The Administrative Fallacy
Since my last entry, a couple people told me that administrative costs (salaries, light bulbs, profits, etc.) for private health insurers are around 30%, compared to around 5% for Medicare.
I have long argued that a government-run health care program, of the sort currently under consideration by Congress, does nothing to address the high cost of health care and, in fact, raises costs by raising demand. So, on the surface, this statistic about administrative costs suggests I’ve been wrong, and that a government-run program has the potential to reduce costs after all.
Robert Book, Senior Research Fellow at the Heritage Foundation, looked beneath the surface (“Medicare Administrative Costs Are Higher, Not Lower, Than for Private Insurance”, June 25, 2009). He found that it is true that Medicare has lower overhead as a percent of total cost, but not because Medicare is more efficient than private insurance companies.
Percent overhead is equal to per-patient administrative cost divided by per-patient total cost. The reason that percent overhead is lower for a Medicare patient is not that administrative cost (the numerator) is lower. In fact, it’s higher - $509 for Medicare vs. $453 in the private sector (2005 data). The reason that percent overhead is lower for a Medicare patient is that total cost (the denominator) is higher - because Medicare insures primarily elderly patients who have more serious health problems. If the government took on large numbers of young patients, as proposed by the Obama administration, its administrative costs as a percent of total spending would increase and fall in line with the private sector. There would be no cost savings due to lower administrative costs, and quite possibly a cost increase.
It’s worthwhile to take a look at the data that Dr. Book uses to back up his argument. See http://www.heritage.org/research/healthcare/wm2505.cfm. The Logic Critic gives him…
4 Blades - Flawless.
For additional arguments that seek to refute the justification for government-run health care, see George Newman’s Op-Ed piece in yesterday’s Wall Street Journal, “Parsing the Health Reform Arguments” (http://online.wsj.com/article/SB124640626749276595.html).
posted by Li Kim Grebnesi at
4:32 PM
6 Comments:
Numbers make my brain hurt! I was wondering what the numbers would do if insurance companies had to insure everyone. As we know people are denied coverage for pre-existing conditions. http://www.healthinsurance.org/risk_pools/
By all means, I am not a fan of government run anything, but a question arises as to why the insurance industry lobby now wants insurance reform, but only if every man, woman and child is required to participate. Wouldn't a single payer system work better if that was the case?
I appreciate all your comments, Suzie.
If insurance companies were unable to deny coverage for pre-existing conditions, and had to insure everyone, then their average expenses for each patient would go up. They would have to cover that additional cost somehow. They could do that by charging higher premiums to those with greater health risks or, if that is considered unfair, then charge higher premiums across the board. However, their administrative expenses, as a percentage of the total would be lower, for the same reason they are lower for Medicare.
I hadn't heard that the insurance industry is lobbying for reform, provided every one is required to participate. Can you point me to some links about that? Thanks.
I read a comment by Karen Ignagni(Insurance Industry Lobbyist ) in Time from a few weeks ago. I found this letter to the editor written by her:
http://www.projo.com/opinion/letters/content/CT_ig16_12-16-08_LBCJPQ4_v15.3e2e218.html
"We listened to concerns about access to health insurance for early retirees and people with pre-existing medical conditions who do not have employer-provided insurance. To address this, we propose guaranteed coverage for all as part of a universal participation plan in which all individuals are "required" to maintain health insurance."
The new report by the Health Reform Dialogue, a group designed to develop a consensus for reform, was issued in the same week as health insurance industry trade group officials reiterated before a Senate Committee their willingness to provide health coverage to all individuals, regardless of health status.
Article from National Underwriter:
http://www.lifeandhealthinsurancenews.com/Issues/2009/April%206%202009/Pages/Health-Insurance-Reform-Gaining-Momentum.aspx?k=health+insurance+reform+gaining+momentum
"The industry is willing to do that, said Karen Ignagni, president of America’s Health Insurance Plans, if that is what is needed to secure legislation creating a comprehensive health reform plan that requires individuals to have coverage."
So basically Ms. Ignagni is an insurance industy lobbyist who is promoting a law requiring all Americans to purchase the insurance industry's product. This is the downside of having the government's tentacles so deep in the economy - well-heeled corporations try to turn government policy to their own advantage. The phenomenon is common enough that it has a name - economists call it "rent seeking".
So why didn't the industry initiate reform years ago? Were they waiting for a health care crisis, anticipating a government option, hoping that "rent seeking" would get them more policy holders?
I can only speculate.
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