September 21, 2011 8:40AM

Private Insurance Is More Efficient than Medicare – By Far

Diane Archer has a post at the Health Affairs blog arguing that Medicare is more efficient than private insurance.  One can only reach such a conclusion through such sleights of hand as conflating spending with cost, and by ignoring most of Medicare's administrative costs.

As a pre-buttal, I offer this excerpt from a paper I wrote about a "public option" (emphases generally added and citations omitted):

Is Government More Efficient?

Supporters of a new government program note that private insurers spend resources on a wide range of administrative costs that government programs do not. These include marketing, underwriting, reviewing claims for legitimacy, and profits. The fact that government avoids these expenditures, however, does not necessarily make it more efficient. Many of the administrative activities that private insurers undertake serve to increase the insurers’ efficiency. Avoiding those activities would therefore make a health plan less efficient. Existing government health programs also incur administrative costs that are purely wasteful. In the final analysis, private insurance is more efficient than government insurance.

Administrative Costs

Time magazine’s Joe Klein argues that “the profits made by insurance companies are a good part of what makes health care so expensive in the U.S.and that a public option is needed to keep the insurers honest.” All else being equal, the fact that a government program would not need to turn a profit suggests that it might enjoy a price advantage over for-profit insurers. If so, that price advantage would be slight. According to the Congressional Budget Office, profits account for less than 3 percent of private health insurance premiums. Furthermore, government’s lack of a profit motive may not be an advantage at all. Profits are an important market signal that increase efficiency by encouraging producers to find lower-cost ways of meeting consumers’ needs. The lack of a profit motive could lead a government program to be less efficient than private insurance, not more.

Moreover, all else is not equal. Government programs typically keep administrative expenditures low by avoiding activities like utilization or claims review. Yet avoiding those activities increases overall costs. The CBO writes, “The traditional fee-for-service Medicare program does relatively little to manage benefits, which tends to reduce its administrative costs but may raise its overall spending relative to a more tightly managed approach.”7 Similarly, the Medicare Payment Advisory Commission writes:

[The Centers for Medicare & Medicaid Services] estimates that about $9.8 billion in erroneous payments were made in the fee-for-service program in 2007, a figure more than double what CMS spent for claims processing and review activities. In Medicare Advantage, CMS estimates that erroneous payments equaled $6.8 billion in 2006, or approximately 10.6 percent of payments. . . . The significant size of Medicare’s erroneous payments suggests that the program’s low administrative costs may come at a price.

CMS further estimates that it made $10.4 billion in improper payments in the fee-for-service Medicare program in 2008.

Medicare keeps its measured administrative-cost ratio relatively low by avoiding important administrative activities (which shrinks the numerator) and tolerating vast amounts of wasteful and fraudulent claims (which inflates the denominator). That is a vice, yet advocates of a new government program praise it as a virtue.

Medicare also keeps its administrative expenditures down by conducting almost no quality-improvement activities. Journalist Shannon Brownlee and Obama adviser Ezekiel Emanuel write:

[S]ome administrative costs are not only necessary but beneficial. Following heart-attack or cancer patients to see which interventions work best is an administrative cost, but it’s also invaluable if you want to improve care. Tracking the rate of heart attacks from drugs such as Avandia is key to ensuring safe pharmaceuticals.

According to the CBO, private insurers spend nearly 1 percent of premiums on “medical management.” The fact that Medicare keeps administrative expenditures low by avoiding such quality-improvement activities may likewise result in higher overall costs—in this case by suppressing the quality of care.

Supporters who praise Medicare’s apparently low administrative costs often fail to note that some of those costs are hidden costs that are borne by other federal agencies, and thus fail to appear in the standard 3-percent estimate. These include “parts of salaries for legislators, staff and others working on Medicare, building costs, marketing costs, collection of premiums and taxes, accounting including auditing and fraud issues, etc.”

