In Praise of Administrative Costs

Advocates of socialized medicine, such as Physicians for a National Health Program, love to argue that America’s health care sector is less efficient than socialized systems because private insurers appear to have higher administrative costs. In yesterday’s New York Times, Tyler Cowen reveals the flaw in that logic:

The monitoring, marketing and overhead costs of private insurance are what allow more expensive medical treatments through the door. It is precisely because competing insurance companies spend money evaluating the appropriateness of claims that they are willing to pay for so many heart bypasses, extra tests, private hospital rooms and CT scans.

If European health care systems appear to have lower administrative costs, it is because, rather than scrutinizing claims, they limit the overall amount they will spend on medical services. Of course, that just means they shift costs to patients who either must pay for medical services themselves, or deal with the costs of waiting.

If the U.S. Medicare program appears to have lower administrative costs, it is because, rather than scrutinizing claims, Medicare just shovels money out the door. That merely shifts those costs onto taxpayers by driving up Medicare spending and taxes. 

In Medicare Meets Mephistopheles, Cato adjunct David Hyman delights in the irony that medicine-socializers praise one of Medicare’s greatest failings (inadequate oversight of claims payment) as if it were a virtue.