• Health Care Admin. Costs: What’s Worth Debating?

    M.S. read some of the papers on health care administrative costs recommended by readers of this blog and put up a new post at The Economist. Like me, M.S. “was hoping for someone who simply addressed the issue of how to calculate administrative costs in the American system.” But it seems much of the literature (or at least that which M.S. read) focuses on comparing U.S. administrative costs to those of Canada or what they might be under a single payer regime.

    Since single payer isn’t on the table I don’t find that a very useful exercise. That is, I’m not convinced it is worth debating the relative size of administrative costs in U.S. vs. Canada. M.S. pulls a quote from Henry Aaron’s paper that would seem to be consistent with this notion.

    The most important question is what these differences should tell policy makers. I believe the answer is, “Not much.”…The U.S. health care administration, weird though it may be, exists for fundamental reasons, including a pervasive popular distrust of centralized authority, a federalist governmental structure, insistence on individual choice (even when, as it appears to me, choice sometimes yields no demonstrable benefit), the continuing and unabated power of large economic interests, and the virtual impossibility (during normal times in a democracy whose Constitution potentiates the power of dissenting minorities) of radically restructuring the nation’s largest industry — an industry as big as the entire economy of France.

    I agree with Aaron here, though M.S. finds it a “strange thing to say” particularly in light of the fact that a significant transformation of the health care system has nearly come to fruition (and may do so next week). But let’s be clear, the reforms that may pass next week are peculiarly American. They are not a step toward a Canada-style single payer system and are the product of (and will reinforce) some of the forces Aaron cites. Substantial though it will be, health reform will not be a radical “restructuring of the nation’s largest industry.”

    More generally, this is a perfect example of why I’m usually skeptical of cross-country comparisons or extrapolation of the results of a study on one set of countries in service of predictions about another outside the sample. There are often far too many uncontrolled differences for such comparisons to be meaningful. Perhaps there are some narrow instances where a strong case can be made that such international comparisons and extrapolations are sensible, but I don’t think health care is one of them. The U.S. is quite a different animal.

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    • Brad DeLong:

      The United States’s health care system right now wastes about $1,000,000,000,000 a year, in that we spend much more money than other North Atlantic economies and yet have a health care system that does rather less on average to cure disease and ensure long and healthy lives. $400,000,000,000 a year of this comes from higher doctors’ salaries in the U.S. relative to average wages in the country. $300,000,000,000 a year of this comes from unnecessary, inappropriate, ineffective, and positively harmful care prescribed by doctors who fear malpractice liability, have sweetheart deals with those entities with which they subcontract, or simply do not know what treatment protocols are worth doing. $300,000,000,000 a year is spent in administration as insurance companies play the game of trying to pass the costs of paying for treatment of the sick off to somebody else.