The Incidental Economist

It requires willful stupidity to think administrative costs wouldn’t be lower. Has Holman Jenkins ever seen a billing office in a doctors office? Is it so hard to imagine one?

Don’t forget that administrative costs should be measured per beneficiary. When using this measure, Medicare has higher administrative costs than private insurance:

http://www.heritage.org/research/reports/2009/06/medicare-administrative-costs-are-higher-not-lower-than-for-private-insurance

Also, this entire idea that comparing administrative costs is the same as comparing cost efficiency is absurd. Administrative costs can increase efficiency. Low administrative costs could just signal underinvestment in management and fraud detection among other services.

Medicare also contributes to the cost of medical education:
recently stated as $8 Billion for post-graduate medical education,
i.e., residents. Since this contribution does not reimburse the
expense of any direct healthcare encounter, should it be considered
as an administrative expense? Also, medicare reimburses the medical
schools at a higher rate for health care offered by its employed
physicians. Is this extra-reimbusement acknowledged in any of the
medicare accounting statements? And, if its not an administrative
expense, should Medicare have any involvement in medical education
support at all? Finally, the failure of Medicare to expand its
financial contribution to post-graduate medical education
represents yet another insult to anyone considering a future
professional commitment to life as a physician! The level of
paradigm paralysis is profoundly pervasive for our nation’s entire
healthcare industry.

There is dead weight loss to taxation. Some info on
Medicare funding for the commentors above: Medicare, which provides health care to about
50 million elderly or disabled Americans, is financed through a
combination of funding streams: a Medicare payroll tax; general
revenue (mostly from federal income taxes); premiums paid by
Medicare users; and a tax on Social Security benefits and state
payments toward the prescription drug benefit. We’ll go a little
deeper in the weeds. The program is financed through two separate
trust fund accounts: the Hospital Insurance (HI) Trust Fund and the
Supplementary Medical Insurance (SMI) Trust Fund. Medicare payroll
taxes go to the HI trust fund, which is primarily used to pay for
inpatient hospital stays (otherwise known as Medicare Part A). The
SMI trust fund is used to pay for physicians visits, outpatient
care and prescription drug benefits (Medicare Part B and Part D).
The SMI trust fund is funded primarily (about 75 percent) through
general revenue, with most of the rest coming from patient
premiums. Let’s start with the first half of Pawlenty’s statement,
that “only about 50 percent” of Medicare is paid for by either
premiums or payroll taxes. According to the 2011 Annual Report of
the Boards of Trustees of the Federal Hospital Insurance and the
Federal Supplementary Medical Insurance Trust Funds, Medicare
expenditures came to $523 billion in 2010. Here’s a breakdown of
the revenue side of the equation: • Payroll taxes, $182 billion •
Premiums, $61 billion • Taxation of benefits, $13.8 billion •
General revenue, $205 billion • Transfers from states for
prescription drug benefits, $4 billion If you break out premiums
and payroll taxes, Pawlenty is correct that they covered about half
the cost of Medicare in 2010. Also, you can only tax
people so much, so all taxes go into one bucket. The separate SS
and medicare taxes exist only to fool the voters into thinking they
paid for their benefit thus making it more politically difficult to
change the programs.

Holman Jenkins is correct to point out that many on the left suggest adopting a Medicare-For-All system. Some view this as a panacea of sorts, as it will simultaneously reduce the numbers of uninsured and bend the cost curve. Whether Medicare-For-All would indeed be able to accomplish the dual goals of improved access and cost containment is an empirical question that is highly unlikely to ever be answered. What can be said is that Medicare as currently constituted suffers from a multitude of issues that prevent it from being a system worth emulating from an efficiency perspective. To illustrate, I will focus on Medicare’s procurement policies regarding drugs and biologics. First, the peculiar mixture of market and administrative pricing, such as Medicare Part B’s Average Sales Price + 6%, is not conducive to minimizing cost. In fact, such formula’s often introduce perverse incentives which lead to higher, not lower prices of physician-administered drugs. Second, Medicare’s explicit prohibition of considering costs in its deliberations on whether new medical technologies are deemed “reasonable and necessary” and therefore reimbursable would appear to be inconsistent with the objective of efficient purchasing. Third, Medicare’s fixed co-payments, such as Part B’s 20% co-insurance for all drugs and vaccines, bear no relationship to the products’ value. In other words, a patient pays 20% regardless of the product’s price or its effectiveness.

From the left’s perspective a VA-For-All system would be a more suitable choice than Medicare-For-All. The VA’s system of hospitals, doctors, and pharmacies resembles more closely the single payer systems of, say, England and Australia, than Medicare. Moreover, the VA operates under a rather hard budget constraint (something conspicuously absent with Medicare), adopts a monopsonist position in terms of pricing negotiations with product manufacturers, and manages a national formulary. Nevertheless, be careful what you wish for. Should the U.S. ever implement a VA-For-All system of health care (even less likely than the remote possibility of Medicare-For-All), patients would encounter problems similar to the ones, say, NHS beneficiaries are faced with: Rationing (particularly of newer, more expensive medical technologies), under-utilization of diagnostics and therapeutics, and chronically under-funded hospitals and clinics.