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The eloquent Craig Garthwaite
He emails me:
There is also a broader point that I have always wondered when people cite the low administrative costs of Medicare. At least a portion of it has to come from the fact that they cover everything with little dispute. In addition, Medicare is also approaching fiscal insolvency. These are not two unrelated points, and therefore I wonder if perhaps Medicare might want to spend a little bit more on administrative costs?
Addendum: More from Megan McArdle.
Posted by Tyler Cowen on July 7, 2009 at 11:30 AM in Economics | Permalink
Comments
Exactly! Private insurance is superior to Medicare because of its larger bureaucracy that more effectively rations health care! Thank you for the enlightenment.
Posted by: Michael Thaddeus at Jul 7, 2009 11:39:41 AM
Sarcasm aside, the point is that an expanded plan will have to do rationing and fraud reduction as well unless it wants to go bankrupt like the current smaller plan, something the smaller plan has not demonstrated an ability to do.
Posted by: Andrew at Jul 7, 2009 11:46:41 AM
Aren't many of the administrative costs hidden from the cost of medicare anyway? For example revenue collection is made by the IRS, does Medicare get billed for that? Much of fraud prevention is done by the DOJ, does Medicare get billed for that? It seems that at least some of the administrative savings are really just reallocated to someone else's budget.
Posted by: Sebastian at Jul 7, 2009 12:00:30 PM
I happen to work for a (non-profit) health insurance company. 3 issues jump out at me as driving Medicare's lower admin costs compared to commercial carriers:
1. Commissions -- commercial carriers pay them, Medicare doesn't. This would make roughly 3-4% of premium. Standard commissions for individual coverage are usually closer to 10%.
2. Reserves -- commercial carriers have to maintain reserves to prove to the various departments of insurance that they won't go insolvent, Medicare is... going insolvent. Typically 3-5% of premium.
3. Claims cost -- a commercial carrier's average cost per member per month might be in the $300 range, Medicare's is maybe in the $500 range (just making up numbers here, but the ratio is about right). 5% of $500 = 8.3% of $300, but it takes about the same amount of adjudication to handle each.
For-profit carriers also have their owners to think of, of course.
Only a tiny percentage of claims are fraudulant, although surely everyone agrees that it is worth the admin costs to prevent that fraud, lest it grow.
Posted by: Mark at Jul 7, 2009 12:17:34 PM
Can anyone seriously believe that private health insurance is better than public insurance at containing overall costs?
The absurdity of this is evident from even a superficial comparison of US health costs with those of other countries: no need to speculate about the future...
And if revenue collection is already carried out by the IRS, that's an efficiency arguing in favor of a public system: we'll have the IRS no matter what.
Posted by: Michael Thaddeus at Jul 7, 2009 1:11:28 PM
Mr. Thaddeus
Why are you being so bold in your convictions in light of the fact that Medicare is going to be insolvent. The whole point of Tyler's post is to ponder whether or not medicare is truly that efficient considering it's impending insolvency.
The argument being that if you want to hold costs down, you are going to have higher administrative costs. There are no free lunches, which is what the pro government side is arguing.
Posted by: John Pertz at Jul 7, 2009 1:38:16 PM
"Can anyone seriously believe that private health insurance is better than public insurance at containing overall costs?"
Can anyone believe it is not? Public insurance rations much more than the system we have now.
American medical treatment costs the most because we deliver the best care in the world and we develop most of the new technologies.
When we go socialist who are we going to free load off of, as the world currently does of us?
Figure that out before leap into any new system.
Posted by: Td at Jul 7, 2009 1:39:14 PM
Look man, I like your blog, but one more anti-public health care post and I'm gone for good.
Posted by: el chief at Jul 7, 2009 1:42:22 PM
"American medical treatment costs the most because we deliver the best care in the world and we develop most of the new technologies."
Sorry. I am one of those docs supposedly delivering the best care in the world. We are one of the best, and maybe best in some areas, but your broad assertion is not sustainable if you look at existing data.
Steve
Posted by: steve at Jul 7, 2009 1:42:37 PM
This is crazy that the left doesnt even want to debate this stuff anymore. Its as though France, Norway, and Canada have the Cleveland Clinic and MD Anderson and America has a bunch of a back ally hacks. LOL
Posted by: John Pertz at Jul 7, 2009 1:56:58 PM
If you worry about the long-term insolvency of Medicare -- which is perfectly legitimate -- you should equally worry about skyrocketing private insurance costs. That's an even faster way to go bankrupt. The growth of overall medical costs is a serious problem, but there's not a shred of evidence that private insurance mitigates the problem. Just the opposite.
Posted by: Michael Thaddeus at Jul 7, 2009 1:57:57 PM
"The growth of overall medical costs is a serious problem, but there's not a shred of evidence that private insurance mitigates the problem. Just the opposite."
Not to put words into the mouths of Tyler et al. but methinks that he (some of us?) would find that a strawman? At least since some of the people arguing against public funded health care probably aren't operating from the axiom that bloated insurance oligarchs dole out coverage most efficiently.
Posted by: gilligan at Jul 7, 2009 2:12:27 PM
I recently saw a presentation that identified the five largest problems in healthcare financing, mentioned in passing that national healthcare would solve all of them but that we couldn't do that because we were America, and then outlined a typically Rube Goldberg-esque solution using the private sector. I like Rube Goldberg. He is awesome. So what if all the other industrialized nation have something that does it for half as much with arguably better results? Their systems are not cool! And besides, economic theory states that their bloated government administrative costs are huge, so it should really only cost them 1/3 what our awesome system does. But so what, we are Americans!
