Medicare has lower administrative costs?

Maybe not:

only an extremely small portion of administrative costs are related to the dollar value of health care benefit claims. Expressing these costs as a percentage of benefit claims gives a misleading picture of the relative efficiency of government and private health plans.Medicare beneficiaries are by definition elderly, disabled, or patients with end-stage renal disease. Private insurance beneficiaries may include a small percentage of people in those categories, but they consist primarily of people are who under age 65 and not disabled. Naturally, Medicare beneficiaries need, on average, more health care services than those who are privately insured. Yet the bulk of administrative costs are incurred on a fixed program-level or a per-beneficiary basis. Expressing administrative costs as a percentage of total costs makes Medicare's administrative costs appear lower not because Medicare is necessarily more efficient but merely because its administrative costs are spread over a larger base of actual health care costs. When administrative costs are compared on a per-person basis, the picture changes. In 2005, Medicare's administrative costs were $509 per primary beneficiary, compared to private-sector administrative costs of $453.

Thanks to Craig Newmark for the pointer.

Update: A reader points me to this related study. Also, see the discussion here and here. Finally, Paul Krugman disses the study I quoted above, and then the author of the study pushes back.

Costs versus Efficiency

Advocates of government-run health insurance like to point to Medicare's low administrative costs (which, as I noted yesterday, is a controversial claim). But even if that factual claim were true, the argument would hardly be dispositive as to the greater efficiency of a publicly run system. As I put it in my recent Times article, "True, Medicare’s administrative costs are low, but it is easy to keep those costs contained when a system merely writes checks without expending the resources to control wasteful medical spending."

A reader finds support for this position in some recent testimony by Malcolm K. Sparrow, Professor of the Practice of Public Management at Harvard's Kennedy School of Government. Professor Sparrow suggests that greater administrative costs aimed at uncovering medical fraud might be money well spent. Here is an excerpt:

The units of measure for losses due to health care fraud and abuse in this country are hundreds of billions of dollars per year. We just don't know the first digit. It might be as low as one hundred billion. More likely two or three. Possibly four or five. But whatever that first digit is, it has eleven zeroes after it. These are staggering sums of money to waste, and the task of controlling and reducing these losses warrants a great deal of serious attention....

By taking the fraud and abuse problem seriously this administration might be able to save 10% or even 20% from Medicare and Medicaid budgets. But to do that, one would have to spend 1% or maybe 2% (as opposed to the prevailing 0.1%) in order to check that the other 98% or 99% of the funds were well spent. But please realize what a massive departure that would be from the status quo. This would mean increasing the budgets for control operations by a factor of 10 or 20. Not by 10% or 20%, but by a factor of 10 or 20.

The bottom line: Low administrative costs are not to be confused with high administrative efficiency. In other words, administrators are not necessarily a deadweight loss to the system.

Leonhardt on Health Care

In yesterday's NY Times, David Leonhardt asks why Americans spend much more on health care than do the citizens of other countries, even though we don't seem to benefit with longer life expectancy:

The administrative costs of our patchwork bureaucracy eat up about 25 percent of health spending, which is why would-be reformers have long focused on these costs. But they aren’t the main story. Even in Europe’s single-payer systems, administrative costs account for about 15 percent of health spending, once everything is included, according to the Lewin Group, a consulting firm....

So something beside administrative costs is at work here, and it involves a basic cultural difference. Americans seem to be less willing to take no for an answer and more willing to try almost anything, no matter how expensive or how slim the odds, to prolong life. (The United States is also a fatter, more diverse country with wider income disparity, which gives our medical system a harder task.)

There are enormous benefits to the American refusal to go gently into that good night. It has made us obsessed with medical advances and turned this country into the world’s research laboratory. If you followed this year’s Nobel Prize announcements, you may have noticed that every scientific prize went to an American. Even hernia surgery, which has been around for 5,000 years, is now based in significant part on American methods, notes Raymond C. Read, a retired surgeon who has studied its history. Some of our spending, in short, goes to support medical care in other countries.

But much of it is simply wasteful. Expensive procedures — like some Alzheimer’s treatments, some knee surgeries and many body scans — are often no more effective than basic ones, according to research. Yet doctors can keep on getting reimbursed for the expensive ones. “Basically, anything that doesn’t kill patients is paid for by Medicare and insurance companies,” said Jonathan Skinner, a health care researcher at Dartmouth College.

If David is right, then the question is: What institution will we trust to say "no" to medical procedures that don't pass a cost-benefit test?

Would Hillary make a good president?

