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.