Posted by: es32 at Jul 7, 2009 2:12:55 PM
To es32
And I recently saw that "hot college coeds in your town want to meet you", but that doesn't make it convincing. Just the "all the other industrialized nation have something that does it" makes it sound as if you aren't aware that the plans of, say, Canada, Frrance and the UK are different. And "does it" isn't exactly well defined. My Canadian relatives are happy with the Canadian plan, bearing in mind that they also can and do come across the border when they don't want to wait. I have a couple of English friends who have been extremely dissatisfied with their system.
Posted by: Laserlight at Jul 7, 2009 2:40:35 PM
el chief:
Don't let the door hit you on the way out.
Posted by: Right Wing-nut at Jul 7, 2009 2:45:25 PM
To Laserlight, in fact I am aware of most of the various systems in place in other countries, and many people are dissatisfied with the English system, as it is quite miserly, and we probably don't want the English system.
I am somewhat curious as to how many Canadians come across for treatment as I hear anecdotal statements about this all the time. "An estimated 6 million Americans are traveling each year to such countries as India, Costa Rica, Mexico and Thailand in search of less-expensive treatments for simple and complex procedures. Even France and Belgium tend to be cheaper than the United States." (Don't know the source of this statement from news.health.com.) Are the numbers relatively higher for Canada or lower?
Posted by: es32 at Jul 7, 2009 2:59:54 PM
McArdle: "No, not the automatic denials so many insurers are fond of, and I'm not defending."
The automatic denials from insurance companies are a form of price discrimination. The left should be pleased.
Posted by: Andrew at Jul 7, 2009 3:19:41 PM
So, now the complaint against Medicare is that it doesn't ration like the free market health care insurers do???
So, the argument that we don't want government health care because the government would ration health care is:
a) rationing by private for profit insurers is more egalitarian and equitable
b) private for profit insurers won't ration health care and will give patients and doctors everything they desire
c) just an excuse to protect the only growth industy, besides government, that actually reliably creates jobs
After all, if it weren't for the rapidly increasing cost of health care as a share of GDP, then conservatives couldn't make the argument that the solution for laid off manufacturing workers is to go into health care which has a strong demand for health care workers.
If we took the sort of weighted average cost of health care of Canada, Japan, Switzerland, England, Australia, Germany, France, Norway, et al at about 10% of GDP, then reducing the US health care industry to say 12% would eliminate 5% of US GDP and that would eliminated about 5% of the jobs in the US, or about 7 million jobs.
Posted by: mulp at Jul 7, 2009 4:39:56 PM
I have anecdotes, not data. And I'm not saying the current US system is a dream, either--my father is a US physician who got fed up with Medicare and moved to Zambia, where he's happily practicing in a missionary hospital.
Posted by: Laserlight at Jul 7, 2009 5:22:27 PM
Private and Public insurance costs are spiraling for the same reason: perverse incentives for doctors. Since Medicare, everything has pushed doctors in the direction of using expensive tests and procedures. Other developed countries adopted socialist health care in the 1940's and 50's and their health care systems matured in a much different manner. They have their own issues, but they benefit from not having the perverse incentives.
Read the New Yorker article on health care in McAllen, TX. I cannot say this strongly enough: a public health care option will do nothing, NOTHING, ABSOLUTELY NOTHING about the escalation of costs. Once again, health care costs are escalating for both public AND private insurance in this country.
Obama should not try to draw big strokes and see more government as automatically better. We need piecemeal reforms which address incentives, putting doctors on salary and severing any referral payments, using a separate medical court to decide malpractice cases instead of doctors, and other such reforms. I'm also in support of some form of an individual mandate while eliminating private insurers screening for preexisting conditions, as well as taking employers completely out of the loop in choosing insurers.
Posted by: mw at Jul 7, 2009 6:16:52 PM
How Medicare actually works:
1) Granny sees doctor for regular checkup.
2) Doctor sees Granny for five minutes, writes prescriptions for placebos for all the ills she gripes about.
3) Doctor's office bills Medicare for "emergency heart operation for Granny".
4) Doctor's office gets a check for $500 six months later.
5) System crunches on, one more day.
Posted by: Silas Barta at Jul 7, 2009 6:21:22 PM
Makiw also dealt with this today:
http://gregmankiw.blogspot.com/2009/07/costs-versus-efficiency.html
Posted by: Steve Reilly at Jul 7, 2009 6:44:17 PM
Can anyone believe it is not? Public insurance rations much more than the system we have now.
the only people who can say this are people haven't needed to use their insurance. i deal with denied claims all the time and i work in clinics for people who just can't get private insurance. private companies ration A LOT...ideology can't trump facts.
Posted by: BK, MD at Jul 8, 2009 1:00:05 AM
Only the cost of medical insurance from the community, not with the other. The cost of the community is the people.
Posted by: 172786144 at Jul 8, 2009 3:10:14 AM
My first job out of college was for HCFA, the federal agency that oversees Medicare, and was very influential in my current libertarian outlook. It was then general knowledge that every dollar allocated to the Office of Inspector General (OIG), the department of the agency that handles fraud, resulted in $10 in savings. Yet, every year, their budget was cut. The funding for HCFA and OIG is from the general fund and is "administrative expense". Claims are paid from the "trust fund" and are medical expenses. Cutting the general fund helped to balance the budget. Payments from the "trust fund" were not considered manageable. I'm not sure if this changed, but at that time, there was huge incentive to let money be wasted. Part of the administrative expense of insurers is to ensure that we don't pay doctors to enter nursing homes and give every patient cataract surgery, whether they need it or not. There were many instances of fraud that were sickening. Low administrative expense is not necessarily good.
Posted by: Jenny at Jul 8, 2009 3:13:57 AM
