The Agenda

NRO’s domestic-policy blog, by Reihan Salam.

Peter Suderman and Yuval Levin’s Replies to Paul Krugman on Health Care Cost Containment


Peter Suderman of Reason argues that Paul Krugman’s claim that all evidence suggests that centralized public health systems “are better than the private sector at controlling costs” is unwarranted. Among other things, Krugman references the fact that Medicare and Medicaid have “less bureaucracy” than private insurers. One way to translate this claim — how do we measure the amount of bureaucracy? — is to compare administrative costs. Suderman writes:

What about bureaucracy? A study by consultants at Milliman for the Council on Affordable Health Insurance, an industry group, looked at all the ways that Medicare hides its administrative costs, for example by shifting many expenses to other parts of the federal budget. The study found that private insurance administrative costs are actually a lot more competitive than is commonly thought. And taken on a strict per-person basis, rather than as a percentage of the total budget, Medicare’s administrative costs are actually higher than private sector counterparts. No matter what, it’s hard to respect the efficiency and effectiveness of a set of programs — Medicare and Medicaid — that the government’s own watchdogs say blow about $65 billion every year on improper payments, everything from mistaken billing to outright fraud. That’s $65 billion in taxpayer money that these programs are paying out that they shouldn’t.

Programs, public or private, presumably spend on administration for the express purpose of reducing improper payments. So it seems at least coherent to factor in the cost of improper payments into overall administrative costs and then comparing the total. 

To put the $65 billion in perspective, per the Health Affairs article Suderman cites, the Medicare program spent $565 billion on behalf of 48.7 billion beneficiaries and federal and state governments spent $428 billion on the Medicaid program. And when we add in improper payments made by state governments, the $65 billion federal total climbs by $10 billion. Improper payments represent roughly 7.55% of total expenditures.

One assumes that private insurers also make improper payments, but we’d presumably want to know if higher administrative costs are “buying” less waste. By way of example, if my administrative costs are (notionally) 2% but I am wasting 8% on improper payments, I’d actually come out ahead if I increased my administrative costs to 7% while wasting only 2% on improper payments.

There are a number of other questionable claims in Krugman’s column, e.g., his failure to acknowledge that competitive bidding is designed to guarantee access to today’s standard Medicare benefit at no additional cost to beneficiaries who choose one of the two most efficient providers in any given region. Yuval Levin has much more at The Corner. 


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