Arnold Kling  

Paul Krugman Hearts Medicare

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According to Mark Thoma, Krugman writes,


Medicare, which is a universal health insurance program for older Americans, spends less than 2 cents of every dollar on administrative costs, leaving 98 cents to pay for medical care. By contrast, private insurance companies spend only around 80 cents of each dollar in premiums on medical care; much of the remaining 20 cents is spent denying insurance to those who need it.

If we had a universal system — Medicare for everyone — ... we’d almost certainly spend less on health care than we do now.


My guess is that most of the administrative costs in private health insurance are claims-processing costs.

One thing about Medicare for all as that you would need taxes to pay for it. In fact, our existing Medicare system needs more taxes than we now collect in order to pay for it, and the future gap between promised spending and tax revenues is projected to be in the trillions of dollars. Medicare is the fiscal Titanic, and Krugman says that it is time to add passengers.

Taxes impose what economists call deadweight loss. We tax activities like work, thrift, and risk-taking. The higher the tax rate, the less of those things we get. Most estimates of deadweight loss from the typical tax would say that it is much higher than 20 cents on the dollar. If so, then taking into account deadweight loss, financing health care through Medicare is more costly than financing it with private health insurance.

Meanwhile, Kevin C. Fleming writes,


Policymakers should go beyond the promises of single-payer advocates and closely examine the performance of these systems. The empirical evidence generally shows that such a system would result in government rationing and waiting lines for care, reductions in the quality of care, chronic funding crises, slower adoption of and reduced access to advanced medical technology, labor strikes and personnel shortages, creation of new sources of inequality in access to care, expanded bureaucratic power, politicization of personal health care decisions, and a loss of personal freedom.


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TRACKBACKS (2 to date)
TrackBack URL: http://econlog.econlib.org/mt/mt-tb.cgi/567
The author at Tim Worstall in a related article titled Govt. v. Insurance Based Healthcare writes:
    It's one of the great assumptions of the health care debate in the US that paying for it through the tax system would be much cheaper than the current private insurance market method. That would indeed be true if you [Tracked on September 25, 2006 8:35 AM]
The author at Club for Growth in a related article titled Monday's Daily News writes:
    ECONOMIC NEWS Hume vs. Schumer and Graham - Greg Mankiw, GregMankiw's Blog HBO Hijacks Barry Goldwater's Ideology - Lee Edwards, Human Events Paul Krugman Hearts Medicare - Arnold Kling, EconLog Interview with Mike Pence - RedState Radio The Growth of ... [Tracked on September 25, 2006 8:51 AM]
COMMENTS (14 to date)
Horatio writes:

"...spends less than 2 cents of every dollar on administrative costs, leaving 98 cents to pay for medical care."

Have to call bullshit on that one. Administrative costs at the hospital level eat up on the order of 30% of all medical expenses. Of course, those administrative costs are mostly a result of complying with regulations created by the same bureaucrats who foist medicare upon us.

Mr. Econotarian writes:

The last comment is food for thought. Of course Medicare has lower administrative costs, because it is a government mandate. You can't fight the government. Much of the medicare claims processing costs may be subsumed by the providers.

On the other hand, private insurance companies may have more incentive to provide "customer support" and thus may bear a larger part of the claims processing support costs "outsourced" by the providers.

This link provides some interesting food for thought:

http://www.acponline.org/counseling/medclaimsproc.htm

Medicare claims are processed by non-government organizations or agencies that contract to serve as the fiscal agent between providers (hospitals, doctors, and other health care providers) and the Federal Government. These claims processors are known as "intermediaries" and "carriers." They apply Medicare coverage rules to determine the appropriateness of claims.

Medicare "intermediaries" process Part A claims (Hospital Insurance) for institutional services, including inpatient hospital claims, skilled nursing facilities, home health care agencies, and hospice services. They also process hospital outpatient claims for Part B. Examples of intermediaries include Blue Cross and Blue Shield Association, and other commercial insurance companies.

