David R. Henderson  

Last Night's Debate on Health Care

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I'm so glad that I don't need to use quotation marks around the word "debate" in the title above. For the days leading up to it, every time I've mentioned it, I've used quotation marks because the typical format is Q&A where, if the candidates are good at evading or outright lying, they can often get away with it. But last night's forum was so open-ended that if one candidate wanted to respond because he thought the other guy was getting away with it, he could. Jim Lehrer tried to prevent that early on when it was Romney's turn by asking Romney what question he would ask Obama. Had Romney played along and asked a question, then, even with background to the question, that would have taken less than his 2 minutes. So Romney didn't play along and essentially ignored Lehrer's thumb on the scales. It was also humorous, by the way, to see Lehrer actually coach Obama when the issue was deficit reduction. Lehrer said:

But -- but Mr. President, you're saying in order to -- to get the job done, it's got to be balanced. You've got to have ...

Now to the health care substance. I'm still working through what I think but meanwhile, the best thing I've seen on it is Avik Roy's piece on Forbes.com, "In the First Presidential Debate, Mitt Romney Told the Truth on Health Care and Obama Tried Not To." I'll preface, as Roy himself does, by noting that Roy is a health-policy advisor to Romney's campaign.

About the "administrative cost under Medicare" debate, Roy writes:

President Obama delivered this whopper regarding Medicare: "Every study has shown that Medicare has lower administrative costs than private insurance does, which is why seniors are generally pretty happy with it. And private insurers have to make a profit. Nothing wrong with that. That's what they do. And so you've got higher administrative costs, plus profit on top of that. And if you are going to save any money through what Governor Romney's proposing, what has to happen is, is that the money has to come from somewhere."

False. Indeed, the most persuasive research on Medicare's administrative costs comes from my Apothecary colleague Robert Book, who notes that (1) half of Medicare's administrative costs are booked by other federal agencies; and (2) On a per-beneficiary basis, despite this advantage, Medicare spends more on administrative costs than private plans do.


This post is not a comprehensive treatment of all the health care issues that were covered last night: if you want to see such a treatment, go to the Avik Roy piece.

But one other thing I got out of the Roy article that I somehow missed when he wrote it in March is this:

Obama adviser Jonathan Gruber, on the other hand, filed reports with state governments as to why Obamacare will increase non-group premiums by as much as 30 percent.

This is earth-shattering. Gruber, if you recall, is the MIT economics professor whom many Congressmen relied on when he said that ObamaCare would cause premiums to fall. [For what I've written before on Gruber, see here and here.] But Roy links to a piece he wrote in March that points out, with detail and explanation, Gruber's reversal. One excerpt from Roy's March piece:
In Wisconsin, Gruber reported that people purchasing insurance for themselves on the individual market would see, on average, premium increases of 30 percent by 2016, relative to what would have happened in the absence of Obamacare. In Minnesota, the law would increase premiums by 29 percent over the same period. Colorado was the least worst off, with premiums under the law rising by only 19 percent.

And:
The money paragraph in Gruber's report to Colorado comes on page 14. It's there that he admits that his model doesn't take into account Obamacare's biggest change to the insurance market: its requirement that insurers take on all comers irrespective of pre-existing conditions, a.k.a., "guaranteed issue." Here's what he has to say about that (emphasis added):

It is important to recognize some limitations in our modeling of prices. In particular, given publicly available data we cannot incorporate the effects of the ban on pre-existing conditions exclusions. This ban will cause a rise in premiums as insurers are forced to cover conditions that they had previously excluded. In addition, there are new premium taxes on insurers that will raise premium rates...Overall, we cannot predict the net impacts of these factors on premiums without more analysis.

It is precisely this aspect of the law--its requirement that insurers cover those with pre-existing conditions--that is central to the analysis conducted by PriceWaterhouseCoopers, the analysis that Gruber and other PPACA advocates criticized back in 2009.


Did you get that? The guy they relied for estimates of the effects of one of the most important pieces of legislation in the last 30 years admits that his own model doesn't incorporate what everyone who thinks about it regards as one of the most important regulations.


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COMMENTS (10 to date)
And so you've got higher administrative costs, plus profit on top of that.

I was surprised Romney didn't jump all over the above howler. He could have said something along the lines of, 'Those of us who actually have run businesses know that you don't get to add profits on top of your costs. We know that profits only happen if you manage your costs effectively, so that you have something left over after paying the bills.'

