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07/07/2009

Administrative Costs

In the latest debate: Paul Krugman attacks Greg Mankiw for linking to a study by Robert Book arguing that administrative costs under Medicare are not as low as many people think.  Book defends against Krugman's attack here.  I find the debate peculiar for a number of reasons:

1)  Picking out one measure of health care "costs" to compare systems is sadly reminiscent of the arguments for socialism.  Do you remember those arguments?  Under socialism:

  • "Think of how much money we will save on advertising!"

  • "Socialism will lower costs by maximizing economies of scale!" 

  • "Money will be used for production not profits!"

Exactly these arguments are regularly trotted out in the debate over administrative costs in health care so color me unimpressed.  To be clear, the point is not that these statements are false - the point is that these premises to the argument are all in some sense true it's just the conclusion, socialism is more efficient than capitalism, which turned out to be false.  We tried that and it didn't work. In other words, you have to compare systems not arbitrarily pick out for comparison one type of costs.

2)  Closely related to this point is the bizarre habit of taking about costs without mentioning benefits.  The implicit argument appears to be that administrative costs are simply waste - this is the ancient cutting out the middleman fallacy.  Administrative benefits, for example, reduce fraud and are a necessary consequence of making it easy for patients to get second and third opinions from different doctors.

3)  Even if we could switch from a private to a public system and save administrative costs, the deadweight costs of taxation will far exceed any reasonable savings.

4)  Any savings on administrative costs is a one-time level effect but the real issue with health care costs is growth as a share of GDP.  (By the way, this same point explains why the debate over whether the public plan will discipline private monopolies is not especially important, monopoly--even if it is a  problem--could at best explain a level effect not a growth effect which is where the action is.)

5)  I'm not surprised that administrative costs under Medicare and under Canada's system suggest some potential cost reductions from moving to a single-payer system--again, Lada did save on marketing expenses--but it's a complete blunder to use Medicare administrative costs as an argument in favor of a "public option."  The whole point of the public option, so we are told, is to compete on a level footing with private plans which means marketing expenses and all the rest.     

Addendum: n.b. this post is about administrative costs not other reasons for preferring one system to another.  See also Tyler on administrative costs further below.


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