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economic justice | health

U.S. spends more on health care, gets less

A recent study found that private insurance companies spend 11.7 cents of every health care dollar on administrative costs, mainly advertising and underwriting, compared with 3.6 cents for Medicare and 1.3 cents for Canada's government-run system.
New York Times
February 17, 2004
 http://www.nytimes.com/2004/02/17/opinion/17KRUG.html?n=Top%2fOpinion%2fEditorials%20and%20Op%2dEd%2fOp%2dEd%2fColumnists%2fPaul%20Krugman&pagewanted=print&position=


The Health of Nations
By PAUL KRUGMAN

The Economic Report of the President, released last week, has drawn criticism on several fronts. Let me open a new one: the report's discussion of health care, which shows a remarkable indifference to the concerns of ordinary Americans and suggests a major political opening for the Democrats.

According to a recent Gallup poll, 82 percent of Americans rank health care among their top issues. People are happy with the quality of health care, if they can afford it, but they're afraid that they might not be able to afford it. Unlike other wealthy countries, America doesn't have universal health insurance, and it's all too easy to fall through the cracks in our system. When I saw that the president's economic report devoted a whole chapter to health care, I assumed that it would make some attempt to address these public concerns.

Instead, the report pooh-poohs the problem. Although more than 40 million people lack health insurance, this doesn't matter too much because "the uninsured are a diverse and perpetually changing group." This is good news? At any given time about one in seven Americans is uninsured, which is bad enough. Because the uninsured are a "perpetually changing group," however, a much larger fraction of the population suffers periodic, terrifying spells of being uninsured, and an even larger fraction lives with the fear of losing insurance if anything goes wrong at work or at home.

The report also seems to have missed the point of health insurance. It argues that it would be a good thing if insurance companies had more information about the health prospects of clients so "policies could be tailored to different types and priced accordingly." So if insurance companies develop a new way to identify people who are likely to have kidney problems later in life, and use this information to deny such people policies that cover dialysis, that's a positive step?

Having brushed off the plight of those who, for economic or health reasons, cannot get insurance, the report turns to a criticism of health insurance in general, which it blames for excessive health care spending.

Is this really the crucial issue? It's true that the U.S. spends far more on health care than any other country, but this wouldn't be a bad thing if the spending got results. The real question is why, despite all that spending, many Americans aren't assured of the health care they need, and American life expectancy is near the bottom for advanced countries.

Where is the money going? A lot of it goes to overhead. A recent study found that private insurance companies spend 11.7 cents of every health care dollar on administrative costs, mainly advertising and underwriting, compared with 3.6 cents for Medicare and 1.3 cents for Canada's government-run system. Also, our system is very generous to drug companies and other medical suppliers, because unlike other countries' systems it doesn't bargain for lower prices.

The result is that American health care, which at its best is the best in the world, offers much of the population a worst-of-all-worlds combination of insecurity and high costs. And that combination is getting worse: insurance premiums are rising, and companies are becoming increasingly unwilling to offer insurance to their employees.

What would an answer to the growing health care crisis look like? It would surely involve extending coverage to those now uninsured. To keep costs down, it would crack down both on drug prices and on administrative costs. And it might well cut private insurance companies out of the loop for some, if not all, coverage.

But the administration can't offer such an answer, both because of its ideological blinders and because of its special interest ties. The Economic Report of the President has only negative things to say about efforts to hold down drug prices. It talks at length about insurance reform, but it mainly complains that we rely too much on insurance; it says nothing about either expanding coverage or reducing insurance-company overhead. Its main concrete policy suggestion is a plan for tax-deductible health savings accounts, which would be worth little or nothing to a vast majority of the uninsured.

I'll talk more about alternatives for health care in future columns. But for now, let's just note that this is an issue the public cares about an issue the administration can't address, but a bold Democrat can.
The ER of the President was brilliant, Krugman, as usual, lies 18.Feb.2004 12:13

James

Krugman is an economist, so you would hope he might offer certain caveats when dishing-out statistics. But as is his norm, he does not. He just sticks to his rhetorical devices and lets facts swing by the wayside.

First, let's take this nugget:

"A recent study found that private insurance companies spend 11.7 cents of every health care dollar on administrative costs, mainly advertising and underwriting, compared with 3.6 cents for Medicare"

This statistic is tossed around by all universal healthcare supporters, but it's very misleading. It's comparing apples and oranges. Prive health insurance is made-up mostly of children and adults under age 65, almost exclusively. Most seniors carry a some form of private prescription drug coverage, on top of their Medicare coverage. But the vast majority of the privately-insured are not seniors.

