Tyler Cowen Looks at European Health Care

Particularly he looks at the claims by advocates of nationalized health care that by switching to a single payer system we could save lots of money in terms of administrative costs.

Proponents of single-payer national health insurance note that private health insurance has overhead costs of 10 to 25 percent of expenditures. Medicare, by contrast, has overhead costs of about 2 to 3 percent, and socialized European health care systems generally have low overhead costs as well. That is why single-payer supporters claim that we can save money by substituting government for private insurance. But this would shift overhead costs, not reduce them.

Personally, I’ve always been skepitcal of the 2 to 3 percent claims for Medicare since it isn’t clear that Medicare measures administrative costs the same was as insurance companies do. After all, Medicare is not a for profit concern while private insurance companies are.

But even if there is a difference in the over-head costs Tyler is right that by making such a switch we’d likely not see much of a savings.

The monitoring, marketing and overhead costs of private insurance are what allow more expensive medical treatments through the door. It is precisely because competing insurance companies spend money evaluating the appropriateness of claims that they are willing to pay for so many heart bypasses, extra tests, private hospital rooms and CT scans.

Medical insurance, whether private or government, is always going to be faced with a fundamental problem: patients and doctors will try to get the most out of any system. When they aren’t paying directly, patients will seek extra care and doctors will be happy to oblige. To deal with that problem, health care systems can offer services indiscriminately and write off the resulting losses, spend money on monitoring, or limit services and prices. An analogous problem is faced by retail stores: they must either put up with theft, hire security to limit theft, or carry lower-value items.

If the government does not do any monitoring and allows indiscriminate use of health care resources that will make health care resources more expensive. Or, any savings we get will likely be eaten up by increased consumption. If the government does engage in monitoring this is not costly. Thus, any savings will be reduce or eliminated by the costs of monitoring. The idea that somewhere in the health care industry there is a free lunch should make people think twice about claims that by switching to this policy or that policy will result in big savings.

Some commenters in the past have objected to these types of claims. They argue that nobody is going to go in for extra triple bypass surgeries. And that is true, but not all health care is like a triple bypass surgery.

Just as some items are harder to shoplift than others, so some medical services are less prone to overuse. European systems are relatively good at providing prenatal care or mending someone hit by a car. Few people would try to get these services unless they were really needed. No one but an expectant mother, for instance, will show up for a prenatal checkup; nor would excess prenatal checkups cost a great deal. The unwillingness of European systems to spend on overhead means they will do best specializing in these kinds of services.

Health insurers cannot just offer expensive tests, technologies, hospital rooms and surgeries for older patients for the taking. Doctors will too often recommend these services and receive reimbursement, even to the point of financial abuse. Medicare has this problem to some extent.

When it comes to these discretionary benefits, European systems are more likely to make people wait for them, more likely to make the service inconvenient or uncomfortable, or simply not make the services available in the first place. All of these features discourage those who don’t really need care, and, of course, some people simply go elsewhere and pay out of their own pockets. Either way, the overhead costs have been shifted onto patients and their families.

I’ve made this argument myself. Another way that European systems can control cost is by increasing wait times for discretionary health care. Increasing wait times will discourage abuse, but is can also make people wait longer who do have legitimate problems. Even waiting for care for something that is non-life threatening but painful imposes costs. Living with minor pain or limitations on mobility and/or lifestyle make people worse off and can be equated to decreases in income.

Think of it this way, if you are currently experiencing some painful yet non-life threatening problem your are clearly worse off than if you could get it treated. To use economist we call this a reduction in welfare. Reductions in welfare can occur for a host of reasons. For example, price increases reduce our ability to purchase certain goods and lower our welfare. Decreases in income also decrease welfare by decreasing our ability to buy all goods. We could attach a monetary value to the living with a painful non-life threatening condition. We’d do this by looking at the welfare attained prior to aquiring the condition and the level of welfare after aquiring the condition. We could cause a similar decline in welfare by reducing the person’s income. In short, reducing the availability for discretionary health care is like a non-pecuniary tax.

But those who advocate switching to a single payer system due to lower administrative costs never want to talk about issues like this. To them the only costs that seem to matter are the monetary costs that show up on balance sheets and budget statements. Of course, this doesn’t mean that the current health care system in the U.S. is just peachy. Personally, I think it has some serious problems and if they are not addressed eventually the market and political realities will intervene to provide very undesirable solutions. Just as one cannot grow the world’s food supply in a flower pot, we cannot afford to let health care continue to increase at a rate that is about 3% points higher than economic growth.

