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Costs and Implications of a Single Payer Healthcare Model for the State of Vermont







Kenneth E. Thorpe

Emory University




Prepared for: Vermont Commission on Health Care Reform




August 29, 2006 (revised)
























Overview and Summary


This analysis examines the costs associated with a single payer program designed to extend health insurance coverage to all uninsured residents of Vermont.  The study examines one version of a single payer plan. Several other approaches toward designing a single payer plan could be devised which could result in different costs and different financial implications for the state and its residents.


Overall, I estimate that a single payer plan could extend coverage to all non-Medicare eligible residents of the state, and reduce overall state healthcare spending by approximately $51 million. The proposal would, however, result in significant changes in what employers and families pay for health insurance from current policy. Overall, the plan would require a new 13.5 percent payroll tax to fund the program. I assume employers would pay about 75 percent of the total (10.1 percent payroll tax) and workers the remaining 3.4 percent. Obviously spending among those employers that do not offer insurance today (an estimated 9,247 private sector establishments) would face a new 10.1 percent tax and their uninsured workers a 3.4 percent tax.[1] On the other hand, some employers and families current pay more than 10.1 and 3.4 percent of payroll respectively for insurance and would pay less.


In this report, I provide an estimate of the overall changes in health care spending in the state of Vermont, and some preliminary estimates of changes in the distribution of spending among employers and families. An overview of the single payer plan estimated in the report is outlined below.





The Proposal



The plan examined below would extend coverage to all residents of the state not enrolled in the Medicare program. By assumption, this is a plan that Vermont would implement with federal approval, but absent federal legislation the Medicare program would remain intact. The program would be financed with existing Medicaid dollars, and a new payroll tax (paid by both the state and private sector employers). The estimates are presented in 2007 dollars (and implicitly assume the plan is fully implemented in that year).


The benefit package would be modeled after the typical plan in the state (i.e. a plan where 50 percent of those with private insurance today have more generous benefits). The package envisioned however would be managed using the Blueprint principles. As a result, I assume co payments and deductibles in the package are very low (using the same condition-specific co-payment assumptions passed as part of Catamount health). These low cost sharing obligations will result in substantial reductions in consumer out-of-pocket spending.


I assume that provider payments would, on average, not change from their current levels. Bad debt and charity care provided by hospitals and other providers would be virtually eliminated—resulting in lower private insurance payments. Moreover, current Medicaid payments to providers would rise to cover the costs of providing health care services. Implicitly, spending on Medicaid payments would rise, while spending on private insurance payments would decline. On a statewide per capita basis, they would remain about the same.


The estimate presumes the current Blueprint for reform initiatives. Children and adults in Medicaid and the state children’s insurance program (Dr. Dynasaur) would retain the current scope of benefits they enjoy today.


The program would streamline administration in several ways. First, hospitals would receive fixed annual budgets eliminating the need to bill individually for services and negotiate, monitor and track rates with private health plans. However, Vermont hospitals would have to retain these functions for out-of-state residents they treat and for Medicare patients.


Vermont residents employed outside the state would be required to show proof of insurance coverage annually on their state income tax returns.


The plan would be financed by redirecting existing Medicaid funds and a new payroll tax paid by employers and workers.




Estimating the Impact of a Single Payer Plan in Vermont



Estimating Approach


The estimates rely on a health insurance simulation model (HISM) that starts with the most recent March version of the Current Population Survey (CPS)(the most recent to date is the March 2005 version). In addition, I use data from several other sources. The first is the 2003 Statistics of U.S. Business from the Bureau of the Census (SUSB). Data on total payroll were provided by as projected to 2007. These data are statistically matched to the CPS to provide information on the number and distribution of establishments, and payroll. I also use the Medical Expenditure Panel Survey (2003) Household Component (MEPS-HC). The MEPS data allow us to add health care spending by source, and medical conditions treated. Both the MEPS and the SUSB are linked to the CPS and the data are re-weighted to reproduce the CPS sampling distribution.


We update the population data, and the expenditure data using the projections from the Office of the Actuary at the Centers for Medicare and Medicaid Service (national health accounts projections).


