Myth #9

National Health Insurance Would Reduce The Administrative Costs Of The U.S. Health Care System.

Table 9

The administrative costs of any production system can be reduced by firing all of the administrators and abolishing all reporting requirements. But most systems would perform far less efficiently as a result. The real goal is not to get administrative costs as low as possible, but to make the system as a whole perform as efficiently as possible.

A similar observation holds for marketing and other costs of competition. Money could be saved by, for example, abolishing all car dealerships and all advertising by auto producers. Money could also be saved by producing a single model car and eliminating competition among different models and different producers. We could simply pay taxes and have government provide us with a new automobile every few years. But the end result would be decreased efficiency and less consumer satisfaction, however. If socialism worked, the economies of communist countries would not have collapsed.

Table 10

A number of studies have claimed to show that the administrative costs of the Canadian system are well below those in the United States. [93] One problem with these studies is that government accounting techniques invariably underestimate the real cost of government provision of goods and services. [94] A more basic problem is that the studies look only at one aspect of administration (e.g., administrative salaries, costs of paperwork, etc.) while ignoring the effects of administration (e.g., how efficiently the health care system meets consumer needs).

The costs of rationing by waiting and the waste of resources caused by perverse incentives are costs of administering the Canadian system. One cannot legitimately calculate administrative savings in the system without including the adverse effects on patients.

Moreover, many administrative costs in the U.S. system exist not merely to oversee the exchange of money between suppliers and third-party payers. but also to prevent inappropriate care and maintain quality. Even if the United States adopted a program of national health insurance, it is unlikely that we would follow the Canadian practice of giving hospitals global budgets and forcing physicians to ration care with few questions asked.

How the U.S. Tax System Encourages High Administrative Costs.

The administrative costs and paperwork burdens of our system are much too high. That is a consequence not of private provision of health care but of federal policy. Under our tax system, employees (through their employers) can spend unlimited amounts on third-party health insurance. At the same time, any funds employees set aside as self­insurance for small medical bills face a 15, 28, or 33 percent income tax, a 15.3 percent FICA tax and, usually, a 4, 5, or 6 percent state and local income tax. [95]

As a result of federal tax policies, most employees are overinsured – using third parties to pay for routine checkups, diagnostic tests and other small medical bills. Not only does too much insurance encourage people to be wasteful consumers in the medical marketplace, it also adds to administrative costs:

  • Studies show that physicians spend about $8 to process a single insurance claim. [96]

  • Most third-party payers spend another $8 for every check they write, and if the insurer makes an additional effort to verify the claim, the costs can be much higher.

  • Thus, a $25 physician's fee can easily become $50 of total costs when third-party payment is involved – effectively doubling the cost of health care.

Reducing Administrative Costs With Medical Savings Accounts.

A different approach is used in Singapore, where people are required to deposit 6 percent of their salaries each year in personal medical savings accounts, called Medisave accounts. When Singapore residents are hospitalized. they pay the bills from their Medisave funds and avoid many of the administrative burdens of health insurance. [97]

If the U.S. government gave as much tax encouragement to self-insurance through Medisave accounts as it now gives to third-party insurance for the employers and employees of large companies, the administrative costs of U.S. health care could be cut in half.

  • Whereas the administrative costs of private health insurance average about 11 to 12 percent of premiums, payment of medical bills with Medisave funds could be accomplished by use of health care debit cards – with administrative costs between 1 and 2 percent.

  • There is no economic reason why we could not move to a system in which most medical bills are paid by patients with health care debit cards, relying on third-party insurance to pay only catastrophic expenses. [98]

Health Care Debit Cards.

A general system of Medisave accounts would lead naturally to the use of health care debit cards. Patients could, for example, pay for physician visits by using their cards just as people now pay for merchandise at retail stores. Several health care debit card companies already exist, including Pulse Card, headquartered in Kansas City. Kansas, and Security Plus, headquartered in Newport Beach, California. [99]

Health care debit cards could be combined with another technological innovation to reduce other costs and improve the quality of care. Several companies are experimenting with technology that would put a patient's entire medical record on a credit card. [100] This would allow physicians immediate access to each patient's complete medical history. Putting medical records on a credit card could be costly. But it might be less costly than the current system under which physicians treat patients about one-third of the time without access to their records. [101]

The Benefits of the Canadian System Without the Costs.

Advocates of the Canadian system of national health insurance cite two principal benefits: 1) patients entering the health care system need produce only a national health insurance card in order to receive care, and 2) the administrative costs of the system are lower because the paperwork is reduced and other costs – such as marketing – are eliminated. Fortunately, the United States can enjoy these advantages without the disadvantages of the Canadian system.

Table IX shows three estimates of how much U.S. administrative costs could be reduced by adopting the Canadian system. The estimates range from a Lewin/ICF estimate of $34 billion to a General Accounting Office (GAO) estimate of $67 billion. As noted above, we believe these estimates are too high.[102] But they may serve as an indicator of potential administrative savings – to the degree medical bills are paid with health care debit cards.

Table IX also shows the additional cost in the United States of making health care absolutely free at the point of consumption as it is in Canada. The estimates are based on the GAO's interpretation of a Rand Corporation study, which found that making medical care free greatly increases the amount consumed – even though the additional consumption has little impact on the patients' health. As the table shows, the additional cost of making health care free for everyone more than offsets even the most optimistic estimate of administrative savings.

We used the GAO method to estimate the potential reduction in administrative costs under a system of Medisave accounts and health care debit cards, and the Rand Corporation's method to estimate the likely reduction in health care spending if people had high-deductible health insurance. Table X shows the probable effects of a generalized system under which everyone (including Medicaid and Medicare patients) has third-party catastrophic insurance and uses health care debit cards to draw on individual Medisave accounts for small medical bills. As the table shows:

  • The widespread use of Medisave accounts would reduce administrative costs by as much as $33 billion.

  • Because high deductibles would make patients more prudent purchasers of health care, total spending would go down by as much as $147 billion.

  • Overall, universal catastrophic health insurance combined with Medisave accounts would reduce total spending by $168 billion – almost one-fourth of what the United States currently spends on health care.