Also, Medicare’s administrative costs should be understood to include the deadweight loss from the taxes that fund the program. Economists estimate that it can easily cost society $1.30 to raise just $1 in tax revenue, and it may sometimes cost as much as $2.36 That “excess burden” of taxation is a very real cost of administering (i.e., collecting the taxes for) compulsory health insurance programs like Medicare, even though it appears in no government budgets.

Comparing administrative expenditures in the traditional “fee-for-service” Medicare program to private Medicare Advantage plans can somewhat control for these factors. Hacker cites a CBO estimate that administrative costs are 2 percent of expenditures in traditional Medicare versus 11 percent for Medicare Advantage plans. He writes further: “A recent General Accounting Office report found that in 2006, Medicare Advantage plans spent 83.3 percent of their revenue on medical expenses, with 10.1 percent going to nonmedical expenses and 6.6 percent to profits—a 16.7 percent administrative share.”

Yet such comparisons still do not establish that government programs are more efficient than private insurers. The CBO writes of its own estimate: “The higher administrative costs of private plans do not imply that those plans are less efficient than the traditional FFS program. Some of the plans’ administrative expenses are for functions such as utilization management and quality improvement that are designed to increase the efficiency of care delivery.” Moreover, a portion of the Medicare Advantage plans’ administrative costs could reflect factors inherent to government programs rather than private insurance. For example, Congress uses price controls to determine how much to pay Medicare Advantage plans. If Congress sets those prices at supracompetitive levels, as many experts believe is the case, then that may boost Medicare Advantage plans’ profitability beyond what they would earn in a competitive market. Those supracompetitive profits would be a product of the forces that would guide a new government program—that is, Congress, the political system, and price controls—rather than any inherent feature of private insurance.

Economists who have tallied the full administrative burden of government health insurance programs conclude that administrative costs are far higher in government programs than in private insurance. In 1992,University of Pennsylvania economist Patricia Danzon estimated that total administrative costs were more than 45 percent of claims in Canada’s Medicare system, compared to less than 8 percent of claims for private insurance in the United States. Pacific Research Institute economist Ben Zycher writes that a “realistic assumption” about the size of the deadweight burden puts “the true cost of delivering Medicare benefits [at] about 52 percent of Medicare outlays, or between four and five times the net cost of private health insurance.”

Administrative costs can appear quite low if you only count some of them. Medicare hides its higher administrative costs from enrollees and taxpayers, and public-plan supporters rely on the hidden nature of those costs when they argue in favor of a new government program.

Cost Containment vs. Spending Containment  

Advocates of a new government health care program also claim that government contains overall costs better than private insurance. Jacob Hacker writes, “public insurance has a better track record than private insurance when it comes to reining in costs while preserving access. By way of illustration, between 1997 and 2006, health spending per enrollee (for comparable benefits) grew at 4.6 percent a year under Medicare, compared with 7.3 percent a year under private health insurance.” In fact, looking at a broader period, from 1970 to 2006, shows that per-enrollee spending by private insurance grew just 1 percentage point faster per year than Medicare spending, rather than 2.7 percentage points. That still omits the 1966–1969 period, which saw rapid growth in Medicare spending.

More importantly, Hacker’s comparison commits the fallacy of conflating spending and costs. Even if government contains health care spending better than private insurance (which is not at all clear), it could still impose greater overall costs on enrollees and society than private insurance. For example, if a government program refused to pay for lifesaving medical procedures, it would incur considerable nonmonetary costs (i.e., needless suffering and death). Yet it would look better in Hacker’s comparison than a private health plan that saved lives by spending money on those services. Medicare’s inflexibility also imposes costs on enrollees. Medicare took 30 years longer than private insurance to incorporate prescription drug coverage into its basic benefits package. The taxes that finance Medicare impose costs on society in the range of 30 percent of Medicare spending. In contrast, there is no deadweight loss associated with the voluntary purchase of private health insurance.

Hacker nods in the direction of non-spending costs when he writes, “Medicare has maintained high levels of . . . patient access to care.” Yet there are many dimensions of quality other than access to care. It is in those areas that government programs impose their greatest hidden costs, on both publicly and privately insured patients.

