Asymmetrical Information

A primary reason for national health insurance is that it is efficient. Medicare's administrative costs are 2%, while private insurers routinely spend anywhere from an (estimated) 8-15% on administration.

I would like to see the evidence for the proportion of so-called "medical innovation" that is directly attributable to health insurers, rather than hospital groups or other health care entities. (And I am unclear when you speak of medical innovations whether you are talking about clinical innovations or organizational innovations to do with service delivery, benefit packages, or financing.) For example, service delivery innovations that I am familiar with have been heavily supported by government and instigated by non-profit service providers. There is no reason why this would be any different under nationalized health care. Indeed, a major "medical innovation" -- managed care -- was inspired in large part by the home of socialized medicine itself -- Great Britain.

You also miss a major reason why adverse selection may not be an issue in the studies you cite: because the government is already insuring the most costly and risky individuals: the elderly and disabled, who receive health insurance through Medicare or Medicaid.

The truth of the matter is that the free market just doesn't work in health care. Look at the problem of creating vaccines for highly prevalent diseases that affect poor people: malaria, etc. Our innovative pharma industry hasn't been the slightest bit interested in this because there is no market (unless a kindly rich person or WHO steps in). You'd rather have a cure for a very low prevalence disease than one for malaria? I don't see how any economist could justify this, on a cost-effectiveness basis.

Medicare has some efficiencies, but my understanding is that it realizes not a few of them by forcing doctors to do more paperwork. THis is not a gain to the economy.

I'm talking about plain old technology or process innovation, not building a better computer system, although over the long run I would expect to see the market outperform here too. I'm pretty well convinced that medical device manufacturers and pharma firms, for example, innovate pretty much entirely because of the US market; it's the only place where they're allowed to sell in volume at more than cost-plus.

If the government is already insuring the costly, risky individuals, then there would seem to be no reason for us to expand government health care.

Contrary to your assertion, the rich world has been working on malaria for fifty years. Your assumption is that research dollars are fungible; the only question we should consider how many people have a given disease. But other factors, like how easy the disease is to cure, enter into it; it seems that mosquito eradication is more effective than any cure to date.

Now, of course, it is true that one of the reasons that pharmaceutical companies put less into malaria research is the low return such projects offer (though lack of intellectual property rights in the third world is as big a problem as poverty). But I don't understand how you think nationalising America's health care system would fix this. Do you think that our government would suddenly start spending huge sums of money on a disease that Americans don't get, rather than researching lower-prevalence diseases that we do?

It is interesting to read this just after InstaPundit's post on litigation causing drug manufacturers to become much more cautious. Every effective drug has side effects. The market won't be the innovator you want if the courts continue to effectively outlaw side effects.

If you want to see an example of how the market might work when insurance does not, have a look at
www.integramed.com. This company encourages infertile couples without insurance coverage for IVF treatment to undertake IVF treatment by sharing treatment risk with them. My impression is that by helping to manage treatment they mitigate some of the risks of the treatment.

KJ

"...if I supported nationalised health care I would be privileging the needs of those who are undertreated now, over those who have diseases that we could cure in the future. Since there are more of the latter than the former, this does not seem to me to be a reasonable moral choice, though I am sure that there is more than one left-wing moral philosopher out there who would like to explain to me why I am wrong."

Oh, I can't resist a smarmy, only semi-joking response from the right.

What's your discount rate moral returns from uncertain future health care? As discount rates depend upon the demand for current consumption -- very high among today's sick -- and the uncertainty of the real future returns to bearing this cost today -- also high -- a cold hearted quant might decide nationalized health care today has a higher net present value.

If you take in all of the activities that Medicare performs you find out it is very inefficient. As an anecdotal example - my mother works for a cardiovascular clinic that the government has classified as diagnosis fascility - yet they can perform angioplasties. Medicare won't pay for an angioplsty performed at a diagnostic fascility even though the cost is 50% of what can be done in a hospital. There is no consideration for the quality of work, just the bureaucrat designation.

There are mountains of similar circumstances throughout medicine, yet we only hear the 2% administrative overhead rather then the percentage of waste through mismanagment.