FILED UNDER: Economics and Business, Health, US Politics,
Steve Verdon
About Steve Verdon
Steve has a B.A. in Economics from the University of California, Los Angeles and attended graduate school at The George Washington University, leaving school shortly before staring work on his dissertation when his first child was born. He works in the energy industry and prior to that worked at the Bureau of Labor Statistics in the Division of Price Index and Number Research. He joined the staff at OTB in November 2004.

Comments

  1. Dave Schuler says:

    I have to say I’m very disappointed with Tyler’s op-ed. He’s a very smart guy and I wish that his op-ed were a lot smarter.

    A key problem with the op-ed is the enormous differences among European healthcare systems. BNH is a fully socialized system; France’s system is a hybrid in which people are insured both by the government and by private insurance; Germany’s system is closer to a real single-payer system; Switzerland a differeny hybrid; and so on. Costs of administration vary (but they’re all lower than ours). Tyler just piles everything into one big heap.

    My own back-of-the-envelope calculations suggest that saving about half of the present administration costs may well be practical for the United States by going to a single-payer system. That’s far from a panacea—administrative costs aren’t the only costs rising, not even the thing rising fastest. And a single-payer system, particularly a hybrid system like France’s, is not fully socialized medicine like BNH.

    As I’ve written ad nauseam my problem with the approaches to healthcare reform being proposed is that I believe we’re only going to get one bite at the reform apple for a generation or more—we won’t be tinkering with it continuously; single-payer alone won’t get us where we need to go; the reform approaches on the table are all demand-side only approaches.

    Here’s an example of a problem no one is addressing: all of the industrialized nations with the exception of Japan and South Korea are offloading their costs of medical education to poorer, less-developed countries. I think that’s both immoral and unsustainable.

  2. Kathy says:

    Another way that European systems can control cost is by increasing wait times for discretionary health care. Increasing wait times will discourage abuse, but is can also make people wait longer who do have legitimate problems. Even waiting for care for something that is non-life threatening but painful imposes costs. Living with minor pain or limitations on mobility and/or lifestyle make people worse off and can be equated to decreases in income.

    No kidding, Steve Verdon. I’ve been living with crippling joint pain for the past 10 years. I should have knee surgery, but I don’t have health insurance and I can’t afford to pay for the surgery. It’s not waiting lists that keep people from getting medical care for “minor pain” or “limitations on mobility and/or lifestyle,” it’s lack of health insurance and lack of a personal fortune.

    Nowhere in your erudite exegesis of the cost savings or lack of cost savings between national health care and the system we have now is there any mention of the fact that 48 million Americans don’t have any health insurance at all. Add up that cost and tell me what you find out.

  3. jeff b. says:

    Add up the economic benefit of fixing up all the productivity-reducing injuries of uninsured working Americans and tell me what dollar amount you get.

    The waiting times argument is a complete misdirection. There’s no reason why we can’t have a national health care system (note the difference between this and national health insurance system) and a parallel private system where you can pay for lower waiting times. For Americans without health insurance the waiting time for basic health care is infinite.

  4. M1EK says:

    The theory that there’s a lot of pent-up demand for unnecessary health spending out there just collides with reality – those of us with jobs typically view time, rather than money, as the inhibitor to treating sniffles and the like; meanwhile, those with time to burn (the elderly) overuse.

    Viewed that way, it’s pretty darn obvious that a health care system with more rigorous rationing based on medical need could in fact BOTH lower costs AND not significantly affect outcomes for those who are healthy today.

    And the idea that we don’t have to wait is just ludicrous. Each time I break in a new rheumatologist, it’s typically 6 months before I can get in for the first appointment.

    That’s one obvious low-hanging fruit out there. The other is that national health care could easily eliminate the incredible waste of having low-income people get deferred basic health care at emergency room rates which is then paid for by the public anyways. IE, we’re already paying for health care for the extremely poor, but we’re doing it at far too high a premium.

  5. Kathy says:

    Jeff B and MIEK: Well said.

  6. Andy says:

    But those who advocate switching to a single payer system due to lower administrative costs never want to talk about issues like this.

