Ooo eee,ooo ah ah ting tang

Walla walla, bing bang.

Paul Krugman’s column today is about voodoo economics as applied to healthcare reform

It’s about time someone said that and, more generally, made the case that Mr. McCain’s approach to health care is based on voodoo economics — not the supply-side voodoo that claims that cutting taxes increases revenues (though Mr. McCain says that, too), but the equally foolish claim, refuted by all available evidence, that the magic of the marketplace can produce cheap health care for everyone.

I believe that’s completely true—at least as “the magic of the marketplace” is construed these days which means reducing demand. However, as if to demonstrate that two can play at the voodoo game Dr. Krugman continues:

Insurance companies do try to hold down “medical losses” — the industry’s term for what happens when an insurer actually ends up having to honor its promises by paying a client’s medical bills. But they don’t do this by promoting cost-effective medical care.

Instead, they hold down costs by only covering healthy people, screening out those who need coverage the most — which was exactly the point Mrs. Edwards was making. They also deny as many claims as possible, forcing doctors and hospitals to spend large sums fighting to get paid.

Even if you remove the insurance companies from the healthcare picture entirely and reduce the cost of administration to zero (which is impossible) that’s not going to “produce cheap health care for everyone”. The slice of the healthcare pie taken by insurance is something like 30%. At the present rate of increase in healthcare costs a cut of 30% will be absorbed in a couple of years.

We’ve got to reform the way in which healthcare is provided. Anything else is voodoo. Or posturing.

3 comments… add one
  • Dave — I think you are being a bit disengenous here and this is with me agreeing with you that reforms in how healthcare is provided are needed.

    Let’s go with your argument that 30% of all healthcare costs are admin and that all could be eliminated. You seem to be implicitly arguing that there is no growth in admin costs over time and that all healthcare costs come from treatment costs increases. You are arguing that the trend growth rates of costs would increase if admin costs were dramatically reduced from the counterfactual of doing nothing. The slopes in your argument would not parrallel each other or more likely slowly converge.

    The more likely scenario is if there was a significant decrease in admin costs the cost growth rate in that scenario would be roughly similiar to the no-change counterfactual but off of a much smaller base. For instance running these two scenarios out for 10 years with an arbitary year as an index value of 1.0 and annual inflation of 10%, the decreased based, same slope system in 10 years costs 1.8x as much as it did in year 0 while the counterfactual has a cost of 2.6x as much in year 10 as it did in year 0.

    Changing the cost base creates a whole lot of breathing room in the system even if you assume that the inflation curves are pararllel curves and no other systemic changes can be made.

  • That’s not what I said, fester. What I said is let’s use the frequently-quoted figure for the size of the insurance’s company’s share of healthcare costs, slightly less than 30%. In the same study they found that Canada’s cost of administration was roughly 15% so I think a prudent estimate of the savings that can be realized by going to a single-payer system (which I support) is roughly 15%.

    But arguendo, let’s say 30% can be lopped off. We’d still have healthcare costs more than double those of France or Germany with all segments increasing rapidly.

    That costs will rise faster is also a reasonable assumption for demographic reasons if for no other.

    Specifically, what I’m attacking is the “whole lot cheaper” claim. If the claim were “marginally less expensive” to give us breathing room, I’d agree with it. But as-is I think the claim is a sham.

    My view is, at it has been for some time, that the change being advocated for now is the change that should have been made 15 years ago. In another 15 years the system will have suffered catastrophic failure.

  • One additional point: context is important. Dr. Krugman also wants to extend healthcare to 20% more people. The breathing room gets smaller.

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