For the record, I share the sitemistress' concerns that nationalizing health care would dumb down treatment options over time (as it were).

Public health is a highly relevant topic, but not one about which I know enough to discuss intelligently.

Meantime, great, litigation is an albatross around the necks of us all. But when manufacturers sanitize unfavorable trial results (or can even be credibly accused of doing so), then the checks and balances in the system OUGHT to be put to use, however unsatisfactory their consequences may be.

Thank goodness for Medicare's 'efficiency'. Imagine what the deficit would look like if it wasn't.

More seriously, the 2% administrative cost figure seems to be a red herring; most of the administrative costs are in fact incurred by the doctors' offices and hospitals who have to fill in the complex paperwork and generally pay for most of the processing costs of the Medicare bureaucracy.

Which is no different from the supposedly 'low administrative costs' for Social Security, which conveniently happen to exclude the costs to the private sector of administering the payroll tax.

"The truth of the matter is that the free market just doesn't work in health care. "

The truth of the matter is that there is no free market in health care. Not in the US, not in Europe, not in Canada. Never mind that most western health care is already either state-controlled or very heavily regulated; I don't quite see how more regulation in the US, for instance, would be the missing ingredient to find a cure for malaria, which, since it is not an issue here, is unlikely to be funded by our health care system.

As for finding a malaria cure, one can only wonder who would want to risk making huge investments in it today when it's already clear that NGOs and third-world governments will then try their best to then steal the product of your work under some grand moral pretense, with self-righteous support from 'civil society'. A weakening answer to increasingly negative incentives is no a market failure.

If you don't want to pay, don't call the lack of supply a market failure.

Just a response to the comments on Medicare's inefficiency -- it is laughable to say that administrative savings are due to shifting the paperwork burden to doctors, when any doctor would tell you that the amount of time wasted due to private health insurers, particularly managed care, far exceeds that wasted on Medicare. Physicians have to hire office managers to stay on top of the insurance paperwork. I'm not arguing that Medicare is perfect -- I agree that some of its rules are absurd. But I would also argue that Medicare has to be transparent about its deficiencies, where private insurers don't. Medicare, for example, is audited regularly about billing violations by physicians -- I find it hard to believe that insurers are significantly more effective in auditing "code creep" than Medicare is.

Also, the comment about malaria cures was not meant to imply that a national health system would cure this problem. Rather, that the free market has no answer for this evident need. From the moral philosophy point of view, this is disturbing (I would hope).

Ben,
You ought to read the article you cite before making unsupported comments. As the article makes clear, the report wasn't sanitized at all; it just adhered to the pre-set timetable for the experiment.

That's not what any doctor tells me. What doctors tell me is that having to master different insurance systems is a pain in the ass, not that any given insurance system takes longer to monitor than medicare. On the other hand, the insurance companies don't jack the reimbursements down below the cost of servicing the patients.

The question is not whether the free market provides every single desireable thing--it doesn't, or I would be richer, thinner, and have a beautiful, even tan. The question is whether the free market is superior to a state-run system. I see no state run system which is providing a cure for malaria. If your point is "the world is a sad place where bad things happen", well, I concur, but that's not really what this post is about.

Perhaps malaria is a bad example. The point is that there are many things in health care that are known to be Good Things -- preventive care, disease management programs, mental health treatment, chronic care treatment -- that have yet to be incorporated into our current system due to their lack of short-term financial impact. In study after study, preventive care has not been shown to save money for insurers, even though over the longer term it is clearly a Good Thing. (It may not save money in the aggregate, either, as people may live to die of more expensive illnesses that are not affected by preventive care, such as Alzheimer's.) Indeed, insurers are reluctant to offer innovative programs for fear of the supposedly non-existent adverse selection problem. (Anec-data, but I did talk w/a woman who said that an insurer had dropped an innovative Alzheimer's care program because it feared atracting the wrong types.) Morally, it is obvious what the right thing to do is. Our current system does not allow us to do the right thing. This is where government has to step in, unfortunately.