    This is where you go stupid. People talk about this all of the time. It’s just a jab, and a half-hearted one at that, James. I’m surprised that you didn’t throw in some “commie” slurs. It’s below you.

    At this point, I think it’s really up to those who advocate sticking with the current system to prove why it is a better model than any of the dozen or so other 1st world models that provide better care (by any number of measures) and a much lower cost.

  7. Andy says:

    Er, sorry, not James but Steve. Reflex complaint typing.

  8. Steve Verdon says:

    Nowhere in your erudite exegesis of the cost savings or lack of cost savings between national health care and the system we have now is there any mention of the fact that 48 million Americans don’t have any health insurance at all. Add up that cost and tell me what you find out.

    That health care spending will likely go up. And please, don’t make the mistake that my view is that we should keep our current system (or you should go re-read my other posts on health care first before trying to pigeon hole me).

    The waiting times argument is a complete misdirection. There’s no reason why we can’t have a national health care system (note the difference between this and national health insurance system) and a parallel private system where you can pay for lower waiting times. For Americans without health insurance the waiting time for basic health care is infinite.

    Uhhhmmm no. England has a nationalized system and wait times are increasing to reduce costs.

    As for a nationalized system and a private system that wont really work, IMO. All the healthy people would go with the national health care leaving only people like Kathy in the private market. That wouldn’t help her because it would still a prohibitively expensive insurance policy.

    M1EK,

    Sorry, but that just isn’t the case. We consume huge amounts of health care in this country. Part of the reason is that we have health insulation not health insurance. The former covers everything from pregnancies, to eye glasses, to triple by pass operations. While the demand for the last one might be pretty inelastic, the others are not. And if you look at Canada they are making certain “discretionary” procedures (think IVF procedures) illegal. Why? Because they are having a huge budget problem related to health care?

    That’s one obvious low-hanging fruit out there. The other is that national health care could easily eliminate the incredible waste of having low-income people get deferred basic health care at emergency room rates which is then paid for by the public anyways.

    Yes, but if you also give them health care like the rest of us have, then you’ll have upward pressure on health care expenditures due to increased discretionary demand.

    Dave,

    I agree that part of the problem supply side, but there is also the burgeoning demand as well. I think both sides need to be addressed.

    And I think a single payer system would be a very bad idea. Right now, many places in Britain are implementing mandantory wait times for various procedures to keep costs from rising so fast.

  9. jeff b. says:

    All the healthy people will go to the national health care system? Healthy people don’t consume health care services!

    You didn’t address my core argument, so I will try to give a concrete example. Suppose an uninsured working class person develops, for example, a chronic joint problem. If he is treated, he will be cured and live a long productive life. If untreated he will be disabled within one year and will never work again. In our current system he is uninsured and cannot afford any kind of treatment whatsoever. His wait time for care is infinite. After a year he will be disabled and the cost to society will be 1) all his lost future work, 2) all future taxes on his earnings, and 3) his future health care expenses because once he’s completely ruined social security will pick up the bill. How perverse is that?

    Now imagine a national health care system which prioritized conditions like this one. He goes to a local clinic for initial examination and his case is assigned a certain priority based on a rational system. After a reasonable waiting period he arthroscopic surgery or whatever and after he recovers he goes back to work for the rest of his life.

    In the first scenario the public bore a huge cost. In the second scenario the public bore a small cost and reaped a large profit. This positive result is possible if we are willing to put the power of the public purse behind it. It’s also possible by a second means: if the market were smart enough to recognize the opportunity to provide health care now in exchange for amortized future payments. But like in so many other examples in the real world, the market fails to recognize this opportunity.

  10. Dave Schuler says:

    And I think a single payer system would be a very bad idea. Right now, many places in Britain are implementing mandantory wait times for various procedures to keep costs from rising so fast.

    You’re illustrating the point of my comment: Britain doesn’t have a single-payer system or, more accurately, they don’t only have a single-payer system. They have a fully-socialized system.

    But there’s another point to be made here. I wish that people would stop doing a bait-and-switch on this issue. Single-payer alone doesn’t extend healthcare coverage one smidgeon nor does it reduce costs other than by reducing whatever proportion of costs are attributable to the delta caused by private insurance (and, as I noted, my casual estimates are that’s about 10%—appreciable but not enough to cure our system).

