09
Jul
09

Administrative Costs — a complex debate

stethoscope

One common claim is that medicare’s administrative costs are much less than the same costs of private insurers (2-3% versus something like 14-22%). Often, the debate ends here. However, the issue is much more complicated.

For one thing, as Greg Mankiw claims, administrative costs aren’t necessarily a bad thing as they can detect outright fraud and also try to ensure that dollars are spent on the most cost effective treatments. In other words, the optimal amount of administrative cost spending may be higher than that of medicare. Also, it’s important to consider that comparing the numbers given above is misleading. For example, part of the administrative costs for private ensurers is collecting payment, but for the government, “collecting payment” is done by the IRS, and the costs of the IRS’s tax collection efforts are not included in medicare’s administrative cost numbers. There are other things too, like the fact that medicare has higher outlays per person, which means that their admin costs as a percentage will inevitably be smaller. (these things too are disputed and argued about).

My point is just that an honest look at these two programs will likely reveal that the administrative costs of medicare and private insurers are closer together than people claim. However, one type of administrative cost a single payer system would eliminate is marketing costs. Private insurers have to compete with each other and so spend money on capturing customers, a single payer system, by being the only game in town, would not have to pay these costs. The question then is: what is the economic benefit of marketing? Usually, marketing helps customers maximize their utility by pointing them toward the products they want, but since healthcare can’t really be measured adequately in terms of quality yet (what’s called a credence good in economics), its likely that advertising right now is not very useful.

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