Replying to Thoma on Health Care By Arnold Kling

Mark Thoma writes,

when I think about moving P to G, I also think about moving the revenue stream with it (e.g. individuals would pay monthly premiums in taxes rather than to the insurance company). Thus, if we move all of P to G, we also move all of the revenue with it. Therefore I don’t see why the budget problem has to get worse

So, as a first approximation, it’s just a reshuffling. Instead of paying a tax to health insurance companies, workers pay a tax to the government. Their take-home pay is the same, and the government deficit is the same. OK.

He goes on,

Why do costs per unit fall? Because of all the administrative savings, savings from buying drugs in bulk, and the ability to manage care (e.g. preventative measures, solving information problems that cause wasteful expenditures by doctors and consumers).

Put a number on the savings from “buying drugs in bulk.” Considering that drug company profits are rounding error in the overall health budget, and assuming that you can’t force profits to be negative, it’s pretty demagogic to suggest that you are going to salvage the health care budget that way.

The other savings are all hypothetical. Suppose we were to abolish private health insurance tomorrow and put everybody on Medicare. Here are the things that would happen.

1. You could get rid of everybody in the private health insurance industry. That would save at most 15 percent of health care spending.

2. There would no longer be a private-sector benchmark for Medicare to use in pricing. You would need to hire a lot of those former private health insurance folks to work for Medicare to figure out what every medical service is worth, to negotiate prices with doctors, hospitals, and so on.

3. Medicare would have to process more claims, which means you would have to hire back some more of those former insurance workers.

After (1)-(3), costs might be less than the existing system. By a small amount. For a short time. But innovation in health care management and administration would slow to a crawl. Health care providers would need permission from Washington to try anything new. In the long run, administrative costs will be higher than they would have been under private health insurance.

In the short run, getting rid of competition and installing a monopoly lowers overhead. In the long run, it’s not so brilliant.

In any event, the cause of rising health care spending is not administrative costs. It is the increasing use of medical procedures, including procedures with high costs and low benefits. In that regard, Medicare as it exists today works no better than private health insurance.

What Thoma wants me to believe is that as soon as we get rid of that pesky private health insurance, Medicare will become expert at weeding out cost-ineffective procedures and paying for cost-effective care. That would be wonderful, but I’m from Missouri. Show me that Medicare can do that for its existing customer base before you go out and shut down private health care. I am reluctant to start toting up lots of savings that could occur in theory when we do not see those savings in practice.