The CPS data are collected on a household basis with some markers for families. However, households, and often families are not the relevant “unit” for assigning either private insurance or Medicaid. Private insurance is generally limited to parents, children and full-time students under age 23. Medicaid income rules often exclude income from care-giving grandparents, or even other older children. As a result, our simulations use the concept of a private insurance unit and a Medicaid standard filing unit. Both are created from the CPS data and are used to determine program eligibility. We use income and other measures of assets where feasible from the CPS data.



I use a three year Vermont sub sample (2003-2005) from the Current Population Survey for information on income and health insurance coverage. The CPS sub sample very closely reproduces the actual distribution of income from the national 2000 Vermont census (see Table 1). Statistically, the distribution of the Vermont population developed from the 3 year merged Vermont sub sample using the CPS is not distinguishable from the actual 2000 Vermont census data.


Table 1. Percent Distribution of Population by Federal Poverty Line: Vermont CPS subsample and 2000 Vermont Census


Income as % Poverty

Three Year Merged CPS Vermont subsample

2000 Vermont Census


Under 125%




















500% +















































NOTE: Totals may not add due to rounding.







Data on health care spending as projected to 2007 are from the BISHCA estimates from their most recent (January 2006) three year health care forecast (2005-2008).

Extending coverage to the uninsured will generate additional use of services, and with it additional spending. I use estimates of the change in spending associated with providing coverage based on recent publications. In general, total spending among the uninsured rise by approximately 60 to 70 percent depending on the type of plan and provider payment associated with the plan.[2]



Table 2 shows the distribution of spending among Vermont residents by source of payment as projected to 2007































Table 2. Health Expenditures by Vermont Residents and Providers, By Source of Payment and Service (Millions $) 2007




Total Health Expenditures = $4,254

*totals may not add due to rounding













The most recent projections from BISHCA projects that Vermont residents will spend approximately $4.2 Billion on health care in 2007. In addition, I estimate that the costs of administering private health insurance in the state at $129 million (an administrative expense ratio of about 9 percent). Overall then total health care spending is projected to be approximately $4.254 Billion in 2007. 


Administrative (insurance) costs in Vermont are substantially lower than found in other states. Nationally, the administrative expense ratios are approximately 12 to 13 percent. Medical loss ratios (total claims expense as a percent of premium) for the largest two plans in the state (Blue Cross and Blue Shield of Vermont and MVP health are approximately 91% and 90% respectively. Moreover, nearly 42 percent of total private insurance spending in the state is self-insured where administrative expenses are lower than found in insured (risk bearing) contracts.



Change in Spending Associated with a Single Payer Plan


The proposal assumes that all residents (other than the Medicare population) would receive a plan equal to the average plan in the private market today. By extending coverage to all 61,000 currently uninsured, uncompensated care provided by hospitals and other providers would be virtually eliminated (some would remain due to non-payment of co-payments and deductibles among those with insurance).


The estimated per capita spending among the (previously uninsured) (projected to 2007 is approximately $2,980 (both adults and children).[3]  The uninsured in the absence of the new insurance coverage are projected to spend $1,795 per


capita. Thus, providing insurance increases spending by approximately 66 percent—or $1,185 per uninsured. Overall, extending coverage to the uninsured would increase total spending by approximately $72 million in 2007 (see Table 3).



Table 3. Change in Vermont Health Care Spending Under a Single Payer Plan, 2007 (Millions of Dollars)




  Change in Spending

Change in Use of Services


--Among the Uninsured


--Among the Underinsured



Change in Administrative Costs


--Insurance Administration


--Physician Administration


__Hospital Administration






$ 72


$ 90





















Under the single payer plan, all (except those on Medicare) residents would receive the same set of health benefits. As a result, spending among Vermonters with less generous benefits today (high deductible plans, limited benefit plans) would also rise. Therefore, health care spending among half of all Vermonters with health insurance would rise over time. There are approximately 180,000 privately insured Vermonters with less generous benefits than those envisioned under the single payer plan. On average, their spending would rise by about 10 percent—approximately $500 per capita—resulting in $90 million of additional health care spending.[4] Overall, there spending among the underinsured and uninsured would rise by $162 million in 2007.