The paper goes on to discuss how private insurance bests Medicare on quality, but this excerpt is long enough.  For more on the comparison between private health insurance premiums and per-enrollee Medicare spending, see this blog post, where I conclude, "If [this comparison] were a farm animal, and social scientists farmers, they would have to take it behind the barn and put a bullet in its head."

In addition to committing the same errors and Hacker and others, Archer fails to note that Medicare Advantage reduces spending in traditional Medicare -- thereby treating us to the spectacle of an opponent of competition taking credit for one of competition's many benefits.

September 20, 2011 2:37PM

‘The Difference Between Governments Where There Is Responsibility, and Where There Is None.’

Over at Volokh Conspiracy, Professor Orin Kerr has taken to defending the individual mandate on supposedly libertarian principles. Professor Kerr, a Cato Constitution Day participant and an excellent defender of civil liberties, argues that the individual mandate preserves our liberties better than a top-down, government-controlled program à la Medicare. He writes, “If the courts conclude that the mandate approach is unconstitutional, then the more market-oriented approach to benefits would be ruled out. Congress would have a choice: Don’t mandate benefits, or else mandate using a 1960s Great Society government monopoly model.”

While I have the utmost respect for Professor Kerr, his analysis here is woefully mistaken. First of all, I will only mention what my colleague Michael Cannon has tirelessly pointed out: ObamaCare will throttle the operation of a free market in numerous ways. It will not only stifle innovation, it will likely result in the evacuation of insurance providers from the market as they get caught in a “death spiral” caused by the simultaneous mandatory insurance of the sick while healthy individuals increasingly choose to pay the fine rather than purchase health coverage. Richard Epstein has also argued that ObamaCare’s regulatory controls on health insurance providers will “systematically strip[] the regulated health-insurance issuers of their constitutional entitlement to earn a reasonable rate of return on the massive amounts of capital that they have already invested in building out their businesses,” thus converting “health insurance companies into virtual public utilities.” Or, in the words of Cannon, “Compulsory health insurance enables, and ultimately would require, politicians and government bureaus to control nearly all aspects of health care and medical practice.”

But perhaps the most insidious thing about ObamaCare is precisely the aspect that Professor Kerr seems to fall for: This is a government take-over clothed in market-based rhetoric. This take-over has been facilitated by nearly a century of constitutional misinterpretations that have left us with the "choice" between one unconstitutional system, a single-payer health care system, and another, the "market reform" of the individual mandate. Professor Kerr, like so many others, has been taken in by the façade of choice and markets. But this façade not only has political significance, it has constitutional significance.

The mandate was partially passed in order to avoid the political accountability that a tax increase would have engendered. Rather than taking your money through properly authorized political channels, Congress decided to further pervert the Commerce Clause in order to save their jobs. Thus, they chose to compel its citizens to purchase a product from a private company. While there is no constitutional provision that proscribes “constitutional avoidance,” misinterpreting the enumerated limits of federal power, as the Court has repeatedly done since the New Deal, encourages such constitutional run-arounds.

The Founders were very wary of a government that had unchecked power to take property from its citizens or laws that compelled citizens to give their property to another. After all, taxes—the Sugar Act, the Stamp Act, the Declaratory Act, the Townshend Duties, the Tea Act—had been instrumental in incubating the Revolution. Therefore, taxation is treated very seriously in the Constitution.

Properly understood, the General Welfare Clause—“Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States”—allows taxes to be collected only in pursuit of the enumerated powers of Congress and only for the “general,” rather than the “specific” (that is, special interest), welfare. Moreover, Article I, Section 7, Clause 1 of the Constitution commands that “All Bills for raising Revenue shall originate in the House of Representatives[.]” During the debates in Philadelphia, Benjamin Franklin expressed “that it was always of importance that the people should know who had disposed of their money, & how it had been disposed of. It was a maxim that those who feel, can best judge. This end would, he thought, be best attained, if money affairs were to be confined to the immediate representatives of the people.” During the Convention, even the clause that allowed the Senate to add amendments to bills of revenue that originated in the House (a clause which eventually found its way into the Constitution) was opposed by those who thought that no form of taxation should be entrusted to a representative body that was not directly accountable to the people (at the time the Senate was chosen by the state legislatures).

