• What makes the US health care system so expensive – Responses to comments, ctd.

    These are continued responses to my series on what makes the US health care system so expensive.  Introduction and links to all posts here.  Responses to comments 1-8 here.

    9.  I have received a number of complaints, some from people I respect, that I have grossly underestimated the amount of money that we are wasting on all administration and overhead.  Part of this stems from the fact that the McKinsey paper figure includes the cost of insurance overhead and program administration, but does not separate out the costs incurred by hospitals, doctors offices, nursing homes, employers, etc. for administration.  This is a fair point.  Some have pointed me to the paper by Himmelstein and Woolhandler in NEJM that concludes total such costs reach 31% of all health care spending.

    I’d note that these administration and overhead costs are lumped into inpatient and outpatient care.  They are, well, part of the cost of providing care.  Just as malpractice costs are spread in there, as are disease prevalence costs.  I had to bunch things one way or another.  This is the way I chose to do it.

    I should note that no one is disputing the fact that we spend more on administration than we should.  I should also note that some people, whom I also respect, have argued that the 31% number is bit high, although even they don’t dispute it’s still going to be a large number, even if it’s really in the mid or high 20’s.

    Here’s my problem with believing we can fix all our cost problems though reduction in overhead spending.  How much lower can we go?  We’re not getting down to zero.  The NEJM paper cites Canada at 17%.  But they have a very low overhead system.  Can we get that low?  I don’t know.  Moreover, I already said we’re too high by 4-5% for insurance administration and overhead.  Could we say there is an additional 4-5% of overhead in the inpatient and outpatient care slices?  Sure.  Tackling those costs alone, without affecting care in other ways, though, outside of radical reform would be very difficult.  Which leads us to…

    10.  A number of single payer supporters have been upset by my apparent dismissal of a single payer system’s ability to fix things.  I admit, this series wasn’t on how much more are we spending than we could expect to under a single payer system.  It’s how much more are we spending than we could expect to based upon our wealth.

    But that skepticism of mine is real, and it has to do with the belief that a single payer system in America could easily bend the cost curve.  I’m not skeptical because I don’t think single payer fails in this potential, but because I don’t believe the American people are being led to understand how much a difference they will see in the health care system if we do bend the curve.  I think many countries, single payer or not, do a better job than we do in terms of the cost curve.  I don’t know if we have the stomach to do enough, no matter what system we adopt.  It’s not a failure of single payer, per se.  It’s a failure of our system, and our national discussion.  It’s possible to have a very, very expensive single payer system, and this series was about costs.

    11.  A wise economist has pointed out to me that by indexing against GDP I’m really discussing health care spending compared to economic output and not wealth.  I’m sure he’s correct, but fixing every post would be too much to bear.  I humbly ask you to read it all as some measure of how rich we are.

    UPDATE: Some people won’t stop.  I’m not saying that other single payer systems don’t cost less than ours does.  Pretty much all systems outside the US cost less, regardless of format.  I’m also not saying that a single payer system in the US would not cost less, would not achieve better outcomes, and would not include everyone.  I actually think all those things are likely true.  The goal isn’t to spend a little less, though.  The goal is long-term cost-containment.  This series is not about solutions or about single-payer specifically.  This series is specifically about what makes the US health care system so expensive.

    Comments closed
    • As somebody who isn’t a partisan for some particular solution, I really appreciated that you just focused on an important aspect of the problem: current cost.

    • Aaron,

      Meant to send this earlier and got distracted…

      And I will admit that what I am offering is a single data point – but I think it supports the 31% [or maybe higher] overhead estimate.

      I recently had significant oral surgery. This was done on an outpatient basis at a hospital in the Cincinnati are that based on the waiting room the morning I was there does a pretty brisk business in this sort of thing.

      Prior to my procedure I was given the option of prepaying for both the hospital and the anesthesia. Payment had to be made – and processed about ten days in advance – credit card or check.

      The discount in each case was well over 50% [I got to see both “bills” after the fact].

      Since I had no insurance covering this work the savings was considerable.

      Has anyone done a study of this sort of thing – what sort of pre pay discounts are generally available.

      I was thinking that this might be an opportunity for cost containment.

      What if insurance companies encouraged this sort of thing – agreed to pay a member a nice fee to prepay – splitting the savings…

      Keep up the good work – I may not always agree with you and Austin – but I have learned a great deal by reading your blog and reading many of the items on Austin’s reco reading list [it is a shame these are often gated to keep us lapsed acacemics from accessing].


    • While your excellent series of articles describes *where* costs are “so expensive” it doesn’t seem to address the actual why. It seems to me (as a non-expert layperson) that there is a big and singlular philosophical difference between the US system and the rest of the world.

      That is, in the US “health care” is considered a profit making or profit taking industry, while in most (or all) of the rest of the world it is considered a social service. Am I missing something? Is this too simplistic?

    • LonelyLibertarian- A lot of insurances do not cover oral surgery very well. When my group provides anesthesia for procedures not covered, we ask for payment up front also. It might also help to know that it is not unusual to discount at a 50% rate for insurance companies. We do.


