Thoughts on Administrative Costs in Health Care
By Arnold Kling
Do we want to eliminate the middle man in the health care industry? I do, but what I want to see is consumers pay providers directly. More thoughts:
[UPDATE: see also Ezra Klein, who agrees with me that a lot of the people shouting about this issue do not know what they are talking about.]1. It seems that if you compare what happens to dollars that flow into Medicare and dollars that flow into private insurance companies, a greater percentage of dollars flow through to health care providers under Medicare. That is what many people suggest makes government better than private insurance. As an analogy, if we were to nationalize the music industry, we could make sure that of the revenues that flow in, a greater percentage would go to musicians. Everybody hates the middleman, so nationalizing health care and nationalizing the music industry both seem like good ideas, as a first approximation.
2. To my knowledge, everyone who talks about this phenomenon is huffing and puffing without knowing exactly why the private-sector insurance middle man takes a bigger charge than the government middle man in health care.
3. For example, I have seen it asserted that the private insurance sector goes to great expense to keep sick people away, but I have never seen a breakdown of costs that shows how much they spend on screening of applicants. I suspect that in fact it is not very much. Most of the private insurance in this country is employer-provided, where applicant screening does not even take place.
4. I have seen it asserted that private health insurance spends more resources denying fraudulent claims. I believe that they spend a lot of resources denying claims, but from what I can observe personally they fight non-fraudulent claims with fierce determination. I cannot imagine they are spending nearly as much resources on fraudulent claims.
5. Medicare has to reduce its spending rate in order to keep the government Budget from exploding. Clearly, if most Medicare dollars flow through to health care providers, then this means that at some point Medicare is going to have to reduce its payments to providers. That creates an incentive for each provider interest group to spend big bucks lobbying to explain why its share of payments should not be cut. That is the very definition of rent-seeking, which is the deadweight loss that comes from political competition for economic resources.
6. Both the private health insurance industry and the music industry are operating business models that to me appear to be unsustainable and anachronistic. The music industry developed in a world of vinyl records. Our health insurance industry and Medicare developed in an environment in which most major diseases were untreatable and the most exotic diagnostic tool was the X-ray. Now, we do 50 million CT scans and 25 million MRIs per year. Now, people with cancer or heart disease expect to survive. As weekend athletes, we expect our knees, shoulders, and hips to be reconstructed by the same technologies that keep Tiger and A-Rod playing.
7. I do not think we know for sure what a sustainable music industry will look like ten years from now. Similarly, I do not think we know what a sustainable health insurance industry will look like ten years from now. The one thing I can predict is that because government will be less involved with the music industry, over the next ten years the music industry will evolve more rapidly than health insurance. We claim to want reform, but in fact we are terrified of change.