Similarly, Article I, Section 9, Clause 7 stipulates that “No Money shall be drawn from the Treasury, but in Consequence of Appropriations made by Law; and a regular Statement and Account of the Receipts and Expenditures of all public Money shall be published from time to time.”

As St. George Tucker, one of the most influential legal scholars of the founding generation, wrote in 1803:

All the expenses of government being paid by the people, it is the right of the people, not only, not to be taxed without their own consent, or that of their representatives freely chosen, but also to be actually consulted upon the disposal of the money which they have brought into the treasury; it is therefore stipulated that no money shall be drawn from the treasury, but in consequence of appropriations, previously made by law: and, that the people may have an opportunity of judging not only of the propriety of such appropriations, but of seeing whether their money has been actually expended only, in pursuance of the same; it is further provided, that a regular statement and account of the receipts and expenditures of all public money shall be published from time to time. These provisions form a salutary check, not only upon the extravagance, and profusion, in which the executive department might otherwise indulge itself, and its adherents and dependents; but also against any misappropriation, which a rapacious, ambitious, or otherwise unfaithful executive might be disposed to make. In those governments where the people are taxed by the executive, no such check can be interposed. The prince levies whatever sums he thinks proper; disposes of them as he thinks proper; and would deem it sedition against him and his government, if any account were required of him, in what manner he had disposed of any part of them. Such is the difference between governments, where there is responsibility, and where there is none.

Finally, the Takings Clause of the Fifth Amendment also demonstrates a concern that government officials would take property to either enrich themselves or to enrich politically powerful interest groups. In short, all the provisions listed above make it clear that the Framers intended the forced taking of property to be above board, on the books, and as politically accountable as possible. As Justice Scalia once wrote:

The politically attractive feature of regulation is not that it permits wealth transfers to be achieved that could not be achieved otherwise; but rather that it permits them to be achieved “off budget,” with relative invisibility and thus relative immunity from normal democratic processes.

Nevertheless, like most politicians, the administration has shown that both its rhetoric and its constitutional theories are sharpened with a Machiavellian edge. During the debates over the law, it wasn’t a tax (as President Obama vigorously asserted to George Stephanopoulos). After the law was passed and the public no longer had a say in the outcome, the mandate suddenly became a tax for the purposes of litigation strategy. Although the Constitution doesn’t require government officials to be rhetorically consistent, there is something truly disturbing about the level of constitutional perversion that is occurring here. The avoidance of proper democratic channels of taxation is yet another way in which the mandate is “improper” and, in the words of Chief Justice Marshall, is inconsistent with “the letter and spirit of the constitution.”

Although a nightmare in terms of policy, a single-payer system funded through taxation would, in many ways, be constitutionally preferable to the individual mandate. As Timothy Sandefur writes at the PLF Blog:

Were the system run by the government, inefficient and troubling as that would be, citizens would at least have a general idea whom to blame and how to remedy the situation. Instead, by reaching back to a model that pre-dates even the Progressive era reforms that the administration likes to evoke in its rhetoric, Obamacare manages to achieve something that the Constitution’s founders would have thought utterly deplorable: using government coercion to enrich private industry in the most direct and anti-democratic way conceivable—all while telling the citizens that it’s for their own good.

Couldn’t have put it better myself.