I have to question the ‘AHIP’ study which put forth the figure of annual premiums of $2,268 for individual and $4,424 for family coverage. I’m in the insurance industry and I find this laughably low for ‘reasonably generous’ coverage. I assume that AHIP is a health insurance industry think-tank/lobbying group who would have a vested interest in pushing forth the notion that nationalized health insurance is not necessary.

This topic (health insurance in the US, not adverse selection) is one of my pet peeves. Why is health insurance aggregated with employment in the US?

I am self-employed and I have individual policies for my family and me. When I left "permanent" employment, I had the option of COBRAing my family's health insurance at nearly $1,000 per month. Under COBRA, my former employer was required to offer me continuation coverage at their cost plus up to a 2% fee for administrative costs, so ~98% of that nearly-$1,000 per month was what they were paying for my family health insurance. I was able to get "less good" health care coverage (i.e., 80-20 coverage with $1,000 deductible) for just under half what my former employer was paying.

I could kick myself for all those years I was allowing my employer to provide me the "benefit" of health care coverage. Effectively, I was reducing my wages by the "value" (i.e., employer's cost) of that coverage, which was overly generous and completely unnecessary first-dollar coverage.

Now, my wife and I don't send our kids to the doctor when they have viruses that aren't treatable with antibiotics, we shop around for lower-cost clinics and we purchase prescription medications online far more cheaply than we could at the local big-box discount retailer. None of my wage comes in the form of "benefits," so I get paid only in dollars (not partially in "health care coverage," "accidental death & dismemberment insurance," "life insurance," etc.). I choose to have (and pay for) health care coverage and life insurance, but others in similar situations might make different choices.

The point is that I've disaggregated my health care and life insurance decisions from my employment decision. I'm not sure why most others aren't desiring the same disaggregation.

Maybe someone can show me an economic benefit to aggregating these choices?

"Or is it the sort of person who is so worried about not leaving their family in trouble that not only do they buy life insurance they also buckle their safety belt and eat healthy? The price of life insurance falls the more you buy so evidently insurance companies believe it is the latter."

I believe the price falls because you're buying in bulk. The company's cost of selling the policy is more-or-less independent of the size of the policy.

To those opposed to nationalized health care: What do you propose to do about the 40+ million Americans without healthcare?

I wonder if Pamlet would be so kind as to provide a reference to the 2% claim (apart from The West Wing debate episode)?

Taking it as a given, this would mean either:

• there is a huge profit potential for private firms by using whatever efficiency insights Medicare has gained
• Medicare's efficiency advantage exists due to some governmental priviliege from which private firms are forbidden from using
• the administrative costs are roughly the same on a per-client basis, but the other 98% of Medicare's costs greatly exceed those of private firms.

Any one of these makes the 2% claim moot, either in the short- or long-term.

In other words, lying with numbers is easy.

Rick,

I'm all for a system of national healthcare clinics. Think long waits at clinics staffed primarily by RNs and PAs. But that is what is needed. All this talk about "insuring" people is nonsense, and getting in the way of providing a basic service for those with limited means.

"To those opposed to nationalized health care: What do you propose to do about the 40+ million Americans without healthcare?"

Care to define "healthcare" and how one would be "without" it? Or did you mean medical insurance?

"To those opposed to nationalized health care: What do you propose to do about the 40+ million Americans without healthcare?"

The same thing I would do about the millions of Americans without plasma TVs, expensive sneakers, and other luxury goods: Absolutely nothing.

What do you propose to do about the 40+ million Americans without healthcare

Nothing. Most of them can afford healthcare and simply choose not to because they feel they have better uses for their money. I used to be such a person when I was younger.

To dan and others; if we were a society which was willing to let those without health insurance or assets to perish for lack of health care, then doing nothing might be a good option in terms of efficiency. We are not that society. Therefore, getting young healthy people to participate in the insurance pool is important, if we are to have a well-functioning insurance market.

It's perfectly possible to have a well-functioning market without universal participation. The rates people now in the market might be different with universal participation. Or maybe not, if insurance companies can set different rates for people with different ages and current health--as they should.

Requiring people to buy at least a Chevrolet-level, high-deductible insurance policy makes considerable sense, as does providing vouchers for people who really can't afford that. A 100-Million Payer Plan, if you will.