Compare this to Medicare, where all the beneficiaries are seniors.

Seniors use far and away more health care than any other group of people. So it makes sense that Medicare's administrative costs -- which are defined as administrative expenses versus spending on enrollees -- are lower. They're lower because Medicare spends a great deal more per enrollee.

Furthermore and paradoxically, because Medicare is so inefficient, the number is further distorted. Because Medicare inadequately funds proper management, fraud is rampant, which counter-intuitively serves to raise the purported efficiency of Medicare. (Because the average amount spent per enrollee is higher (due to fraud, or other waste)).

The Economic Report of the President is right. Americans use too much health care. People take too many unneeded drugs, visit the doctor too frequently and generally consume too much.

Only in America will you find parents who routinely take their children to the doctor when they get a cold, or even the flu. Even if doctors tell these morons that they can't do anything for their children, they will continue to bring them back. Again. And again. And again.

It has been estimated that 100 million doctor visits each year are for the common cold.

As if that wasted time and money were not enough, many doctors do nothing to stop it. They even perpetuate it. Surveys have found that more than half of all doctors will regularly proscribe antibiotics to children with the common cold. They know it won't help them -- that in the long run, it'll probably hurt them -- but they do it all the same, because their moronic parents demand it.

This is because of health insurance. If people had to pay for the health insurance they used, they wouldn't go to the doctor for a cold.

Thus, I propose a complete overhaul of our government's health insurance system, in order of importance:

1. Completely dismantle, remove and destroy Medicare. It's an incredible drain on resources, a true boondoggle. Seniors are the wealthiest segment of society. Millionaire grannies do not need government help in getting health care.

2. Expand Medicaid. For seniors (and everyone else) who really can't afford health insurance, provide need-based health insurance, with an annual deductible based on annual income. (3% of income, let's say. So if granny makes $10,000/year, granny has to pay $300. If granny makes nothing, granny has no deductible).

3. National catastrophic health insurance for all. This is the type of insurance I personally carry. It's all I need or want. I never go to the doctor, but I want to make sure they're available to me if I'm ever in a life-threatening situation. So I carry insurance which pays anything above $5,000/year. Haven't used it yet, but it's good to know it's there.

NCHI would lower the costs of all other types of health insurance, since they would no longer carry that risk. That would, in turn, make health care more accessible to all.

This is a simple, elegant solution which doesn't destroy the positive facets of our health system. (Choice, competition). I can't understand why anyone would want anything more, unless the concept of universal health care has for them become a religious issue.

if only we could all be as healthy as james... 18.Feb.2004 17:14

this thing here

so you never have to go to the doctor, so nobody else does either?

we should all get catastrophic health insurance, so when those of us who have cancer finally get such a big tumor in our brains that we can't move or breath well, THEN it's nice to go to the doctor and have health insurance. or, so when those of us who have diabetes finally lose that leg or go blind, then it's nice to go to the doctor and have health insurance kick in, but not before? all those testing and health and medical supplies diabetics have to deal with on a daily basis, well they should just pay full price right, because nothing catastrophic has happened yet...

this is an incredibly arrogant and ignorant idea for a national health plan james. think a little about other people, who aren't as healthy as you. it's called empathy...

>Seniors use far and away more health care than any other group of people. So it makes sense that Medicare's administrative costs -- which are defined as administrative expenses versus spending on enrollees -- are lower. They're lower because Medicare spends a great deal more per enrollee.<

hmm. explain how spending a great deal more per enrollee automatically means Medicare's administrative costs are lower. i don't see the connection.

Well, yes, basically 18.Feb.2004 19:11

James

Well, explain to me why I should be forced to pay an equal portion for the treatment of someone's diabetes as they themselves pay. It's not my diabetes. I don't understand why I should have to pay for it.

I try to live what I consider to be a healthy vegan lifestyle. Does this affect my health? Do I have a lower risk of getting diabetes by avoiding excessive sugar, by keepin a healthy weight? I don't know. It doesn't even matter, so I'm going to drop this line.

A certain amount of a person's health is just the luck of the draw. And all people deserve health care. But we have limited resources. It's not just a question of money. There is also a limit of talent, a limit of doctors able to perform services at a high-quality level.