September 20, 2011 1:58PM

Tax the Rich? Depends On How You Define Rich

[caption align="alignnone"]

Media Name: 201109_blog_ekins201.jpg

Q3 2011 Reason-Rupe Public Opinion Survey[/caption]

As the myriad of media polls have made clear, Americans are typically averse to tax increases except if offered the option to tax the “wealthy.” However, few polls ask respondents how they would define wealthy. The latest Reason-Rupe poll takes on this task by asking respondents to define what level of income they would define as wealthy and thus would be subject to higher taxes. Similar to a step function, as individuals’ incomes increase their definition of “wealthy” increases also, especially for households with annual incomes over $200,000. For instance, the median household making $25,000-$49,999 a year believes that “wealthy” is defined as $200,000 year. However, the median household actually making over $200,000 a year believes that “wealthy” is defined as $500,000. More discussion can be found here.

September 20, 2011 1:16PM

‘Incredible Shrinking Presidency’? I Wish!

My Washington Examiner column this week looks at the eternal recurrence of a media myth, "the Incredible Shrinking Presidency." We go through a cycle of media hand-wringing about a weakened presidency virtually every time a president runs into trouble in the polls. The most recent example is the Politico's September 7 cover story on "The Incredible Shrinking President," examining "a once muscular presidency's dramatic downsizing."  (Richard Cohen actually beat them to the punch, a year to the day before the Politico story ran, with "Obama's Shrinking Presidency.")

As I write in the Examiner, "it's a peculiar office, the presidency. Apparently, it keeps shrinking, but -- with an executive branch of some 2.1 million civilian employees and counting -- it never gets any smaller." I take a look at the "shrinking presidency" meme during the Bush years:

A little over 10 years ago, the Wall Street Journal ran a column by then-Washington editor Al Hunt with the same title, "The Incredible Shrinking President."

President Bush was "on the defensive," Hunt insisted -- increasingly weak and irrelevant. Three days later, al Qaeda toppled the twin towers, and, in short order, America had embarked on a seemingly permanent war, with permanently enlarged powers for the commander in chief.

But the shrinking-CINC meme somehow refused to die. After Bush's Republicans lost the House and Senate in the 2006 midterms, the Economist led with a story on, yes, "The Incredible Shrinking Presidency." The magazine's cover featured a caricature of a dwarfish Bush, his head peeking above the top of a cowboy boot.

During the Clinton administration, Arthur Schlesinger Jr., who coined the phrase "Imperial Presidency," could be found announcing the institution’s demise—-and sounding almost despondent about it. In an August 1998 New York Times op-ed, "So Much for the Imperial Presidency," Schlesinger complained that independent counsel Ken Starr had left the executive branch ‘‘harried and enfeebled.’’ Not too long after, the ‘‘harried and enfeebled’’ president carried out a 78-day air war over Kosovo despite Congress’s refusal to authorize it.

This silly meme is, it seems, as resilient as the modern presidency itself. But the truth is, as Yale's Jack Balkin wrote on the eve of Obama's inauguration, "in terms of the possibilities of power, the Presidency has never had more tools at its disposal....This trend in Presidential power building poses enormous risks for liberty whoever occupies the White House." The presidency isn't "shrinking"--but it should.

September 20, 2011 12:49PM

Calderón Hints at Drug Legalization Again

Mexican President Felipe Calderón seems to be experiencing a dramatic change of mind regarding his war against drug cartels. Soon after a drug gang set fire to a casino in Monterrey a few weeks ago killing 52 people, Calderón told the media that “"If [the Americans] are determined and resigned to consuming drugs, they should look for market alternatives that annul the stratospheric profits of the criminals, or establish clear points of access that are not the border with Mexico.” Many people interpreted that as a veiled reference to drug legalization.

Yesterday, during a speech to the Americas Society and Council of the Americas in New York, Calderón was at it again: “We must do everything to reduce demand for drugs,” he said. “But if the consumption of drugs cannot be limited, then decision-makers must seek more solutions—including market alternatives—in order to reduce the astronomical earnings of criminal organizations.”

After launching a military offensive against drug cartels that has resulted in approximately 42,000 people killed in drug-related violence thus far, it appears that President Calderón has finally realized that the war on drugs is a futile endeavor and that drug legalization is the only alternative to the mayhem.