The entire HMO/Insurance market currently is rife with inefficiency, but nationalized healthcare will just combine it all into one bureaucracy with forced wait times and rationing. It will force cost cuts, which in turn will lead to fewer doctors and fewer technological and pharmaceutical advances. Everyone gets hurt in the long run, because those that currently burden the system have no incentive to NOT burden the system in the future.

I come from a large family, almost all of which are involved in the medical field, including 4 doctors. Medicare does probably cost the government less to administrate, because there is little debate over what they will and will not cover. If you find out you have some rare disease and want a treatment that costs $10,000 a month, and you are on Medicare, odds are you are screwed. Some private insurers will cover this. You can damn well bet that any national health insurance will not. Likewise, Medicare is almost always a losing proposition for medical practices, they make their money on the people that are covered by private insurers. Less and less doctors (especially top doctors) are willing to accept Medicare as full payment because other than the 20% co-pay over the deductible, you cannot charge anymore than the government allowed rate for that service/product. It is the biggest racket in the world.

The only way we can ever get over this entire problem is a combination of high deductible insurance meant for catastrophic diseases/injuries combined with high dedictible HSA's. People will self-ration because they actually can see the money coming out of their accounts. People will always overuse services when it is part of their "benefits" and "someone" else is paying the bill.

What a bogus post! What you're saying--or quoting Tabarrok on--is that there's no adverse selection problem in the health insurance market as long as insurers don't have to cover sick people. That may strike you as a brilliant insight, but it's not news to anyone who's been paying attention. Tabarrok doesn't refute the argument that's usually made about adverse selection. He just assumes it away by pretending that we're talking about a health insurance market in which insurers can price or deny coverage based on applicants' health status. That's not not the version of "health insurance" that we have in this country. If we did have that kind of health insurance, many of us (the young and healthy) would be better off, while a smaller but very substantial number would be much, much worse off. You're free to argue that we'd be better off with that kind of system. But if you want to make that argument, do so honestly, not with word games.

"it is laughable to say that administrative savings are due to shifting the paperwork burden to doctors"

First, that is not what I said. I said the 2% figure is a red herring : it is grossly misleading since it includes the vast burden spread across private providers around the country. Second, the doctors I do know claim Medicare paperwork to be quite expensive. They do spend more time dealing with private insurers in general, but that's because most of their customers do not have Medicare coverage. Those who do aren't a breeze to process. Hospitals and medical facilities who specialize in elderly care do not have a lower administrative overhead.

Before comparing numbers, one ought to make sure they can be compared.

"Rather, that the free market has no answer for this evident need." Says who ? The 'market' has been researching this for decades and providing scores of antimalarial drugs. Unfortunately, resistance to the drugs in the field has increased, in part due to incorrect use and other problems.

So the market has been providing treatments, and has attempted to do so since before there was a UN or a WHO. (Some of those countries used to be colonies and their 'masters' were plagued by the problem too...)

You might want to consider that the absence of a magic vaccine might have at least as much to do with science than some ill-defined and always convenient 'market failure'.

"A primary reason for national health insurance is that it is efficient. Medicare's administrative costs are 2%..."

Oh, Medicare has a few inefficiencies of its own, among them expenditures that bear negative correlation to outcomes, i.e. more spent, worse results.

It also has the horrible structure of paying for predictible out-of-pocket costs from the first dollar, while leaving calamity uncovered -- so if you get institutionalized you can lose your home to Medicaid. This is exactly the reverse of economic efficiency, imagine car insurance that paid for gasoline and tires but not for crashes and injuries.

The only efficiency there is political: everybody knows they are going to have out-of-pocket expenses, so politicians get credit for picking up the cost. Nobody thinks they are going to wind up prematurely in a nursing home, so the politicians don't bother with what "insurance" actually should cover. No votes in it.

And then national health services "keep costs down" by denying service -- such as caused the Canadian Supreme Court to strike down the Canadian single payer system as an unconstitutional danger to the public's health, earlier this year.

Add these things to that "2% administrative cost".

