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Posted on October 30, 2007

Zycher's dishonest report on administrative costs

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Medicare for All?

Editorial
The Wall Street Journal
October 29, 2007

The frequent claim is that eliminating profits and private administrative expenses would more than pay for the cost of covering all the uninsured.

Well — no, as demonstrated in a new study by Benjamin Zycher, a senior fellow at the Manhattan Institute and a former senior economist for the Reagan Council of Economic Advisers. He estimates that the real economic costs of moving to single payer would be at least twice those of today’s semimarket patchwork.

“Administrative” costs, generally speaking, are those not directly funding medical care but instead spent to deliver insurance benefits. Sure enough, on paper Medicare’s are about 3% of outlays, compared to 11% to 14% for the private system. But Mr. Zycher notes that a more accurate measure of Medicare’s administration would include other indirect federal services, such as tax collection, which round them up by about double. Fold in the incentives for the uninsured to consume more medical services under single-payer than they do now, and those “savings” are revealed as make-believe.

Mr. Zycher also points out that the adverse effects of the increased taxation required for “Medicare for all” more than outweigh the potential efficiencies. It costs the economy more than a dollar — the bottom-rung estimate is 20% — to send a dollar to Washington, so in the end Medicare clocks in substantially above private insurance.

The analysis also offers some reality about what those supposedly wasteful private administrative expenses actually do. Underwriting — i.e., the pricing of premiums in accordance with risks and health status — is often assailed by politicians, but the administrative scrutiny leads to an efficiency. It allocates costs in proportion to benefits: You get, in other words, what you pay for.

http://online.wsj.com/article/SB119362351042074490.html

And…

Comparing Public and Private Health Insurance: Would A Single-Payer System Save Enough to Cover the Uninsured?

By Benjamin Zycher
Manhattan Institute for Policy Research
October 2007

The public discussion of prospective reform of the U.S. health-care system has focused in substantial part on the question of how to extend insurance coverage to those now uninsured, and on how to deal with the attendant increased costs for the system as a whole. Some argue that a single-payer system similar to Medicare would realize savings in administrative costs sufficient to extend insurance coverage to all of the uninsured. The central objective of this study is a comparison of the administrative and other important non-benefit costs of private health-insurance plans with those of Medicare, which is used as a prototype for a large single-payer (that is, government-financed) insurance system.

The lowest plausible assumption about the excess burden engendered by the federal tax system—20 percent—raises the true cost of delivering Medicare benefits to about 24-25 percent of Medicare outlays, or about double the net cost of private health insurance. A more realistic assumption — say, 50 percent — raises the true cost of delivering Medicare benefits to about 52 percent of Medicare outlays, or between four and five times the net cost of private health insurance.

http://www.manhattan-institute.org/html/mpr_05.htm

Comment:

By Don McCanne, MD

Normally we wouldn’t respond to a dishonest study like this since it would give it further unwarranted exposure and provide it with a limited degree of credibility merely because we thought it was worth our time to comment on it. Unfortunately, The Wall Street Journal has granted it their editorial stamp-of-approval, and the conservative and libertarian non-think tanks are gearing up to be certain that the conclusions in Zycher’s report are widely distributed. We will be hearing more about this, and we should be prepared to respond.

Although this study is presented under the guise of comparing administrative costs between Medicare and the private insurance plans, it is important to note that Zycher states that “a term perhaps more useful than ‘administrative’ costs might be ‘non-benefit’ costs.” Thus, primarily for the Medicare model, he includes much more than administrative costs.

Let’s look at how he adjusts the explicit administrative costs of Medicare. As an example, look at how he measures the amount of administration of justice in the Medicare program. He notes that Medicare spending ($356 billion for 2005) is 17.1 percent of federal non-defense spending ($2081 billion). Thus, he concludes, because of the costs of investigating Medicare fraud, Medicare consumes a prorated 17.1 percent of the government costs of the administration of justice. The dollar amount involved in this calculation alone increases the administrative costs of Medicare from 3.1 percent to 5.1 percent. Considering Dr. Zycher’s training as an economist, stating that Medicare consumes 17.1 percent of the government’s administrative costs for justice is not simply a distortion of the facts; it is a blatant lie.

The most egregious fraud in Zycher’s analysis is the cost of Medicare that “appears nowhere in government budgets,” and that is “the real economic cost of the distortions created by the tax system.”

Zycher quotes Martin Feldstein as his authority, to wit, “The traditional method of analyzing the distorting effects of the income tax greatly underestimates its total deadweight loss as well as the incremental deadweight loss of an increase in income tax rates. … The true deadweight losses are substantially greater than [prior] conventional estimates because the traditional framework ignores the effect of higher income tax rates on tax avoidance through changes in the form of compensation… and through changes in the patterns of consumption…”

This concept ignores completely the fact that government services are an integral part of our total economy, and the (greatly exaggerated) deadweight losses from taxing the private sector are more than recovered through the higher value of services provided in the public sector (certainly a pompous statement, but no more so than Feldstein’s).

It is primarily this “economic cost of the distortions created by the tax system” that leads Zycher to his conclusion that “a more realistic assumption — say, 50 percent — raises the true cost of delivering Medicare benefits to about 52 percent of Medicare outlays, or between four and five times the net cost of private health insurance.”

Another outrageous concept in Zycher’s study is his description of how the administrative services of the private insurance industry provide market “efficiency.” He indicates that cross subsidies in insurance are anti-competitive because insurers would have to charge those with fewer health care needs higher premiums than are warranted based on their use of services. The purchasers of insurance are receiving benefit from the administrative services such as medical underwriting that are used to prevent cross subsidies from the healthy sector to the sick sector. As he states, “the administrative costs borne by insurers seeking to align premiums with costs are efficient, in the sense that they provide a somewhat subtle service valued by consumers: avoidance of premiums that subsidize others.”

Imagine the possibilities of using innovative economic theory to analyze the real costs of the private insurance industry. As did Zycher, we’ll use both the administrative costs and the “non-benefit” costs.

What is the dollar value of a human body and soul? That is almost impossible to quantify, but we can get a relative estimate based on our recent tragic fires here in Southern California. Victim after victim, many of whom lost million-dollar homes and all their possessions, stated they were so fortunate to escape with their lives and their health, and all the rest of it was just “things.” A million dollar home is nothing compared to your family.

So what is the body and soul component of health care worth? It is a value that would appear nowhere in a budget. But what would that component be in an $80 office visit? Considering quality of life gained through medical care and other factors such as being able to return to work earlier, it would not be unreasonable to place that value at around $800. Or what about a $20,000 hospitalization? A marked improvement in quality of life and perhaps even prevention of premature death could easily have a value of around $200,000. The victims of the fire might suggest that even a million dollars wouldn’t cover it, but it seems fair to say, by this reasoning, that the value of medical care ministered to the body and soul can be estimated to be about ten times the cost of that care.

So how might this apply to the “non-benefit” costs of the private insurance industry? Although they insure about two-thirds of us, they pay only about one-fourth of our health care costs. Thus the private sector insurance industry has used the power of the market successfully to avoid paying for about three-fourths of our $2.2 trillion health care expenditures, shifting about $1.7 trillion to us as individuals and as taxpayers. The “non-benefit” cost to us of the care they have avoided covering is about $17 trillion! That is more than our $13 trillion GDP!

Enough of these silly games! What we need to carry on the health reform debate are the true facts and legitimate analyses of the policy implications. What we don’t need is to read more dishonest reports while the ideologues opposed to health care justice snicker in the background.