Calderón has flirted with an alternative approach before. A year ago, he said that it was “fundamental” to have a debate on drug legalization. Shortly afterwards, Colombian President Juan Manuel Santos openly supported the call for a debate. However, Calderón soon recanted, firmly stating that he was against legalization, and the possibility of a high-level hemispheric debate on drug reform died there.

If we take his recent statements seriously, perhaps the massacre in Monterrey finally broke Calderón’s faith in his war on drugs. His two immediate predecessors, Ernesto Zedillo and Vicente Fox, have been vocal proponents of drug legalization in the years since they left office. Calderón still has over a year left in his term. He has been very assertive in the past, demanding that Americans reduce their demand for drugs and change their gun laws in order to curb violence in Mexico. But his rhetoric has proven fruitless time and time again, all the while thousands have needlessly died. Calderon must remain assertive towards Washington, but now he should demand a change in drug policy in the U.S.

Nothing will reverse the damage that his war against drugs cartels has inflicted on his country. But Felipe Calderón could do his country a great service if he becomes the first sitting president to raise his voice to Washington and demand an end to the war on drugs.

September 20, 2011 11:09AM

Sweet Commerce in South Asia

Tom Palmer is very fond of this quotation from Voltaire on the connections among commerce, toleration, and the erosion of prejudice:

Go into the Exchange in London, that place more venerable than many a court, and you will see representatives of all the nations assembled there for the profit of mankind. There the Jew, the Mahometan, and the Christian deal with one another as if they were of the same religion, and reserve the name of infidel for those who go bankrupt. There the Presbyterian trusts the Anabaptist, and the Church of England man accepts the promise of the Quaker. On leaving these peaceable and free assemblies, some go to the synagogue, others in search of a drink; this man is on the way to be baptized in a great tub in the name of the Father, by the Son, to the Holy Ghost...

You can find it in Tom's essay "Globalization and Culture," which is included in Realizing Freedom: Libertarian Theory, History, and Practice.

I found a very similar thought in a Wall Street Journal review of the book Ghetto at the Center of the World by Gordon Mathews. The book focuses on "the most notorious flophouse in Asia," which accommodates people from all over the world, but especially from Africa and South Asia and especially merchants who trade cheap Chinese-made goods to buyers from other countries. The review notes:

Interpersonal relations at the building, the author says, might not be reliably friendly, but "they are generally peaceful." He adds: "As a Pakistani said to me vis-à-vis Indians, 'I do not like them; they are not my friends. But I am here to make money, as they are here to make money. We cannot afford to fight.' "

Voltaire and Mathews, like many other observers, have noticed that people trying to make money don't generally get too upset about other people's race or religion. This is part of the "doux commerce" or "sweet commerce" thesis that goes back to the Middle Ages. Albert O. Hirschman wrote about it in 1982, and much of Deirdre McCloskey's current work explores the idea of "doux commerce" and bourgeois virtues.

September 20, 2011 10:26AM

The Decline in Global Economic Freedom

After having risen for decades, global economic freedom has fallen for a second year in a row. That’s according to Economic Freedom of the World: 2011 Annual Report co-published today with the Fraser Institute. The average global economic freedom score rose from 5.53 (out of 10) in 1980 to 6.74 in 2007 and has fallen to 6.64 in 2009, the last year for which data is available.

As the graph below shows, the United States has had one of the largest declines in the past decade. It now ranks in 10th place compared to 3rd in 2000, largely due to higher government spending and lower ratings on “rule of law” measures. The report documents the strong, positive relationship between economic freedom and a range of indicators of standard of living including wealth, economic growth, longer life spans, better health care, lower poverty, civil and political liberties, and so on. Economic freedom is central to human progress. As the response of activist governments to financial and ongoing debt crises fails to address underlying issues responsible for low growth and high unemployment, this report is an important empirical reminder about the wide-ranging consequences of politics or markets in determining the use of resources.


Media Name: declines.jpg