Change in Administrative Expenses



The single payer plan would result in lower administrative costs. The assumed design of the system would place all hospitals on fixed annual budgets. However, hospitals would continue to receive Medicare payments as they do today, and would still submit bills to out-of-state patients. The single payer plan would replace all private insurance in the state. This would eliminate all underwriting expenses, sales commissions, marketing, and other expenses. In short, the cost of insurance administration is assumed to be similar to the Medicare program nationally. Administrative expenses in the Medicare program are approximately 1.5%- to 2% of total spending. However, the proposal would retain the existing chronic care initiatives and spending associated with it. Moreover, other legal and regulatory costs (such as HIPAA related expenses) would also remain. Overall, insurance administration is assumed to decline from about 9 percent of total spending to 3 percent.


Administrative expenses in Vermont hospitals are approximately 23.5 percent of total expenses (see Table 4). I include the following items in the definition of hospital administrative costs:

Table 4. Vermont Hospital Administrative Spending, 2005



Total Administration Expenditures, Actual '05

Total Operating Expenses, Actual '05

% of Total Costs Attributable to Administration, '05

Fletcher Allen Healthcare








North Country




















Mt. Ascutney





































SOURCE: Derived from Medicare cost reports, 2005.





Relying on fixed annual budgets for hospitals would result in lower administrative spending. While administrative costs are not likely to be as low as found in Canada (since hospitals will have to retain billing systems and other functions to service Medicare and payments for out-of-state patients) hospital administrative spending will decline. In Canada, the hospital administrative costs are approximately 13 percent of total expenses. Overall, I estimate that hospital administrative costs would decline from 23.5 to 17 percent of total spending.


I use previously published estimates of the administrative costs in physicians’ offices.[5] These data indicate that administrative spending in physicians’ offices accounted for 27 percent of gross income. The proposed plan would also reduce physicians’ administrative costs. Use of a single, standardized claim and payment from a single source would reduce costs associated with claims adjudication. However, physicians would still retain their billing expenses for the Medicare program and for out-of-state patients. Using earlier work, I assume that physician administrative costs would decline to approximately 20 percent of total physician spending.


Table 5 presents an estimate of total administrative spending (for insurance, physicians and hospitals) in the state, administrative costs under the single payer proposal and the change in spending. Overall, administrative spending in the state would decline by $213 million in 2007 dollars.















Table 5. Administrative Costs under Current Law and a Single Payer Plan for Vermont, 2007. (Millions of Dollars)



Current Law

Single Payer

Change in Spending





Private Insurance





























Administrative spending in the state will total an estimated $607 million in 2007. Under a single payer plan, administrative spending could decline to $394 million; a $213 million reduction in spending.




Financing the Single Payer Plan



Table 6 examines the sources and uses of funds under the single payer proposal. Total benefit payments flowing through the single payer were estimated at $3.05 Billion of the $4.25 Billion in total spending estimated for the year. Of total spending ($4.25 Billion), we subtract spending for Medicare, out of pocket spending, other state and local spending (such as spending on Veteran’s Administration hospitals) and other spending associated with long term care services. In addition, spending on government health care activities (such agency for human services spending on mental health are also excluded (i.e. their financing remains the same as under current policy).[6] I then subtract an additional $51 million to reflect the overall change in spending associated with the single payer plan. This yields a total of $2.2  Billion to be financed through the proposal.[7]




Table 6. Sources and Uses of Funds under the Single Payer Proposal, 2007 (Millions of Dollars)


Uses of Funds

Source of Funds


Benefit Payments       $2,235.0             


Medicaid*      $611




Tax            $1,624


Tax (10.1%)    $1,215



Tax (3.4%)     $ 409





Note: Total wage and salary payroll in the state estimated at $12.078 Billion in 2007.

* excludes Medicaid long term care spending, spending on government health care activities and some administrative spending.