Also note the difference between national health insurance, which tries to retain and support a competitive market for health care suppliers, and nationalized health care, in which the government takes over provision of services. Two very different things, commonly conflated.

Ooops. Forgot that Preview button. The above should be reading : "it is grossly misleading since it excludes..."

Is it really that surprising that physicians would have office managers? Don't most small businesses employ someone to handle administrative matters, whether an office manager, secretary, A/R clerk, or bookkeeper? Do doctors' offices in Canada really function without any administrative staff?

I happen to be an actuary, and I can tell you that Mr Tabarrok is very much mistaken in some of his assertions about anti-selection.

In fact, it does exist in life insurance. This is because insurers do not always find it cost-effective to ask every last question and do every last test that would allow them to distinguish perfectly between applicants. In extreme cases (simplified issue products) they only ask 6 or so questions and do not ask for bloodwork. Believe me, the quality of the applicants under these scenarios is not great.

He proves the lack of antiselection in life insurance by pointing to the fact that the price goes down the more you buy. In fact, this is because the portion of the premium that is used to cover insurer expenses gets smaller relative to the mortality component.

Cornelius, if you google 'Medicare administrative costs', you will find the 2% claim clearly defined. And there is clearly a snag : it is defined as administrative costs over spending on all enrollees. Given the population the program serves - predominantly retirees, as opposed to working-age people - the amount dished out per admin dollar is bound to be a lot higher than for an insurer who deals mainly with working age people. All other things being equal, the denominator is just much bigger.

So as far as efficiency goes, this is not a very useful statistic. In fact, if the total amount spent on enrollees included fraud, the latter would also contribute in making the ratio's denominator larger and the final result even more 'efficient' !

Admin costs per enrolee would probably be a better measure.

But we'd still have work to do: Medicare numbers do not yet include the new prescription drug program, while private health insurers do a lot of this and it ain't free.

"Why is health insurance aggregated with employment in the US?"

The goverment did it. It imposed wage controls during WWII, then when the big industrial employers needed to increase employment they couldn't increase wages to attract more workers. So the government let them add health benefits as a wage increase not counted in "wages".

It's terribly inefficient, and unjust too to many people (and businesses).

And while its often cited as a failure of "the market" it's really the government in action yet again. Will politicians do any better designing medical care programs in the future?

> Requiring people to buy at least a Chevrolet-level, high-deductible insurance policy makes considerable sense

How are you going to require people to buy anything? Or rather, what are you going to do to people who refuse? You can't garnish their wages because they work under the table for cash. Some will claim that they don't have the money. In some cases, you can't even find them.

If you don't have a politically plausible way to enforce "must buy", it won't happen, so there's no point in talking about the good that would happen if it did.

"So as far as efficiency goes, this is not a very useful statistic. In fact, if the total amount spent on enrollees included fraud, the latter would also contribute in making the ratio's denominator larger and the final result even more 'efficient'!"

Yes, that fraud reduces the administrative expense ratio is true, and alas not only in an arithmetic exercise. E.g., as to that other government-run health care program...

"It's like a honey pot," said John M. Meekins, a former senior Medicaid fraud prosecutor in Albany who said he grew increasingly disillusioned before he retired in 2003. "It truly is. That is what they use it for."...

James Mehmet, who retired in 2001 as chief state investigator of Medicaid fraud and abuse in New York City, said he and his colleagues believed that at least 10 percent of state Medicaid dollars were spent on fraudulent claims, while 20 or 30 percent more were siphoned off by what they termed abuse, meaning unnecessary spending that might not be criminal.

"So we're talking about 40 percent of all claims are questionable," Mr. Mehmet said - an amount that would approach $18 billion a year. NY Times

Add that to a 2% administrative cost.

"Admin costs per enrolee would probably be a better measure."

Sure. The NYC Board of Ed used to say it had a 4% "administrative cost". Then its CFO and an outside auditor determined that was the cost of administering a school system in which only 36 cents of every dollar actually reached the schools.

