Robert F. Graboyes

Robert F. Graboyes

Robert F. Graboyes is the senior health care adviser at the National Federation of Independent Business (NFIB) in Washington, D.C.

Umpire or Play Ball, Not Both

With multiple public option proposals under discussion, I'll focus on the original: a government-run plan, competing with private insurers, whose existence is guaranteed by law and taxpayers. Such a plan would likely accelerate, not decelerate, the rise in costs.

If the public plan could compete on a level playing field with private insurers, it's hard to say how it would keep anyone honest. But a level playing field is unlikely. The Lewin Group predicted a public plan would rapidly and massively erode the private insurance market. An alternative possibility is that the public plan churns through money but ultimately fails; Maine's Dirigo, Tennessee's TennCare and Hawaii's Keiki Care are instructive cases.

Administrative efficiency? Our biggest public plan is Medicare and its costs are high. Claims that Medicare spends less than private insurers on administrative costs are based on a misreading of data (good explanation here). Plus, "administrative costs" doesn't even capture fraudulent claims, which some estimates place as high as 12 percent of Medicare's total expenditures. Google "Medicare" and "fraud" and you get 1.4 million hits.

Payments to providers? As I told a reader a few weeks ago: In 1965, President Johnson predicted Medicare would cost $500 million per year ($3.5 billion in 2009 dollars) and he considered that amount "a train wreck." This year, Medicare will actually spend over $500 billion -- 143 times larger than LBJ's prediction. (It'll double again in around 10 years.) Medicare's $30 to $60 trillion long-term funding gap is on course to consume the entire federal budget by mid-century. Medicare's rigid, wasteful, antiquated reimbursement structure rewards doctors for poking, prodding, cutting and slicing, but not for getting patients healthy or keeping them that way.

Back to basics: I work on behalf of small businesses and they need rising costs to decelerate. That means making the private insurance market more competitive and empowering consumers and providers to find ways to restrain costs. Asking the government to be both umpire and player is no way to get that job done.

By Robert F. Graboyes  |  August 7, 2009; 11:10 AM ET  | Category:  Health costs , Public option Save & Share:  Send E-mail   Facebook   Twitter   Digg   Yahoo Buzz   StumbleUpon   Technorati  
Previous: Haven't We Learned Our Lesson? | Next: Public Plan? Surprise - We've Already Got One.


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It appears that there is not enough interest in this blog to warrant my writing a long analysis of Dr. Book’s article for the Heritage Foundation so I will end with just a few remarks.

1. I still believe that “administrative cost per person” is the wrong statistic to compare two populations one of which has a lot more medical transactions than the other.
2. I think the term “administrative costs” is the wrong one to look at since each person seems to have a different definition of the term. I think it is more instructive to look at “Medical Loss Ratio” or “overhead” (= 1- MLR) which has the clear definition MLR = medical benefits paid/inflow (premiums or taxes).
3. There is a clear difference between the opposing groups. You can see both sides at which is Paul Krugmen’s blog that contains under the comments a long rebuttal by Dr Book.
4. After reading all this I think the problem of comparing Medicare and private insurance is made extremely difficult by the large difference in the populations. I think there is much less difference between the entire population of the US and the entire populations of other wealthy countries. I know that the conservatives try to make much of the differences such as homogeneity, obesity, etc., but upon close examination these do not hold up. For example, we are not significantly more diverse than we were in 1950 while many other countries are now more diverse than they were then, but in 1950 we lead the world in life expectancy and were near the top in other public health statistics. Since then we moved to mostly for profit insurance while the rest of the industrialized turned to government run systems mostly single payer, and now (as a result?) we are near or at the bottom in these parameters. Also the Aussies are roughly comparable in obesity, drinking and smoking. (sorry I’m getting off topic here.)
5. The point here that when you compare our system to the others countries, they get better outcomes and they pay less than half as much per person as we do. There are the myths of waiting times and rationing (I can talk more about this if any wants), and one can pick nits about some of the statistics, but there 16 basic public health statistics and there are 10 or 20 countries, so I think Friar Occum would tell us that we have to conclude that for profit health insurance just doesn’t work. As Ezra Klein said recently when asked for a rebuttal to the argument that competition and the free market are the best for health insurance, “Just look around.”

Posted by: lensch | August 9, 2009 9:33 AM
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While I work on the heritage Report, here are two quotes you can chew. The first from Uwe Reinhardt:

"If "economic sustainability," then exactly what do people have in mind with that phrase? During the past 4 decades or so, the long-run, smoothed average annual growth rate in real (inflation-adjusted) GDP per capita has been about 2%. Suppose that fell to only 1.5% for the next four decades. The current average real GDP per capita of about $40,000 would then grow to about $72,500 by 2050 in constant-dollar terms. Medicare now absorbs about 3% of GDP, leaving a non-Medicare real per capita GDP of $38,800. It was estimated by the CBO about a year ago that Medicare will absorb about 9% of GDP by 2050. Let’s make that 10%. At these numbers, the non-Medicare real GDP per capita available to today’s little critters who will run America in 2050 will still be close to 70% larger than is our current non-Medicare GDP per capita."


The second is from a Post chat of Ezra Kein:

"Grand Junction, Colo.: Ezra - What's a succint counter to people who continuously assert "the market will solve all" and the like, in reference to health care reform or any other ail of the day? It's mind numbing and I want friends with this "view" to think about what they're saying.
Ezra Klein: Look around.

The thing about the market is that it doesn't solve problems. It works towards efficiencies. The market's solution to the problem of "a lot of people can't afford health-care coverage" is that "a lot of people can't afford health-care coverage." That's what the market does: Given scarce resources, it apportions them according to the capacity to pay. A lot of people can't afford a Lexus. Thus, a lot of people don't have a Lexus. That's not a market failure. It's the market's solution.

The market isn't failing to solve the problem here. It's just that we don't want the market's solution. We want people to have health care. So we need to go beyond the market. It's the same as fire departments or national defense or roads. There are things we want people to have even if they can't pay for it."

Posted by: lensch | August 8, 2009 11:10 AM
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Wow, I read the Heritage Foundation report you referenced. They are famous for mathematical and logic goofs and this continues the tradition.

It's a long report, so it will take me some time to go through it. Let me just cover one important point here. It has been well established that the administrative costs of Medicare and government run systems in other countries are much lower than those of the for profit US insurance companies. Recently the current Nobel Prize winner in economics, Paul Krugman referred to this fact. (I am amused that the Heritage report refers to him as a "NY Times columnist".)

The report attempts to discredit this finding. It's main argument says that since the average Medicare beneficiary has more treatments than the average enrollee in private insurance, the administrative costs are spread out across a larger base, so, so of course, it appears to be lower. The Heritage report says one should look at administrative costs per person.

But clearly administrative costs are incurred per _transaction_, and more complicated transactions incur more administrative costs than simpler ones. It is irrelevant how many people are involved in the transaction. The way Krugman et al compute these costs effectively do this by simply looking at the amount paid out in medical benefits divided by the total inflow (premiums or taxes). These figures are well known.

As I have explained elsewhere where in this blog because private insurers realize their stock price depends on keeping the percentage of premiums paid to medical benefit (MLR) low, they are willing to spend a lot of money on non-medical costs to keep their medical benefits low. An example they will burden physicians with numerous complicated forms even though it costs them a lot to process them because the money spent processing them is not a medical benefit, so it goes to _lower_ their Medical Loss Ratio. This is an example of a perverse incentive at its worst.

Posted by: lensch | August 8, 2009 8:38 AM
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