The $2.2 Billion total costs of the single payer plan would be financed through two major sources; existing Medicaid funds (excluding long-term care, other government health care activities) and a new 13.5 percent payroll tax. Employers would pay 75% of the cost of the tax (10.1% payroll tax) and workers would pay the remaining 3.4% tax. Overall, employers would contribute $1.2 Billion in tax revenue and workers $412 million. Of course, alternate splits between employer and workers could be proposed as well.





Changes in the Distribution of Private Insurance Spending: Employer Spending


Employers and workers with insurance today are likely to spend less on healthcare overall under the single payer plan. On the other hand, employers that do not offer insurance and uninsured workers will face a new combined payroll tax of 13.5 percent.


Table 7 presents estimates of the number of private sector establishments that do and do not currently offer health insurance today (2005 data). Overall, Vermont has 22,566 private sector establishments, of which 13,185(58 percent of all establishments) currently offer health insurance.


Table 7. Private Sector Establishments in Vermont that Currently Do and Do Not Offer Health Insurance (2005)


Establishment Size

Currently Offers Health Insurance

Does Not offer Health Insurance

All Establishments


Under 10
















































SOURCE:Derived from Vermont Department of Labor, Fringe Benefits in Vermont, 2005. Totals may not add due to rounding.


While the single payer plan would result in lower overall spending and extend insurance to all the uninsured, it would require new spending (the 10.1 percent payroll tax) for 9,382 employers in Vermont that do not offer health insurance benefits today. Of this total, the largest number of establishments that currently do not offer benefits are small firms under 10. Of those employers, 8,578 currently do not offer benefits and would be required to pay 10.1 percent of payroll to help finance the new program. [8]



Table 8 presents an estimate of the change in spending among employers that currently offer and do not offer health insurance today compared to spending under the single payer proposal.





























Table 8. Spending Under Current Policy and the Single Payer Proposal, 2007 (Millions of Dollars)


Employers that contribute and offer insurance today

Employer Payments with 10.1% payroll tax that currently contribute toward coverage

Employer payments with 10.1% payroll tax that currently do not contribute






















Total Payroll Tax



Total Payroll





Premiums As % Payroll

























Today, employers that offer health insurance pay approximately 82 percent of the cost of a single policy and contribute 75% toward the cost of a family policy. Overall, these contributions account for approximately 12.2 percent of total payroll. Thus, the 10.1 percent payroll contribution for firms that currently offer and contribute toward the cost of insurance will, on average, decline.


However, as displayed in Table 9, employers that do not offer insurance today will pay $388 million in new payroll tax contributions. Employers that offer health benefits and contribute toward their cost will pay approximately $183 million less toward the cost of insurance with a 10.1 percent payroll tax.[9]



Table 9. Change in Spending among Employers that Currently Do and Do Not offer insurance Today under the Single Payer Proposal, 2007 (Millions of Dollars)


Employer Payroll Tax

Employers that Offer Insurance Today

Employers That Do Not Offer Insurance Today




















Changes in the Distribution of Private Health Care Spending: Household Impacts


The proposal would also produce significant changes in what workers and families pay for health insurance. On average, workers with private health insurance pay approximately 2.5 percent of their wage and salary income on health insurance premiums today (see Table 10). The proposal would result in a 3.4 percent of payroll contribution from workers, resulting in increased spending among those with insurance today. Of course, one could easily change the payroll tax split between employers and workers to mitigate the higher spending among those with insurance today. For instance, following the estimates from table 10, a lower worker tax (2.4%) and a higher employer tax (11.1%) would result in a lower increase in worker spending relative to current law under the proposal.




Table 10. Change in Spending on Health Insurance Premiums among Insured and Uninsured Workers in Vermont, 2007 (Millions of Dollars)


Payroll Tax Rate

Currently Insured Workers

Currently Uninsured Workers


















For instance, with a 3.4 percent payroll tax, insured workers would spend approximately $77 million more per year on health insurance premiums. A lower rate—around 2.4 percent—would result in a slight reduction ($7 million) in spending on insurance premiums.


Uninsured workers would contribute toward the cost of their insurance, and depending on the payroll tax rate spending would rise by $27 to $38 million per year.