Tradesports says the probability is 57 percent that Hillary Clinton will be the Democratic nominee in 2008. (Obama is running second at 15 percent.) I have never met Senator Clinton, but here is the perspective of one economist who has observed her closer up:

My two cents' worth--and I think it is the two cents' worth of everybody who worked for the Clinton Administration health care reform effort of 1993-1994--is that Hillary Rodham Clinton needs to be kept very far away from the White House for the rest of her life. Heading up health-care reform was the only major administrative job she has ever tried to do. And she was a complete flop at it. She had neither the grasp of policy substance, the managerial skills, nor the political smarts to do the job she was then given. And she wasn't smart enough to realize that she was in over her head and had to get out of the Health Care Czar role quickly.

So when senior members of the economic team said that key senators like Daniel Patrick Moynihan would have this-and-that objection, she told them they were disloyal. When junior members of the economic team told her that the Congressional Budget Office would say such-and-such, she told them (wrongly) that her conversations with CBO head Robert Reischauer had already fixed that. When long-time senior hill staffers told her that she was making a dreadful mistake by fighting with rather than reaching out to John Breaux and Jim Cooper, she told them that they did not understand the wave of popular political support the bill would generate. And when substantive objections were raised to the plan by analysts calculating the moral hazard and adverse selection pressures it would put on the nation's health-care system...

Hillary Rodham Clinton has already flopped as a senior administrative official in the executive branch--the equivalent of an Undersecretary. Perhaps she will make a good senator. But there is no reason to think that she would be anything but an abysmal president.

From Brad DeLong, Berkeley econ prof and former Deputy Assistant Secretary in the Clinton Treasury Department, writing in 2003.

Easterly on Hayek and Sachs

In today's Wall Street Journal, economist Bill Easterly channels Friedrich Hayek to take on economist Jeffrey Sachs. An excerpt:

Hayek's great book [The Road to Serfdom] is all about the dangers of large-scale state economic planning, courageously written in 1944 when Soviet central planning, technocratic socialism and administrative control of the wartime economy appealed as a peacetime model to many New Dealers, celebrity economists and policy wonks of all stripes.

The countries that are now rich subsequently listened enough to Hayek and to common sense to avoid the road to serfdom. Yet today, Mr. Sachs (in his book "The End of Poverty") is peddling his own administrative central plan -- 449 steps in all -- to end world poverty. In his plan, the U.N. secretary-general (to whom he is an adviser) would supervise and coordinate thousands of international civil servants and technocratic experts to solve the problems of every poor village and city slum everywhere. Mr. Sachs is not in favor of central planning as an economic system, but he offers it as a solution, anyway, to the multifold problems of the world's poorest people. If you want the best analysis of why the approach of Mr. Sachs and his confreres in Hollywood and the U.N. will fail to end world poverty this time (as similar efforts failed over the past six decades), you can find it in Hayek.

Allocating Harvard's Resources

An editorial in the Harvard Crimson, the student newspaper, notes:

The economics department is perennially plagued with abysmal satisfaction ratings and high student-to-faculty ratios.

It is true that student satisfaction is lower in economics than in most other departments at the university and that student-faculty ratios are higher. I have been told, however, that if you do a regression of a department's student satisfaction on its student-faculty ratio, the economics department is right on the regression line. This fact suggests that our student satisfaction is low precisely because the student-faculty ratio is high.

The Crimson editorial implores the econ department to take action to prevent the elimination of the junior seminar program. But that will prove hard to do with existing resources. If the student-faculty ratio is the ultimate problem leading to low satisfaction with the econ major, and I believe that it is, there are two ways to improve the situation: Increase the number of economics faculty or decrease the number of economics students.

I am confident we in the economics department would be happy to hire more faculty if only the university would allocate us more faculty slots. In a world of finite resources, the question becomes, where would those faculty slots come from? I would be eager to hear from the students which departments they think should shrink.

Or maybe there are other options. If there are administrative departments that could be reduced or eliminated, that could make room for more faculty. Or, following Brandeis, we could sell off some of the collection in the university art museum! Universities like people, face tradeoffs. If the university is to provide more small classes in econ, it will need to provide less of something else. Right now, I do not see the university administration making substantial efforts to find more resources for the economics department. Sadly, we are not a major priority.

The alternative way to get the student-faculty ratio down in the economics department is to reduce the number of students. Right now, despite the low satisfaction reported on student surveys, economics is the most popular major. The economics department could reduce the number of students by making econ a selective major (e.g., you would need a certain grade in ec 10) or by raising requirements (e.g., every major would have to take multivariate calculus and linear algebra).

Many faculty in the economics department would object to trying to reduce the number of students because we think it is great that so many students choose to major in economics. But if the students make this choice, and the university fails to allocate resources to increase faculty and bring the student-faculty ratio closer to the university average, then it seems almost inevitable that students will leave the major with a below average level of satisfaction.

