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Administrative Costs
In the latest debate: Paul Krugman attacks Greg Mankiw for linking to a study by Robert Book arguing that administrative costs under Medicare are not as low as many people think. Book defends against Krugman's attack here. I find the debate peculiar for a number of reasons:
1) Picking out one measure of health care "costs" to compare systems is sadly reminiscent of the arguments for socialism. Do you remember those arguments? Under socialism:
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"Think of how much money we will save on advertising!"
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"Socialism will lower costs by maximizing economies of scale!"
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"Money will be used for production not profits!"
Exactly these arguments are regularly trotted out in the debate over administrative costs in health care so color me unimpressed. To be clear, the point is not that these statements are false - the point is that these premises to the argument are all in some sense true it's just the conclusion, socialism is more efficient than capitalism, which turned out to be false. We tried that and it didn't work. In other words, you have to compare systems not arbitrarily pick out for comparison one type of costs.
2) Closely related to this point is the bizarre habit of taking about costs without mentioning benefits. The implicit argument appears to be that administrative costs are simply waste - this is the ancient cutting out the middleman fallacy. Administrative benefits, for example, reduce fraud and are a necessary consequence of making it easy for patients to get second and third opinions from different doctors.
3) Even if we could switch from a private to a public system and save administrative costs, the deadweight costs of taxation will far exceed any reasonable savings.
4) Any savings on administrative costs is a one-time level effect but the real issue with health care costs is growth as a share of GDP. (By the way, this same point explains why the debate over whether the public plan will discipline private monopolies is not especially important, monopoly--even if it is a problem--could at best explain a level effect not a growth effect which is where the action is.)
5) I'm not surprised that administrative costs under Medicare and under Canada's system suggest some potential cost reductions from moving to a single-payer system--again, Lada did save on marketing expenses--but it's a complete blunder to use Medicare administrative costs as an argument in favor of a "public option." The whole point of the public option, so we are told, is to compete on a level footing with private plans which means marketing expenses and all the rest.
Addendum: n.b. this post is about administrative costs not other reasons for preferring one system to another. See also Tyler on administrative costs further below.
Posted by Alex Tabarrok on July 7, 2009 at 07:15 AM in Economics, Medicine | Permalink
Comments
The whole point of the public option, so we are told, is to compete on a level footing with private plans which means marketing expenses and all the rest.
No - it means providing a better product as a lower cost. Health insurance is a highly concentrated and regulated industry. Competition is good.
Posted by: fusion at Jul 7, 2009 7:19:52 AM
This post is written as if there were no actual examples of different health care systems around to look at, nor any systemic costs (think job lock-in, bankruptcy, high infant mortality) to the US health care system that are not captured within its explicit costs. It is precisely by comparing the overall systems that people realize that the US approach is dysfunctional.
Posted by: matt wilbert at Jul 7, 2009 7:58:03 AM
Most arguments that a market approach would be better than the proposed reform package are really arguments for a system that we don't have against one that no one is proposing.
Right now, we have fifty small oligopolies whose participants have have strong incentives to figure out who not to insure, how to deny care to people they do insure and how to shift their percentage of the fixed cost of health care capacity to someone else. Those three items are a significant chunk of the administrative costs. And you're right, to the firms they're not an inefficiency, they're what they do. These costs are significantly different from marketing costs.
The right kind of 'public option' is a product which a sane person would actually pay for. The idea is not to get everyone on the public option, but to provide a product with which insurers would have to compete.
And the argument that the deadweight taxation costs would somehow be worse than the current system seems laughable, but maybe it's just that I don't understand how paying more than any other developed country for less is a better than paying less and getting more, but having taxes somehow in the mix.
Posted by: jhe at Jul 7, 2009 8:00:17 AM
I'm not sure being trapped in a "socialism" argument is the most useful thing right now.
