages,split between employer and em-ployee, to preserve the federaltax treatment of health benefits a tax expenditure worth $400million to $500 million in Ver-mont. We recommended delay-ing the implementation of thesingle-payer system until afterVermonts insurance exchangehas been operating for a year, atwhich point the state will have abasis for arguing for a waiverfrom the ACA requirements andestimating the amount of a fed-eral block grant it would receivebefore 2017, when current ACA

law allows for waivers.1

We used two economic mod-els to estimate the impact of theproposed system. We fed esti-mated savings and costs underthe single-payer system into aMicroSimulation Model, devel-oped by the Massachusetts Insti-tute of Technologys Jonathan

Gruber, which simulated the like-ly responses to the ACA by em-ployers and low-income workersand estimated the amount ofstate and federal spending underthe law, as well as computingthe payroll contribution rates nec-

essary to finance our plan. Wethen fed those results into amacroeconomic model developedby Regional Economic Models toestimate the effects on jobs andthe gross state product thatwould result from additionalspending for health care whenmore people were covered andthe increase in household incomeand consumption when insurancepremiums decreased with a sin-

gle-payer plan. The models pre-dicted that, as compared withimplementing the ACA, the sin-gle-payer system would result inlower spending by employers, thestate, and households and in thecreation of more jobs in Vermont.For example, without single-payerreforms, we predict that employ-ers would pay 12% of their pay-rolls in health insurance premi-ums in the first year, with furtherincreases to follow.

The governor has already intro-duced legislation establishing thefirst building blocks of a single-payer system: payment reform,the creation of the independentboard, and the mandate to buildVermonts health insurance ex-change as a platform for a single-payer infrastructure. Legislationestablishing universal coverage

and its financing will follow,when the state can obtain waiversfrom Medicares and Medicaidsprovider-payment rules and theACAs individual mandate andsubsidy rules. Innovative state re-forms are being encouraged, asillustrated by President Obamassupport for the WydenBrown


Estimated Impact of the Recommended Single-Payer Plan for Vermont.*

Variable 2015 2016 2017 2018 2019

Savings (millions of dollars) 580 770 880 990 1,100

Additional expenditures (millions of dollars) 380 395 408 420 435

Payroll tax (% of total payroll)

Employer share 10.60 9.40 9.10 8.90 8.70

Employee share 3.60 3.10 3.00 2.95 2.90

Number of new jobs created 3800 3600 3400 3200 2900

Impact on gross state product (mil lions of dollars) 110 90 75 57 33

* All dollar figures represent 2010 dollars. Additional expenditures represent the total addi-tional cost of covering the uninsured, bringing benefits for underinsured people up to thestandard benefit, covering some dental and vision care, investing in primary care and hospitalcapacity, and achieving uniform payment rates.





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bill,2 which would grant waiversfrom ACA requirements in 2014 ifstates can meet the ACAs goals.The Vermont single-payer plancertainly can.

Perhaps we are at the dawnof systemic reform in U.S. health

care. The Vermont single-payerplan will never be as efficient asTaiwans or Canadas because itmust work within the bounds offederal laws and programs andthe realities of porous state bor-ders. Nevertheless, it can producesubstantial savings to fully fund

universal coverage, reduce healthcare costs for most businessesand households over time, andreform a fragmented delivery sys-tem. Of course, someone willbear the burden mostly theprivate insurance industry and

high-wage businesses that dontcurrently offer insurance. But ifVermont can navigate its politi-cal waters and successfully im-plement this plan, it will providea model for other states and thecountry as a whole.

Disclosure forms provided by the authorare available with the full text of this arti-cle at NEJM.org.

From the Department of Health Policy andManagement, Harvard School of PublicHealth, Boston.

This article (10.1056/NEJMp1100972) waspublished on March 16, 2011, at NEJM.org.

1. Act 128 Health System Reform DesignFinal Report. (http://www.leg.state.vt.us/jfo/healthcare/FINAL%20REPORT%20Hsiao%20Final%20Report%20-%2017%20February%202011_3.pdf.)2. Stolberg SG, Sack K. Obama backs easingstate health law mandates. New York Times.February 28, 2011.Copyright 2011 Massachusetts Medical Society.


Editors note: This Perspective article about the effect of the clinical clerkships on the profes-sional development of medical students was written from the alternating perspectives of ateacher and long-time clinician, Katharine Treadway, and a third-year medical student, NealChatterjee, who is now an intern in internal medicine.

becoming a physician

Into the Water The Clinical ClerkshipsKatharine Treadway, M.D., and Neal Chatterjee, M.D.

Neal Chatterjee: Theres nothingparticularly natural about thehospital ever-lit hallways, thecacophony of overhead pages,near-constant beeps and buzzes,the stale smell of hospital linens.This unnaturalness was striking-ly apparent to me when I arrivedas a third-year medical student freshly shaven, nervous, absor-bent for the first day of mysurgical clerkship.

As I joined my team, my resi-dent was describing a recent pa-tient: He arrived with a littletwinge of abdominal pain . . .

and he left with a CABG, cecec-tomy, and two chest tubes! Thisremark was apparently funny, asI surmised from the ensuinglaughter. And the resident shar-ing the anecdote slouched inhis chair, legs crossed and cof-fee in hand seemed oddly. . . comfortable.

As the year known atHarvard Medical School as thePrincipal Clinical Experience proceeded, the blare of announce-ments dulled to a low roar, thebeeps and buzzes seemed in-creasingly distant, and the stalesmell of hospital linens becameall too familiar. Occasionally,however, there were momentsthat evoked a twinge of my olddiscomfort, some inchoate sensethat what had just transpiredmattered more deeply than Irecognized at the time. Thesemoments were often lost amidst

morning vital signs, our next ad-mission, or the differential diag-nosis for chest pain.

At the end of the year, wewere asked to ref lect, in writing,on our first year in the hospital.What eventually filled my com-puter screen had nothing to dowith vital signs or chest pain.

I began to write, I have seena 24-hour-old child die. I sawthat same child at 12 hours andhad the audacity to tell her par-ents that she was beautiful andhealthy. Apparently, at the sightof his child blue, limp, quiet her father vomited on thespot. I say apparently because Iwas at home, sleeping under myown covers, when she coded.

I have seen entirely too manypeople naked. I have seen 350pounds of flesh, dead: dried redblood streaked across nude adi-pose, gauze, and useless EKGpaper strips. I have met some-one for the second time and seenthem anesthetized, splayed, andfilleted across an OR table with-

in 10 minutes.I have seen, in the corner ofmy vision, an anesthesiologistpresent his middle finger to ananesthetized patient who wastaking too long to wake up. Ihave said nothing about that in-cident. I have delivered a baby.Alone. I have sawed off a mans




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State-Based Single-Payer Health Care