Would a system of national health insurance reduce the administrative costs of the U.S. health care system?

That's a central question in the ongoing debate over what to do about burgeoning health care costs in America. Proponents of Canadian-style national health insurance cite studies claiming to show that the administrative costs of the Canadian "free and universal" system are well below those here. The facts, however, do not warrant such a rush to judgment.

Government accounting techniques invariably underestimate the real cost of government provision of goods and services by leaving out such major items as public employee pension benefits. A more fundamental problem is that the studies which claim Canada's system is run more cheaply look at only 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 lengthy waiting lists and the waste of resources caused by perverse incentives are real costs of administering the Canadian system. One simply cannot legitimately calculate administrative savings in the system without including the adverse effects on patients.

Nonetheless, 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 pre-tax amounts on third-party health insurance. At the same time, any funds employees set aside as self-insurance for small medical bills face a 15 or 28 percent income tax, a 15.3 percent FICA tax and, usually, a 4, 5, or 6 percent state and local income tax.

Largely as a result of federal tax policies, most employees are using third parties to pay for routine checkups, diagnostic tests and other small medical bills. That encourages people to be wasteful consumers in the medical marketplace as it adds to administrative costs. A $50 physician's fee can easily become $100 in total costs when third-party payment is involved--effectively doubling the cost of health care.

A different approach is used in the Asian nation of Singapore, where people are required to deposit 6 percent of their salaries each year in personal "Medisave" savings accounts. When Singapore residents are hospitalized, they pay most or all of the bills from their Medisave funds and avoid many of the administrative burdens of health insurance.

A new Mackinac Center study due out in July maintains that if the U.S. government gave as much tax incentive to self-insurance through Medisave-like accounts as it now gives to third-party insurance, the administrative costs of U.S. health care could be cut in half. Patients might even pay for such items as physician visits by routinely using health care debit cards that draw upon their Medisave accounts, just as they now pay for merchandise at retail stores. That would accomplish the good that the Singapore system does, but via incentives instead of compulsion.

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.

Furthermore, the existence of personal Medisave accounts would allow for much higher deductibles on catastrophic health insurance, a sure-fire way to bring down the premiums on any kind of insurance. The Mackinac Center study estimates the resulting savings would be in the billions of dollars.

Advocates of the Canadian system of national health insurance cite two principal benefits: 1) patients entering the health care system need produce only a card 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 U.S. can enjoy these advantages too, and without the disadvantages of Canada's socialized arrangement.

Health and Human Services Secretary Louis Sullivan was right on the mark when he said that if the government comes to dominate health care via national health insurance or some other scheme, the end result would be a system combining "the efficiency of the post office with the compassion of the I.R.S." Let's not allow the red herring of administrative costs to blind us to either that fact, or to very promising alternatives like the Medisave idea.