Posted by: odograph at Jul 7, 2009 8:03:12 AM
Also, the same arguments that were used when the government was making lots of protected monopolies.
The arguments generally turn out to be bunk.
Posted by: Doc Merlin at Jul 7, 2009 8:10:12 AM
On 3 you are confusing the public option with public financing of the option. No need for new taxes if the option is self-financing (which it might or might not be).
And, did you just compare the health system to the car industry? Oh, I guess it is just fine then and in no need for any government intervention...
Posted by: Morten at Jul 7, 2009 8:20:14 AM
"In other words, you have to compare systems not arbitrarily pick out for comparison one type of costs."
Agreed. Why don't you compare the health care systems of Canada, Australia, and the U.S. in terms of a) cost, b) medical effectiveness, and c) satisfaction levels?
There is no disagreement about the answer to a); the U.S. is twice as expensive.
There is absolutely no good evidence that the answer to b) favors the U.S.; we seem to get absolutely no health improvements for all the extra money we spend.
That leaves c). While not having done a statistically controlled survey, I have spoken to many people in Australia and Canada during travels there and the overwhelming consensus of the people I spoke to is that they like their systems and think the U.S. system is a disaster. Having some experience with health care in the U.S., I have to agree with the last point.
About marketing, I get my car and house insurance from Amica, which is regularly ranked number 1 (each of the last 7 or 8 years for both home and auto) by J.D. Power on customer satisfaction. They don't market at all and seem to do just fine - they've been around a hundred years. I don't see why the public plan, once it is announced and set up, would need to waste money on marketing either.
Posted by: JDM at Jul 7, 2009 8:21:16 AM
A commenter made a good point, and Tyler hinted at it, that a lot of money is spent on keeping people out of private pools. If you just pay every request, sure you save some money on 'administration.'
If everyone can pee in my well, I can save money on fencing.
Posted by: Andrew at Jul 7, 2009 8:33:43 AM
It's also telling that Amica, the highest rated auto and home insurance company for customer satisfaction, is a mutual insurance company,
and Vanguard, the best overall mutual fund and brokerage firm in the country, is owned by and operated for the interests of its clients.
In both cases, the owners are in a sense the clients, rather than third party investors. Interests are aligned.
Posted by: JDM at Jul 7, 2009 8:34:27 AM
The savings in medicare are in the payments and rules. Lets allow private insurance to use the same schedules. It makes no sense that the cash payer, the private insurance payer, the medicare payer , the medicaid payer, and othershave pay differently for the same service. Provider charges and patient payments are out of synch. The stable payment would come were the number of providers that remain in this system is large enough to service the patient base. Providers not participating would be on their own and follow the rules on nonparticipants in medicare .
Posted by: Lowrie Glasgow M.D. at Jul 7, 2009 8:42:06 AM
That leaves c). While not having done a statistically controlled survey, I have spoken to many people in Australia and Canada during travels there and the overwhelming consensus of the people I spoke to is that they like their systems and think the U.S. system is a disaster. Having some experience with health care in the U.S., I have to agree with the last point.
Which is more plausible: That those people you spoke with are basing their opinion with the US system on personal experience or from watching Sicko and other negative portrayals in the media?
Posted by: Colin at Jul 7, 2009 8:44:28 AM
As a Canadian, and a strong supporter of the Canadian health care system, I think Alex is right. The savings from administration are there, but they are not particularly significant.
The savings are from rationing.
Frankly, from an *overall* perspective, rationing works if your goals are an overall healthy society at a moderately low cost.
But if your goal is to provide the health care that each *individual* would like to have (i.e. no wait times, no denial of treatments that only have a small chance of working, etc.), then there's no way any system will be significantly cheaper than what you have now. There is no magic bullet.
Posted by: Tom West at Jul 7, 2009 8:58:28 AM
Another way of making the same point would be to observe that, if the people who run Medicare were given incentives to maximize their cost-effectiveness by Krugman's preferred metric, they would not just rubber-stamp fraudulent claims as fast as they could-- they would encourage providers to file more. The bigger the denominator, the smaller the ratio. Sometimes it's a good thing that we don't pay bureaucrats based on their performance!