Reduced Out-of-Pocket Spending


Household out-of-pocket spending would also decline under the proposed single payer plan. Health care spending among the uninsured would be paid primarily through health insurance rather than paid out-of-pocket or through uncompensated care. Moreover, the underinsured—those with high deductibles and co-payments—would receive more comprehensive health insurance plans, and with it reductions in out-of-pocket spending.


In 2007, Vermonters are projected to spend over $608 million out-of-pocket on health care—approximately $517 million of it on acute care services (with the remaining expenditures used to pay for nursing home and long-term care services). Universal insurance and in particular the reduction in the number of underinsured would reduce out-of-pocket dramatically—about $397 million per year.





Overall Change in Health Care Spending In Vermont[10]



Total health care spending, even with universal coverage, would decline by approximately $51 million in 2007 (assuming full implementation). Any single payer proposal, however, would also involve very significant redistribution of spending on health care compared to current law. Table 12 presents a summary of the overall changes in health care spending associated with the type of plan modeled here.


Spending among employers that offer insurance today would decline by approximately $100 million (or more depending on how the payroll tax rate was set), while spending among employers that do not offer insurance would rise by $426 million starting in 2007.


Household spending would also decline. Workers with insurance would see a small reduction in premium payments, and households overall—particularly the underinsured and uninsured—would see substantial reductions in out-of-pocket spending overall.























Table 11. Summary of Change in Spending By Source of Funding, 2007 (Millions of Dollars)


Change in Spending By Source of Payment

Millions of Dollars


Change in Employer Spending


      Employers that offer insurance today


      Employers that do not offer insurance


Change in Household Spending


      Workers with insurance today


      Workers without insurance today


      Household out-of-pocket spending



Change in Total Spending




















Assumes the use of an 11.1 percent payroll tax on employers and 2.4% percent for workers. 

[1] Data derived from the Medical Expenditure Panel Survey, Insurance Component for 2004 at

[2] Jack Hadley and John Holahan, “Covering the Uninsured: How Much Would It Cost?” Health Affairs, June 4, 2003 web exclusive.

[3] I start with an estimated single premium of $5,275 in 2007 (based on 2004 MEPS data projected to 2007). I then adjust this amount for lower provider payments that will result from the proposal by the reduction of uncompensated care. Today, private insurance plans pay about 144% of the actual costs of treatment. Private insurance payments rates would decline by about 22 percent, falling from 144% to 120% of costs (assuming that approximately half of all uncompensated care remains). The remaining cost shift built into payments under a single payer plan is linked to the on-going underpayment by Medicare. The uninsured are less expensive (younger, healthier, fewer chronic conditions) than the insured. I make a final adjustment in the single premium to reflect the mix of uninsured children and adults.

[4] I use unpublished data from the Actuarial Research Corporation on the distribution of actuarial values (plan generosity) and its relationship to per capita spending. For instance, plans in the 25th percentile in the distribution of plan generosity (i.e. 75% of health plans have more generous benefits) have premiums that are about 20% less expensive than the average premium. I apply these distributions to the Vermont privately insured population.

[5] S. Woolhandler, T. Campbell and D. Himmelstein, “Costs of Health Care Administration in the United States and Canada”, N Eng J Med 348, no 8 (2003): 768-75

[6] I also subtract around $30 million in existing Medicaid administrative spending, and $33 million in unclassified health care spending.

[7] This approach assumes that the average provider payment across all payers remains the same as today (so Medicaid payments would rise, private insurance payments would fall and so on).

[8] The estimates presented above do not include any behavioral changes that would accompany the proposal. In particular, the new 10.1 percent payroll tax for employers that do not offer insurance today would be passed back to workers in the form of lower growth in wages and other benefits. Conversely, wage growth would be higher in situations where employers would spend less on health care under the proposal compared to current law.

[9] This is just for the core benefits, however. Some employers may wish to supplement the core package and retain more generous benefits that are offered today. In this case, employer spending for insurance would rise under the single payer plan.

[10] The analysis assumes that employees with more generous benefits retain their benefits through supplementation.