Mr. Econotarian writes:

I'd love to see the full text of this article as well:

http://www.medscape.com/medline/abstract/2188186

Medicare intermediaries shift bulk of paperwork processing to doctors.

Also see:
http://www.heritage.org/Research/HealthCare/hl665.cfm

When physicians bill Medicare, they are mindful of the fact that the Medicare insurance carrier will scrutinize every billing entry, questioning its medical necessity and reasonableness. They are also mindful of the fact that the Medicare fee schedule places caps on billing amounts for services and is uniformly below market rates. In addition, they know that the costs of complying with Medicare record-keeping requirements often equal or exceed the fee amounts Medicare pays.

Consequently, if Medicare subjects a physician to any inquiry, investigation, or audit, those acts carry with them costs--taxes, in effect--that can cause service to Medicare beneficiaries to result in a net loss for the practice. Many physicians now experience that net loss and must depend upon higher-than-market rates for services to patients not in Medicare to compensate for the losses.

The Medicare carriers, the entities contracting with HCFA, employ sophisticated computer programs that flag billing "outliers" and trigger automatic inquiries upon repeat occurrence of atypical billing patterns. Those inquiries can lead to Medicare inquiries, audits of a physician's patient files, and investigations by federal and state authorities, including the United States Attorney's office, the HHS Office of Inspector General, the Federal Bureau of Investigation, and local law enforcement. Indeed, Medicare inquiries, audits, and investigations are frequently the prelude to either a reimbursement demand or legal action for Medicare fraud or abuse.

Obtaining legal counsel to explain the physician's rights, Medicare procedures, and defenses can cost tens of thousands of dollars. Indeed, a single erroneous bill for less than $100 not infrequently ends up causing the physician to spend tens of thousands, if not hundreds of thousands, of dollars to pay legal fees and to satisfy ultimate reimbursement demands made by Medicare.

Now that's some "customer service"!

Chris writes:

If Krugman would actually talk to anyone that supplies care for Medicare patients I think he would start getting a much different picture. The rules associated with Medicare and the price caps that they impose on doctors cause harm that "official reports" simply don't capture.

Fazal Majid writes:

FYI, "administrative costs" usually encompasses marketing expenditures.

Brad Hutchings writes:

Having just finished reading COA, the run of the mill arguments like Krugman presents above read like high school geometry proofs. That is, simple fact base, simple goal to prove, high school logic skills applied. COA is just sobering, in that it accepts medicine as a very complex market with very complex and continually evolving demands.

You have to look at Krugman's total body of work though. He's not about minimizing bureaucratic costs in the health care system. He's about equalizing outcomes. When he dips into the data to prove a side point, it's appropriate to call him on that. He's not looking at the data and positing a range of solutions to analyze. He's being an ideological hack.

David Gillies writes:

"…such a system would result in government rationing and waiting lines for care, reductions in the quality of care, chronic funding crises, slower adoption of and reduced access to advanced medical technology, labor strikes and personnel shortages, creation of new sources of inequality in access to care, expanded bureaucratic power, politicization of personal health care decisions, and a loss of personal freedom."

In other words, the UK's NHS. Rarely have I seen such an excellent capsule description of primary healthcare in Britain as the above.

Victor writes:

I do feel sorry for Selah Schaeffer.

And according to the original LA Times article, the applicable state-provided insurance is frequently not available or practicable. "... the wait can be long. Lacking coverage, patients often have to pay cash upfront or go without care."

http://www.latimes.com/wireless/avantgo/la-fi-revoke17sep17,0,3083853.story

Separately, does anyone know where Krugman got his statistic about a 32% increase in insurance industry employment from 2000-2005?

Guy writes:

"In other words, the UK's NHS. Rarely have I seen such an excellent capsule description of primary healthcare in Britain as the above."

Actually, that seems like a most felicitous description of any universal public healthcare system in any country that has "universal" health coverage...

