Little Guy Left in the Lurch

The Washington Post
April 23, 2001
by Robert B. Reich, Professor of Social and Economic Policy at Brandeis University

"A few years ago Democrats championed such things as universal health care. Now that there's money to pay for it, they're rooting for the smaller of two tax cuts instead."

"Given what's happened to the incomes of working families relative to the incomes of the people at the top, a cut that mostly benefits the people who enjoyed most of the gains of the past decade is morally repugnant. So how can Democrats support a $1.2 trillion tax cut, with almost no room for expanded health care? Why aren't they putting universal health care on the table instead?"

"To be sure, lowering the debt reduces federal borrowing costs, but so what? As John Maynard Keynes pointed out 60 years ago, public indebtedness per se isn't a problem. The underlying question is what that debt is used for. If the benefits to the public exceed the costs of borrowing from the public, it would be silly not to borrow. And with health care costs soaring and coverage declining, the benefits of universal health care are high indeed."

Jeoffry Gordon's response to Sam Baker and Uwe Reinhardt:

I read Sam Baker's comments about the contemporary USA health system's administrative cost structure with great interest, but the situation is far far worse than he imagines. Under old fee-for-service medicine the insurance company's overhead was occasionally an efficient 10% (medical loss ratio of 90%). However, under HMO medicine, at least here in California by actual survey of the California Medical Association, the INSURANCE COMPANY'S overhead is 14 to 25%. Then we must add the overhead of the local IPA or PHO (contracting with the insurance company to provide and manage the care) which easily runs 8 (unbelievably low) to 30% (I ought to know having run one for 5 years). Then we must add an incremental 5% in each DOCTOR's office for a 1/2 to full time staff person to deal with HMO paperwork and prior authorizations (I ought to know I do it every day). Thus the true administrative cost of the HMO system in California runs 27 to 60%(!) and is in fact probably about 40%. This is no kidding - only 40 to 60 cents of the premium dollar goes to medical services and their "ordinarily associated" administrative costs.

In my opinion Professor Reinhardt's economic calculus is perfectly precise and revealing of the economic biases of contemporary economics which have distorted everything to find ways to justify the free market, competitive approach to health care. What is most sad about this situation is the fact that when I studied health economics 30 years ago (in its infancy) Nobel Prize winning economist Kenneth Arrow had already published an analysis of why the health care system could not function efficiently in an economic sense in the competitive market place. For instance health care is a "public good"; a sick patient cannot comparison shop; the doctor orders the services not the patient; the pervasive insurance system distorts the market; certain aspects of health care consumption are totally inelastic (not price sensitive); etc. All of these insights have been selectively forgotten by all the pontificating academic economists --- and several generations of national leadership as well.

Jeoffry B. Gordon, MD, MPH
1947 Cable Street
San Diego, CA 92107