If you give everyone universal health care and change nothing else about the way we approach health care, you haven't solved anything. Now everyone has access to health care, but resources are scarce. Lines are long. Surgeries are delayed. This is what has happened in nearly all countries with socialized health care. (There are exceptions, though).

There are only three solutions that I see to that fundamental problem:

1) Use less healthcare. Encourage this through education and prices. If you have to pay for health care, you might think twice.

2) Train more doctors. Canada used to do this by offering free education for doctors and nurses and the like, in exchange for a guarantee of something like 5 years of medical service after you graduate. A very good program, no reason we shouldn't do something similar in the United States.

3) Pay doctors more. This is really just a subset of #2, and is handled automatically by the market with our present system -- which is why we don't find long waits for healthcare in the United States.

It's not an arrogant idea and it's certainly not ignorant. It's realistic. It's affordable. And it's do-able today, with few new taxes. (Except on seniors, who for all intents and purposes face a tax increase. (Since we have cancelled their entitlement, but they would still pay the same amount in taxes. That's okay, granny can afford it)).

The plan makes health insurance affordable for everyone by expanding Medicaid, but limits costs by linking benefits to income with a single, simple formula.

It's such a simple and elegant system. No complicated formulas, noone falls into any gaps. Everyone knows exactly where they stand. Health care would be affordable for all.

The only people who face a downside are golden "gimme" grannies and mommies with Munchausen by Proxy.

Please remember that the plan does not take away health care for senior citizens who cannot afford it on their own. It takes away health care for senior citizens who jet set around the world, cruising on the Queen Mary 2 while 40 million others struggle to afford health insurance.

"explain how spending a great deal more per enrollee automatically means Medicare's administrative costs are lower. i don't see the connection."

Because this is the statistic Krugman cites:

"A recent study found that private insurance companies spend 11.7 cents of every health care dollar on administrative costs, mainly advertising and underwriting, compared with 3.6 cents for Medicare"

Most administrative costs have to do with things like new enrollment, account maintenance, customer service (answering questions), billing, et cetera. Some costs have to do with the volume of claims (fraud prevention, payment, et cetera).

So since each Medicare beneficiary, on the average, uses a much greater amount of health care than those in the private sector (by reason of age), but doesn't consume an equal amount more in administrative costs, the percentage spent on administrative costs is much smaller. (Which is what Krugman cites).

Medicare overhead 19.Feb.2004 00:05

Lynn Porter

James,

Well that is certainly a novel theory. I wonder though why Medicare would be so much more expensive per client, even given the age of its clients, when it is only major medical and does not cover doctor visits, prescriptions (yet) or other medical care usually included in most medical insurance. Do you have figures or is this just a theory?

Under your theory, how would you account for the overhead costs of "1.3 cents for Canada's government-run system?" Or for the fact that all other industrialized democracies manage to provide medical care to their entire populations at much less cost, and have better average health outcomes, than the U.S.?

It seems to me that a more logical explanation of the low overhead costs for both Medicare and the Canadian system would be that they are much simpler than commercial health insurance, and therefore not drowning in paperwork. Also they do not have to pay profits to stockholders or high salaries to their CEOs. When you add all the paperwork doctors have to shuffle, U.S. medical insurance overhead has been estimated as high as 25 percent.

Do you have some proof that there is a high rate of fraud in Medicare, or do you just assume it?

HMOs were supposed to impose order or medical insurance, but there is a paradox in trying to use external controls to hold down expenses: all that control increases administrative costs. It just adds another layer of bureaucracy to the system. Isn't that what conservatives are supposed to be against? Control often reaches a point of diminishing returns, but conservatives seem to be control mad.

The U.S. has always had a mixed economy, both capitalistic and socialistic. The ideal would be to get those goods and services best provided privately from private companies and those best provided publicly from government. I don't want to buy my health insurance from a private company because they cherry pick who they will cover and have priced their insurance out of my reach. We need socialized medical insurance.

I recommend a recent book by Joseph E. Stiglitz, The Roaring Nineties. He won the 2001 Nobel Prize in Economics and served on Clinton's Council of Economic Advisers. In his book he talks about the enormous waste in the corporations, and what that has cost us. There is waste in all organizations, public or private. To make any organization work well you need adequate funding, good management and outside oversight. I haven't seen any evidence that corporations in general are any more efficient than government agencies. In fact U.S. corporations and government are entertwined so extensively that it is hard to see where one leaves off and the other begins. U.S. "private enterprise" is heavily subsidized by the government, and we pay the bill.