Matt writes:

As noted by the posters, the 2% rule on medicare is a lie.

By the same token the term deadweight loss is a misleading term.

Taxes represent our purchase of government services in a generally imperfect market. The "losses" created by buying government services rather than private services come from inefficiency in government and the imperfection of the government market for services.

We choose to have government provide a good or service when we think the economies of scale overcome the distortions and inefficiency.

Other than distortion and inefficiency there is no economic bias for or against the government market place.

Lord writes:

As opposed to rationing by income and the ability to fight administrators and insurers, reductions in the availability of care and the certainty of coverage, less economical care, and less development of advanced medical technology, creation of wider inequality in access to care, sales oriented health care decisions, and loss of any decision to most people?

Like it or not, it is about half the healthcare in the country. If eliminated, spending would decline, and that is both the good news and the bad. This would mean fewer new treatments even for those that can afford it.

Dr. T writes:

I had commented about Krugman's mistaken beliefs about Medicare before. As noted by other commenters, Medicare shifts administrative and billing costs to the providers. Filing must be electronic, and providers must buy computer packages to do this or farm it out to billing services.

The 2% administrative costs figure also is misleading because it includes hospital payments. A single large hospital bill of $50,000 might cost $200 to process: only 0.4% of the bill. Smaller bills from doctor's offices might have administrative costs of >5%.

A third reason that the 2% figure is misleading is that it does not include the costs of the buildings and land owned by the government. Only the annual personnel and upkeep costs are included.

James writes:

Before I start writing about Krugman in general I would say that in this article he fails to ask whether people would receive the same 'quality' of care. That's an important aspect - consumers would get hit not just by the tax and the DWL but they do have a 'value' they place on health care. I would imagine that value would change in a universal health care system, ie, they would notice negative aspects. One of those is that Medicare/Medicaid patients are not that attractive to treat except in an inpatient setting. I imagine that Krugman might actuallly find that appealing as he probably believes that consumers are receiving care that they do not require. That's true but the same is true under Medicare - there is massive fraud that goes undetected. We only hear about the most blatant frauds on the system but there's a large daily cost on the undiscovered fraud claims. Anyway a switch would just aggravate that as the private industry does a pretty good job monitoring what they are paying for - the govt doesn't much care.

Krugman stopped being an economist a long time ago; he realized that he can use his authority to influence the ignorant through his columns.

Yes, he did important work. Note the 'did' aspect. My understanding is that he's still at Princeton receiving pay while presumably collecting income from the paper.

I did read one of his recent 'academic' papers that he co-authored - they are more 'refined' versions of his opinion columns. I believe he does some 'scholarly' work to make it appear that he is doing something at his (academic) job and also communicate to the public that he's still active in the econ field (in case anyone decided to see if he published in the last few years etc)

This isn't meant to be a personal attack on Krugman but just a reminder that there is Krugman the journalist and Krugman the opinion writer. He's the latter these days which is somewhat dangerous. It's dangerous because Krugman has fans with the political left who 'cite' his columns to support their positions (and they usually 'elaborate').

It's *great* that he has made economics 'interesting' or 'applicable' to the public but at the same time an 'objective' writer/economist is not going to have the following that Krugman has. Taking 'sides' matters.

James writes:
In other words, the UK's NHS. Rarely have I seen such an excellent capsule description of primary healthcare in Britain as the above.

One might also remind Krugman that NHS is still a miserable system despite the massive amount of money that Brown/Blair/Labour has pumped into it. The amount they've spent is truly amazing although it is also good that a few of the reforms are market based (making hospitals shutdown if they don't stop the bleeding err perhaps losses is a better choice).

The NHS stats on ER care are amusing in that they show improvement (they are concerned with the amount of time until the patient is seen) while the patients rate the ER care/time poorly. They report that the time they waited is virtually unchanged - to see a doctor. Now they have a nurse come by and basically say 'hi' so they can mark you as 'seen' before the critical 3 hour mark.

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