  11. Dave Schuler says:

    BTW a good place to start in looking at various countries’ health care systems is the World Health Organization. The U. S. has about the same number of physicians per capita as Uzbekistan (and significantly fewer than France, Germany, or Switzerland).

  12. Kathy says:

    As for a nationalized system and a private system that wont really work, IMO. All the healthy people would go with the national health care leaving only people like Kathy in the private market. That wouldn’t help her because it would still a prohibitively expensive insurance policy.

    Uhhh… no. Kathy would go with the national health care, where I might have to wait a few weeks or months for knee surgery, depending on the results of a medical exam, but I would not have to wait indefinitely, which is what I’m doing now.

  13. Maniakes says:

    Here’s my idea for providing critical care for the medicaid-ineligible uninsured. Gov’t arranges rates with private providers in a PPO-like system, with reduced benefits for those who use the program to buy from out-of-network providers. Program beneficiaries buy the service, and the government pays the bill at the arranged rate. Then the beneficiary owes the government the arranged rate, which may be paid over time like a student loan.

    For situations like Jeff’s example, the patient and the government are much better off than if the patient becomes disabled. The patient is not disabled, and can continue working, although he has a substantial loan to pay off. The government subsidizes the interest loan and bears the risk of default, but is spared the costs Jeff outlines.

    By making this a loan rather than a handout, the program is much cheaper, doesn’t encourage unecessary treatment as much, and doesn’t crowd out private insurance for those who can afford it.

  14. M1EK says:

    “Part of the reason is that we have health insulation not health insurance.”

    Which at its basic level is a smart idea – the problem is that the insulator doesn’t reap enough of the long-term benefits. For instance, paying for good prenatal care would save you in the long-run IF you’re still working for that company, and still on that health plan, down the road.

    The insulator is often forced to provide such coverage either by gov’t mandate (minimum length of hospital stay for pregnancy) or by corporate mandate (some level of basic minimum care enforced by employers; the real customers here), but either way, the uninsured person isn’t getting it, and it costs us a lot more in the long-run, as with the knee surgery example given above.

    So, no, I don’t buy this common talking point that this so-called insulation is the root of our problems.

    Speaking as somebody who hasn’t had the same health plan for longer than 2 years in a row since the mid 1990s, perhaps I have a different perspective than you academics.

  15. Rick DeMent says:

    No where in any analysis is there anyone addressing what has to be huge productivity losses and innovation losses due to people who don’t feel they can afford to lose group health insurance in order to pursue entrepreneurial endeavors. People with families feel that they are compelled to be wage slaves just because doing otherwise would put their family at risk. Single people can shoulder the risk much more easily, but too many of us feel that gambling with the health of our children to too high a price to pay.

    We also have a two tiered (actually three or four tiered system) with those who work for companies offering group health plans in one, those who have to attempt to buy heath insurance on the individual market in another (I an with out insurance right now until my new jobs group plan kicks in because I simply cannot get covered at any price), and those who get covered by the government.

    So the idea that health care is not “rationed” in the US is hoarse hockey, also the idea that we are not paying for the heath care of other though higher insurance premiums and higher medical costs is foolish. If we, as a society, decided that we will not allow someone to die on the street simply because they have no ability to pay for medical service then we are taxing ourselves to provide that care. Period … full stop.

  16. dutchmarbel says:

    In addition to the fact that healt insurance systems in various countries are hard to compare; Waiting time also differs between countries in the EU, whilst in most countries you can go (insured) to another country to get your treatment – as long as the costs are not much higher. And appearantly getting to see your doctor the same day is relatively hard in the US:

    There were wide and significant variations in access and waiting times on multiple dimensions across the six countries. Respondents in Canada and the U.S. were significantly less likely than those in other countries to report same-day access and more likely to wait six days or longer for an appointment. At the same time, majorities of patients in New Zealand (58%) and Germany (56%), and nearly half in Australia (49%) and the U.K. (45%), were able to get same-day appointments. Waiting times for elective surgery or specialists were shortest in Germany and the U.S., with the majority of patients in both countries reporting rapid access.

    This gives an overview of area’s where the US system is lacking.

    The US public expenditure on health is much higher than that of most OECD countries. And don’t forget: If a treatment doesn’t get covered by your health insurance that doesn’t mean it is ‘illegal’, it just means you have to pay for it yourself.