Posted by: Paul Zrimsek at Jul 7, 2009 9:01:29 AM
Again, could you please explain point 3?
'Even if we could ... save administrative costs, the deadweight costs of taxation will far exceed any reasonable savings.'
This does not make any sense! Even less so now that you explicitly point out that 'this post is about administrative costs not other reasons for preferring one system to another'. So FINANCING does NOT come into play. Please explain!
Posted by: Morten at Jul 7, 2009 9:10:38 AM
I don't know. The people I spoke with were for the most part seemed well educated and well informed. I didn't get the sense that they formed their views on health care based on watching Sicko, which I haven't seen myself. The Australians said that when they switched to their public system in the 70's, the insurance industry and medical establishment employed the same arguments that they are now using in the U.S.
My own extremely poor opinion of the U.S. system isn't based on my conversations with Canadians or Australians but my own first hand experience and close second hand observation.
I'm not an ideologue. I just see that other countries that are similar to ours have a much cheaper and at least equally effective system in place that works. Why should we keep spending twice as much as they do for less universal coverage and getting nothing for it in exchange?
Posted by: JDM at Jul 7, 2009 9:11:04 AM
The central empirical fact in the health care debate is that France, Japan, and just about every other developed or semi-developed country provide equal or better health care at less cost. Theorists should spend their time explaining this counter-intuitive fact. Prof. Tabarrok has provided us with theoretical arguments that the empirical fact can't be true. They're a little like metaphysical arguments that Galileo didn't see what he saw through the telescope. That's no way to run a science.
Posted by: beamish at Jul 7, 2009 9:26:17 AM
Every time I read something from Krugman, my first thought is "Who the hell does this guy think he is?" Is he completely incapable of decorum? Does anyone know him personally? It seems like he might have snapped since winning the nobel.
Posted by: josh at Jul 7, 2009 9:41:58 AM
JDM: Then why do wealthy Canadians always come to the US for medical treatment? (e.g. Even leftwing MPs who voted against allowing private insurance options in Canada).
It seems to me that the evidence falls squarely into the following: socialized medical systems keep costs low primarily by rationing; they offer everyone a lowest common denominator of health care / nursing; depending on the system this may be the only medical care available; there are no incentives or institutions in place for innovation and creation of new medicines, aside from government subsidies, so the rate of advance tends to be much lower.
As a side point, it is not true that advertising and marketing costs go to zero under public provision, and it is not true that in a competitive system they are a waste. They play a vital role in healthy competition, and play a less-useful, but still necessary, role under public provision. In other words, trying to cut them out does not offer the "savings" that people claim.
Posted by: liberty at Jul 7, 2009 10:21:35 AM
As the author of the study that started this whole exchange, I have to agree with all of Alex's points (1)-(5) above. (Although I might have a slight quibble with the second part of (4).)
The debate is indeed quite odd, and I chose to make the argument on "their" turf (i.e., that of public plan advocates) because it is easy and can be done with published numbers, which are harder to dispute than basic economic prinicples.
The public plan advocates argue the proposition that "Medicare administrative costs are lower, therefore a public plan is a good idea."
I don't agree with that proposition, but the point of my article is that even if one does agree with that proposition, it doesn't matter -- because Medicare administrative costs are not, in fact, lower. Even without the higher costs of marketing, profit, replication of fixed costs, etc., Medicare's administrative costs per beneficiary are still higher than those of private insurance. Mentioning those extra costs the private insurers have emphasizes how Medicare is less efficient, not more!
The argument of the public plan advocates fails even by its own standard, because it assumes "facts" that are not actually true.
This is quite aside from the fact that even if the assumed facts were true, there are many other reasons why a public plan would still be a bad idea.
