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Tuesday, July 29, 2008

Arnold Kling Doesn't Understand

Arnold Kling [Update: Arnold's response to this post]:

I Don't Understand Mark Thoma, by Arnold Kling: He writes,

But focusing on the immediate problems brought about by tax cuts and military spending should not divert us from the more formidable problem of solving the escalating health cost problem. If Obama wins and tries to institute some form of universal care, it will be opposed as a budget breaker (and for other reasons), but I think universal care will help a lot in bringing down health care cost growth.

There is health care spending paid for by the private sector. Call it P. There is health care spending paid for by the government. Call it G.

The problem with G is that it is busting the budget. I do not understand how reducing P and raising G represents a solution. Even if you think that government can do health care more efficiently, you are still raising G and making the budget problem worse.

P can grow as a percent of GDP as much as it wants to, and be as wasteful as it wants to, without affecting the fiscal outlook. Only G affects the fiscal outlook.

What happens when you take people out of P and put them into G? You might make people's lives better (that's a separate disagreement). You might increase the overall efficiency of the health care system (another separate disagreement). But you do not improve the fiscal outlook. You make it worse.

I absolutely do not see how anyone can say otherwise.

Agreed there is spending on health care in both sectors. That's why I wrote recently that:

At some point we do have to face budget realities... [T]his ... is mainly a problem with rising health care costs (and that will be a problem whether it's paid for publicly or privately)

I didn't explain fully, but the answer to Arnold's question is straightforward. Health care in the private sector is not free. Using his notation, when I think about moving P to G, I also think about moving the revenue stream with it (e.g. individuals would pay monthly premiums in taxes rather than to the insurance company). Thus, if we move all of P to G, we also move all of the revenue with it. Therefore I don't see why the budget problem has to get worse:

Even if you think that government can do health care more efficiently, you are still raising G and making the budget problem worse.

You are also raising T, taxes, to pay for more G (raising is the wrong word, moving the revenue stream is better). Since costs per unit fall (as he says, "You might increase the overall efficiency of the health care system"), you could provide the same overall service with an improved budget (smaller deficit), or provide better service (e.g. expand care) with no change in the budget deficit.

Why do costs per unit fall? Because of all the administrative savings, savings from buying drugs in bulk, and the ability to manage care (e.g. preventative measures, solving information problems that cause wasteful expenditures by doctors and consumers). Thus, if we did move all of P to G we would be able to rebate some of the taxes, expand coverage, etc.. Even if we did nothing but eliminate fights over who pays the bills, or eliminate the costs of screening out the unhealthy (who end up in public sector programs anyway), as we would, health costs would fall substantially.

For example:

[W]e spend more than twice as much on health care, on average, as the 21 countries in which life expectancy exceeds ours. American costs are so high in part because the reliance on private insurance multiplies administrative expenses, currently about 31 percent of total outlays.

Most health economists agree that government-financed reimbursement is the only practical way to control these expenses, many of them stemming from insurers’ efforts to identify and avoid unhealthy people. ... A single-payer system that did nothing more than reduce administrative expenses to the levels of other countries would save roughly $300 billion annually.


Some say that we can’t afford universal health care... But every other advanced country somehow manages... Americans spend more on health care per person than anyone else... Yet we have the highest infant mortality and close to the lowest life expectancy of any wealthy nation. How do we do it?

Part of the answer is that our fragmented system has much higher administrative costs than ... the rest of the advanced world. ... In addition, insurers often refuse to pay for preventive care ... because [the] long-run savings won’t necessarily redound to their benefit. And ... we lag far behind ... in the use of electronic medical records, which both reduce costs and save lives by preventing many medical errors. ...


According to the World Health Organization, in the United States administrative expenses eat up about 15 percent of the money paid in premiums to private health insurance companies, but only 4 percent of the budgets of public insurance programs, which consist mainly of Medicare and Medicaid. The numbers for both public and private insurance are similar in other countries - but because we rely much more heavily than anyone else on private insurance, our total administrative costs are much higher.

According to the health organization, the higher costs of private insurers are "mainly due to the extensive bureaucracy required to assess risk, rate premiums, design benefit packages and review, pay or refuse claims." Public insurance plans have far less bureaucracy because they don't try to screen out high-risk clients or charge them higher fees.

And the costs directly incurred by insurers are only half the story. Doctors "must hire office personnel just to deal with the insurance companies," Dr. Atul Gawande, a practicing physician, wrote in The New Yorker. "A well-run office can get the insurer's rejection rate down from 30 percent to, say, 15 percent. That's how a doctor makes money. ... It's a war with insurance, every step of the way." ...


McKinsey & Company ... recently released an important report dissecting the reasons America spends so much more on health care than other wealthy nations. One major factor is that we spend $98 billion a year in excess administrative costs, with more than half ... accounted for by marketing and underwriting - costs that don't exist in single-payer systems.

And this is just part of the story. McKinsey's estimate of excess administrative costs counts only the costs of insurers. It doesn't ... include other "important consequences of the multipayor system," .... The sums doctors pay to denial management specialists are just one example.

Incidentally, while insurers are very good at saying no to doctors, hospitals and patients, they're not very good at saying no to more powerful players. ... McKinsey estimates that the United States pays $66 billion a year in excess drug costs, and overpays for medical devices like knee and hip implants, too.

To put these numbers in perspective: McKinsey estimates the cost of providing full medical care to all of America's uninsured at $77 billion a year. Either eliminating the excess administrative costs of private health insurers, or paying what the rest of the world pays for drugs and medical devices, would by itself more or less pay the cost of covering all the uninsured. And that doesn't count the many other costs imposed by the fragmentation of our health care system.

Or, finally:

[I]f costs are to be controlled, someone has to act as a referee on doctors' medical decisions. During the 1990's it seemed, briefly, as if private H.M.O.'s could play that role. But then there was a public backlash. It turns out that even in America, with its faith in the free market, people don't trust for-profit corporations to make decisions about their health. ...

Eventually, we'll have to accept the fact that there's no magic in the private sector, and that health care - including the decision about what treatment is provided - is a public responsibility.

    Posted by on Tuesday, July 29, 2008 at 05:31 PM in Economics, Health Care | Permalink  TrackBack (0)  Comments (84)


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