Healthcare and Heritage


There was a recent free-for-all over which is cheaper to administer, public or private health plans. It started with a Heritage Foundation paper by Robert Book, to which Paul Krugman responded with some facts and an attack.  Book then retaliated with a defense and an attack of his own.  I’ve read the orginal paper as well as the responses, and I think it boils down to this:

  • Book believes that it is better to measure per patient administrative costs, rather than per service administrative costs per healthcare.  Let’s take two patients, Harry Healthy and Betsy Deathwatch.  Ol’ Harry is doing pretty well and goes in for some routine visits and maybe a couple of tests.  Let’s say he generates 5 separate billings and $100 in administration costs to pay the providers $1000.  Betsy on the other hand, is grossly obese, has Type 2 diabetes and has bad knees, a bad heart and failing kidneys.  She generates 100 separate billings per year (not at all unlikely – I went in for a kidney stone procedure in the early nineties and there were well over ten billings for that one procedure, hospital, nurse-anesthetist, technicians, X-Ray, Lithotripsy machine provider, and I can’t remember who else).  Let’s say there are $500  in administrative costs for Betsy, in order to pay $50,000 worth of bills.  In Robert Book’s analysis, Healthy Harry’s $100 (10% of total billings) administrative fee should be considered to be much more efficient than Betsy’s $500 (1% of total billings).
  • His key analogy in all this is the credit card.  It doesn’t cost any more to administer $1000 worth of charges than it does for $50,000, and he thinks we should consider health care along the same model.  This is a strong claim.  After all, the vast majority of credit card claims are completely handled by computer.  There is no intervention by a human being whatsoever.  But as anyone who has ever dealt with the health care system knows there are certainly salaries being paid to deal with claims.  Now,  Harry’s routine doctor visit might go off without a hitch (“might” being overly generous here) and get processed with minimal intervention, but a truly sick individual inevitably ends up with hours and hours and hours of phone calls, faxes, arguments between the insurance company and the doctors, billing mistakes, corrections, climbs up the ladder for permissions, revocation of permission, disagreement about what was agreed to.  It is, simply put, an incredible nightmare for all involved.  Not to mention the behind the scenes effort on the part of the insurer to revoke coverage.  So if Book is going to claim that all of these extra costs aren’t significant, he needs to marshal some pretty strong evidence.  I didn’t see it in his paper.
  • Krugman responded with the attack, but then offers what he feels is an apples to apples comparison.  It turns out that Medicare and Medicare Plus have the same pool of insured, but one (Medicare) is public, while the other is private.  and when measured in percentage terms, Medicare Plus is many times more expensive to administer.  Ergo, private is much more expensive than public.
  • Book then attempts to refute this and offers some reasons why this discrepancy may be mitigated by circumstances.  However, there are no numbers tied to his refutations and it is not clear to me that they should be considered persuasive.  Perhaps they could reduce the gap by a quarter or even half, or maybe completely, or maybe not at all. Without numbers they are just speculation.

As for the attack:  Krugman said that anything coming out of the Heritage Foundation is suspect, that it is just an industry mouthpiece rather than a real think tank. All I can say is I’ve never been surprised by anything, and I mean anything, that ever came out of the Heritage Foundation.  It always seems to match industry talking points.  So I think what Krugman said can be considered sound advice, rather than as an attack.  Others may see it differently.

Finally, it truly is difficult to measure the administrative costs associated with health care.  But although Book volunteered an number of mitigations in one direction, he neglected other, perhaps much more significant ones in the other direction.  One that immediately comes to mind is the adminsitrative costs in the providers office.  He only counts time and expense in administering on the insurer’s part.  He doesn’t make any attempt to include the two, three, four or more people employed by every doctors office, or the time spent by the doctors arguing with providers,  etc.


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