Thanks for the links and the discussion!
Posted by: Robert A. Book at Jul 7, 2009 10:41:30 AM
Once again to several of the commenters, where is the evidence that Americans will live longer and more healthily under, let us say, the Canadian system than under the present system in the US?
Posted by: Yancey Ward at Jul 7, 2009 10:46:05 AM
Life expectancy , controlled for car accidents and fire arms related death is larger in the USA than in most countries
When you are diagnosed cancer in Canada you are referred to the USA .
My mother in law was diagnosed with a heart condition in Spain. Her appointment was for 11 months later.
The brother in law of a former canadian PM was the CEO of a private health enterprise( forbidden in Canada).
Movies: see Barbarians Invasion
Posted by: k at Jul 7, 2009 11:00:12 AM
Btw:" Krugman attacks Mankiw? does he have head about freedom of expession?
Posted by: k at Jul 7, 2009 11:02:00 AM
A previous post (from an MD, no less) says "let the private insurers use the Medicare reimbursement rates" (paraprased). These are not copyrighted, so that is already possible. And, there is a reason why it is hard in many places to find providers willing to provide services under Medicare. When you set the price so far below the market level, a shortage indeed arises. So, lowering costs by fiat will require a different form of rationing than the one we currently have (we can debate which is better, but the single payer system is not condemned merely because it rations care - and not all wealthy Canadians come to the US for all their treatment).
Regarding administrative costs, some comments make me wonder whether their authors have ever dealt with actual health care insurers. The complexity of conflicting forms (and don't forget the costs for providers to deal with this system - estimates are that these far exceed the insurer's administrative costs) creates pure waste from my point of view. I see no value added in having multiple conflicting forms. In fact, I believe the real reason for them is to convince patients to not contest insurer's payment decisions, and to have providers decide it isn't worth fighting with the insurer. This is surely one way to deal with the high costs of care - but it is one that I find unacceptable in a country as wealthy as we are.
The real purpose of the administrative costs is to reduce reimbursed care. If you don't believe this, then you probably have too little real experience with our health care "system." It is debateable whether a single payer system will be better - but let's not fool ourselves into thinking that our current system of differing forms, payment schedules, and payment policies was designed to improve the quality of care or add value to anybody other than the insurers themselves.
Posted by: dale at Jul 7, 2009 11:12:25 AM
I have been waiting for people to point out just the points that you made. The administration argument could apply to anything.
To those who are saying that the USA performs worse or at least not better in healthcare than the socialized healthcare countries, there is no credible relevant evidence to make that claim. Admittedly there is very little evidence to make the claim that the USA performs better but there is some and the benefit is tiny and we pay a huge price for it.
Some random points:
Advertising is not all cost it pays for much of our entrainment.
I think that there are still arguments for socialized healthcare:
One would be that healthcare beyond the cheap basics yields very little benefit and so if Gov. provides healthcaret and has monopsony power it can reduce spending on healthcare allowing us to spend the money better elsewhere. Gov. health insurance may result in more waiting and poorer care but we might still be better off. One could argue that saying that we can avoid the costs ourselves but many of us are too risk averse to drop insurance and the health insurance options are already limited by Gov. and markets.
Gov. squeezing providers may not have the usual bad affect of price ceilings because Doctor is a very high status profession and the current Doctors are over qualified as measured buy school grades, due to excessive licensing. So the candidates should be plenty qualified even at much lower compensation levels.
Also people seem to trust a refusal to treat from Gov. to be because the treatment is ineffective were they think that the insurer is try to renege on them.
Posted by: Floccina at Jul 7, 2009 11:12:44 AM
I know that some people find that answer unacceptable: they know that the private sector is always more efficient than the government, and no amount of evidence will shake their faith. But that’s what the evidence shows.
Posted by: Tomasz Wegrzanowski at Jul 7, 2009 11:29:25 AM