    • On the single payer advocacy, my guess is most of the commenters are unaware of how few singe payer systems there are; Canada isn’t really single payer, the UK was but is no longer strictly single payer, Germany, Israel, Japan were never even close to single payer, the Swiss provided the template for Romneycare which is the template for Obamacare. The purist singe payer might be Taiwan, but it is a very young system, less than two decades old.

      Every mature system provides significant choice which always involves multiple payers. Even “single payer” Medicare is multi-payer with Medicare providing basic coverage which is in almost all cases supplemented by a “second payer” which adds to the basic coverage a lot of essential coverage, so the patient isn’t the “second payer”.

      The real key to all of the competing systems is near universal coverage – coverage so universal that those not covered create no public or private burden of note.

      But the key in universal coverage is everyone is in the same boat – if you punch a hole in the boat to sink “them” to save yourself money, you sink with “them”, and the same for them. Today, those on Medicare are skilled at defending their own coverage while pushing policies that destroy the individual market – ie., negotiating the lowest payment rates, a policy adopted by businesses for their group plans in self defense, pushing the costs to individuals up because they have little market power to negotiate lower rates.

    • Ken Hamer:

      Economists differentiate between return on investment and profit. In a commodity market, which many nations create and the health reform seek to create, ROI is present everywhere, but profit is driven out. In nearly all nations, the insurers and providers are for-profit, but they make little profit.

      A Japanese health economist explained the way they handled such things as CT scans and MRIs. If the total payment for a service is increasing, that signals it is profitable (more than paying ROI) so they cut the service price. Everyone figured out how to be more efficient and total costs rose again and the prices were cut again. The result was much cheaper and simpler equipment, which could do the imagining for 10% of what it costs in the US. When it is seen that a useful service isn’t being done, they raise the price, assuming the service ROI is too low.

      In the US, end-of-life planning has a negative ROI so few doctors do it, resulting in high end-of-life costs no one wants, especially the patient because they suffer more and have a lower quality end-of-life.

      And one key point is the profit motive can drive the expansion of money losing business – the US air passenger firms have had a collective net loss since Carter deregulated. Low cost of entry increased competition driving down prices below what the full service firms needed for ROI, while the startups often burned their startup capital trying to gain market share sufficient to get positive ROI, but failed. Hospitals seem to have pursued the airline strategy of expanding to gain market share while slashing time in the hospital to reduce prices – more hospitals but fewer total patient days.

      Many confuse price with cost – the price of cell phone service is a fraction of what the service would cost in 1990, but the total market is ten times larger, and you are spending more, cost, for cell service today than you did in 1990.

    • I read this second set of responses to see if you corrected your comments about moral hazard. I also read the rants you linked to.

      You clearly do not understand moral hazard. Yes, you get the sentence and example you likely paraphrased from Wikipedia right, but you completely miss the point of it in the context of health care. Going to the doctor more because it’s cheaper and demanding free colonoscopies “by the dozen” are not examples of moral hazard. They’re not even close.

      An actual example, which has been supported by research, is that insurance mandates requiring coverage for diabetes treatments increases the BMI of patients with diabetes. The moral hazard comes about because the extra coverage changes the relative costs of treating diabetes with diet and exercise vs. treating it medically.

    • See, I don’t believe in coincidence. I flatly do not believe that the wealthy nation with the largest role for private health insurance has unexpected costs chiefly for unrelated reasons. Why should I believe it if you can’t give us an explanation?

      You say in this post that single-payer could significantly cut costs without harming quality of care. But you say you’re not misleading the American people, “because I don’t believe the American people are being led to understand how much a difference they will see in the health care system if we do bend the curve.” Seems like you’ve found a novel definition for some of those words — perhaps you refer to some other country in the Americas.

    • Excellent series: I would like to share some thoughts about costs – I have worked many years in hospitals.

      While you indicate that the Admin costs are not that excessive, we have so much overhead in health care. In hospitals less than 40% of the employees actually perform some form of direct patient care and Administrative salaries have exploded in the past ten years while most staff salaries have been held under inflation rates. Surely our overhead can be reduced.

      There is a huge sign in every hospital that says the hospital can not refuse to provide urgent care of patients regardless of their ability to pay (mandated by the US Gov’t); However, emergency rooms are bursting with patients needing non-urgent care especially in urban areas because ‘unfortunates’ use these very expensive areas for ‘basic’ care. But there is no requirement that walk-in centers or primary care centers must see or take care of ‘basic’ medical needs. Just try to walk in and ask to be seen in a medical office without insurance or paying a huge upfront fee. So ‘unfortunately people flock to the ER. Just having a system of clinics providing good free/or reasonable co-pay ‘basic health care’ would help to lower costs; and reduce the need for the ER expansions because they can not cope with the overwhelming demand for services.

      The President says we will lower costs’ by getting health care providers to implement Electronic Health Records. Congress provided over $30,000 in incentives to doctors. This may lower some costs for providers but I have yet to see documentation for any computer system implementation actually lowering the cost to a consumer.

    • Very informative. I wish I’d found this earlier. My thoughts are that a similar study should be done on US military spending relative to the rest of the world. In that context the arguments for medical overspending might take on a different tone. The health care industry is the last one the US has that hasn’t been exported overseas, just like our military spending. I do think your arguments about inefficiencies in the system are valid and I also am dismayed to find that we are underspending for elder care.