Probably thought it would have been overkill, since Obama had revealed his inner dilettante too many times already. I thought Ann Coulter nailed it with her line that Barack looked like he knew that, even though it was their anniversary, Michelle wanted to go home with Mitt.

John Thacker writes:

What I recall is that Medicare has administrative costs lower as a percentage of overall costs, but that's a confusing metric to use since Medicare patients are older and consume more and more expensive care. A lot of administrative costs per beneficiary are fixed per beneficiary, and others are fixed per claim (so that the administrative costs of a claim for a simple yearly physical for a healthy person are nearly the same as those for a more complicated single procedure.)

If you look at "medical loss ratio," then Medicare does better, but it's more of a case of increasing the denominator (total costs) rather than decrease the numerator (administrative costs).

MG writes:

Fast forward a couple of years (but it could be just a couple of months, really), substitute "insurance premiumns" with "global temperatures", "not fall, but rise" with "not rise, just fluctuate", "health care expert X" with "climate scientist Y", "effect of cloud cover, ocean sinks, etc, with "effect of guaranteed coverage, ban on pre-existing conditions coverage, etc.", BUT leave "MIT" constant, and you are reading the jist of a future post that ends with: "Did you get that?"

MingoV writes:
...half of Medicare's administrative costs are booked by other federal agencies; and (2) On a per-beneficiary basis, despite this advantage, Medicare spends more on administrative costs than private plans do.
The federal government loves to use the ratio of Medicare administrative costs to payments. That's because the largest portion of Medicare payments are for hospital bills. A single hospital bill can be $100,000 and has much lower administrative costs than a thousand $100 payments for outpatient care. Since most private health care insurers pay more for outpatient care than hospitalizations, their ratio is higher.

Another factor is that Medicare only considers direct administrative costs (labor, contracts, and supplies) and does not consider indirect costs such as buildings and real estate, parking lots, and services provided to its Medicare-related employees such as human resources, shipping and receiving, security, etc.

This is yet another example of by the government of creative accounting that would never pass muster in the private sector.

And this might not be the best time to be crowing about Medicare's efficiency;

Ninety-one people including doctors, nurses, and other medical professionals have been charged with committing $430million in Medicare fraud in seven U.S. cities, Attorney General Eric Holder said on Thursday.

An investigation coordinated by the U.S. Justice Department and the Department of Health and Human Services uprooted alleged false billing schemes involving $230million in home health services, over $100million in mental health services, and $49million from ambulance transportation.

Charges range from healthcare fraud and conspiracy to wire fraud, kickback violations, identity theft and money laundering. The number and cost of the alleged fraud makes it the largest bust of its kind, Mr Holder said.

Ken P writes:

There are two sides to the coin on the administrative cost calculation. It works to the advantage of Medicare to calculate the metric per dollar of health care. It works to the advantage of private industry to calculate per individual. There's much less administrative effort to processing a doctor visit than a hospitalization. Excluding administrative efforts by other agencies is an interesting aspect. Overall, I would say it's difficult to compare the two.

Patrick R. Sullivan rightly points out above that private businesses don't just tack profit onto costs to determine price. Companies compete and those that can't outperform on cost control go out of business. This point seems to elude so many people, including the President. However, in the case of insurance companies, I get the feeling that they often do just dial up the charges. It's a lazy way to make profits, but it works when price is hidden from the consumers throughout the entire purchase process.

Ken P writes:

Oops, I was thinking of providers when I said "dial up the charges." My bad. I'm sure insurance companies have a different approach and many providers do as well.

Shayne Cook writes:

I didn't actually watch the debates, but maybe somebody who did can respond ...

Did Romney talk (compare) at all about how his Romney-Care thing in Massachusetts worked out for them versus the Obama-Care?

I was somewhat under the impression that Obama-Care was modeled closely on Romney-Care - mandatory insurance, etc. I would have thought Romney would seize on his success with that under his Governorship in Massachusetts in contrast to the federal Obama-Care model.

Steve Z writes:

Shayne:

Romney distinguished Obamacare and Romneycare by coming out in favor of federalism (although he didn't use the word). Since states are laboratories for experiments, he would like to see them free to experiment with systems like Romneycare, but also with other systems. He contrasted this with Obamacare, which is a vertical mandate from the federal government.

Probably the best tack he could take. I wonder if his commitment to federalism extends to consensual crimes. . .

...in the case of insurance companies, I get the feeling that they often do just dial up the charges.

Well, they're in a heavily regulated industry, so there is little competition to prevent them doing so.

Insurance is a lousy way to pay for anything except catastrophic loss. Which isn't exactly a winning political message.

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