But what can you expect for 4%? ;-)

Yep, mandated health insurance would be much more difficult to enforce that doing so with auto insurance, which , in some states, is quite a problem in itself. I suppose what could be done is to mandate, and fully inform people, that those who obtain medical service without insurance cannot have their medical debts discharged via bankruptcy. No doubt there would be a lot of young people who would still choose to believe that such a risk is worthwhile, but such a regime would likely convince some to insure themselves.

I reject the assertion that adverse selection makes it impossible to buy a good used car. Once a dealer establishes a reputation for selling good ones, he has a marketing advantage over his competition which it would not be profitable to abandon by selling lemons. My son found such a dealer just down the road from us, and shortly after he bought his second car there (the first one cost $300 and went 25,000 more miles with no repairs except a new clutch) I bought one there also. I had no trouble paying over bluebook for it after an inspection even knowing, which I wouldn't had the dealer not told me, that the air conditioning needs service.

Pamlet,

Are you suggesting 40 million people are dying in the streets as we speak?
And if indeed, as you assert, we are a society that doesn't let such people go without insruance, why doesn't that "society" - you and others like you who believe pepople should not go without insurance - pay for it?
I don't ask you to pay my church dues, why don't you settle accounts with your conscience without forcing everyone else to partake?

I have a couple of questions about the study cited here.

I read the study and was surprised by the role of young people age 18-24 in the study. Maybe it is because most older people would have group insurance through their jobs. But, isn't this group of insured people really college students that get their insurance through the school -- so it really is a group policy.

Second, the study is of policies issued. consequently, it is the costs after the companies have used whatever tests they apply to get customers that are unlikely to be in bad health -- ie, adverse selection. So you can not use a study of results after the adverse selection impact is in the results to demonstrate a lack of adverse selection.

The cited study does not justify the claims made about it without several questions about potential baises in the study being answered.

The AHIP number that Tabarrok cites--$2268 for "reasonably generous coverage"--is far too low to be accurate. Compare this number to that reported by Mercer Consulting for the all-in cost of employer-based health insurance: Mercer's 2005 National Survey of Employer-Based Health Plans reports that the average firm spends about $7564 on medical + dental insurance per employee per year.

Some thoughts on why the AHIP number is lower: it could refer to the fact that on average individual insurance has a much higher deductible than most Americans would like to pay for, or individual insurance is significantly more restrictive in terms of the access to care it provides than what we'd expect from an employer-based plan. (Individual insurance, as anybody who's had the misfortune of having to use it will tell you, is very rarely "reasonably generous.")

Secondly, selection bias could be at play in terms of where these numbers are coming from: for example, the only people who can reasonably afford to purchase individual insurance might be otherwise lower-cost healthy people, who would cost, on average, a lot closer to the $2,264 that Tabarrok cites. The chronically ill or those in high risk groups--including groups that we might not otherwise think of as "high risk," such as women in their 20s / 30s (potentially childbearing, and therefore prohibitively expensive for individual insurance coverage)--can effectively be denied access to care from insurers who simply price their policy at a point where these individual can't afford to buy it. (An actual annual premium of closer to $12-$20k would be more appropriate for these groups).

Finally, the range of premiums by state is extremely high--I notice from the table in the AHIP article that the high is New Jersey, with an average annual premium of $6048, and the low is California, with an average annual premium of about $1885. I suspect that what's depressing the premiums in several of the states with lower than average premiums is state government intervention (forcing insurers to cover individuals at cost, forming risk pools for individuals, etc).

1. The "2% administration" cost in Medicare is bogus because it does not include the administrative costs of obtaining Medicare tax dollars (done by another fed agency), HIPAA compliance, industry costs associated with complying with Medicare rules and regs (borne by hospitals and clinics), and ignores huge amounts of paperwork done by practitioners submitting and appealing bills.

2. The problem with national health care is primarily one of choice. With Medicare, the options are decided not by the patient but by the government. And there's no way around that. Egalitarianism delimits choice, and enforces federal options by coercion. Moreover it becomes subject to the same political forces dominating foriegn policy and other domestic spending.

This is "fair" in the same way that school cafeteria food is fair: mediocre and bland, and everyone hates it equally.

Jim Glass rocks. Does he have a website?

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