There is one final possibility: Some angel with deep pockets could give the university a wad of cash with the stipulation that it be spent on the economics department. If any would-be angels are out there reading this blog post, we in the economics department would be happy to hear from you.

Has economic mobility declined?

No, says a new paper by Raj Chetty et al.:

"We present new evidence on trends in intergenerational mobility in the U.S. using administrative earnings records. We find that percentile rank-based measures of intergenerational mobility have remained extremely stable for the 1971-1993 birth cohorts....[C]hildren entering the labor market today have the same chances of moving up in the income distribution (relative to their parents) as children born in the 1970s."

Proposed Changes in the Child Tax Credit

A new paper by Kevin Corinth, Bruce Meyer, Matthew Stadnicki, and Derek Wu finds the following (emphasis added). 

The proposed change under the American Families Plan (AFP) to the Tax Cuts and Jobs Act (TCJA) Child Tax Credit (CTC) would increase maximum benefit amounts to $3,000 or $3,600 per child (up from $2,000 per child) and make the full credit available to all low and middle-income families regardless of earnings or income. We estimate the anti-poverty, targeting, and labor supply effects of the expansion by linking survey data with administrative tax and government program data which form part of the Comprehensive Income Dataset (CID). Initially ignoring any behavioral responses, we estimate that the expansion of the CTC would reduce child poverty by 34% and deep child poverty by 39%. The expansion of the CTC would have a larger anti-poverty effect on children than any existing government program, though at a higher cost per child raised above the poverty line than any other means-tested program. Relatedly, the CTC expansion would allocate a smaller share of its total dollars to families at the bottom of the income distribution—as well as families with the lowest levels of long-term income, education, or health—than any existing means-tested program with the exception of housing assistance. We then simulate anti-poverty effects accounting for labor supply responses. By replacing the TCJA CTC (which contained substantial work incentives akin to the EITC) with a universal basic income-type benefit, the CTC expansion reduces the return to working at all by at least $2,000 per child for most workers with children. Relying on elasticity estimates consistent with mainstream simulation models and the academic literature, we estimate that this change in policy would lead 1.5 million workers (constituting 2.6% of all working parents) to exit the labor force. The decline in employment and the consequent earnings loss would mean that child poverty would only fall by 22% and deep child poverty would not fall at all with the CTC expansion.

The Case against Cap-and-Trade

In a comment on a previous post, reader James offers a good reason why, if the government is to do something about climate change, a carbon tax is better than a cap-and-trade system:

This just occurred to me, so maybe I'm missing something but there seems to be another big advantage for taxes: they probably are much more likely to be both tax-burden and progressivity neutral.

Here's why: Both carbon taxes and cap-and-trade would affect consumers by raising energy costs. (Approximately equally, although to the extent that cap-and-trade imposes more administrative costs, you might need to add more to the price of energy to achieve equivalent carbon emissions.) Taxes raise the after-tax prices directly; cap-and-trade raises the price indirectly by forcing producers to purchase credits, which raises the cost of producing, and thus purchasing, energy. Raising energy costs harms the poor most, because they spend more of their budget on energy.

The regressive effects of a carbon tax are obvious because they are direct, so it should be relatively easy to convince Congress to make the tax revenue and progressivity neutral by instituting income tax cuts (and hikes in the earned income tax credit) weighted toward the poor. (And there's a great bargain to be struck here between conservatives and liberals. Liberals can say, "We'll keep it revenue neutral as long as you keep it progressivity neutral.")

But this will be much more difficult to do for cap-and-trade programs. The main reason that Congress might choose such a program over a carbon tax is the fiction that, unlike a tax, it does not impose costs on consumers. This fiction ignores the indirect cost imposed on consumers when the program increases the price of producing energy. Given that animating fiction, it seems like Congress would be less likely to make progressive changes in the tax code to offset the regressive effects of cap-and-trade. (Congress couldn't argue that they were just offsetting the costs of cap-and-trade because their choice of cap-and-trade was based on denying that those costs exist.)

CBO on the Baucus Plan

The CBO blog on the health plan du jour:

the Chairman’s proposal would reduce the federal deficit by $16 billion in 2019, CBO and JCT estimate. After that, the added revenues and cost savings are projected to grow more rapidly than the cost of the coverage expansion. Consequently, CBO expects that the proposal, if enacted, would reduce federal budget deficits over the ensuing decade relative to those projected under current law, with a total effect during that decade that is in a broad range around one-half percent of GDP....

These projections assume that the proposals are enacted and remain unchanged throughout the next two decades, which is often not the case for major legislation. For example, the sustainable growth rate (SGR) mechanism governing Medicare’s payments to physicians has frequently been modified (either through legislation or administrative action) to avoid reductions in those payments. The projected savings for the Chairman’s proposal reflect the cumulative impact of a number of specifications that would constrain payment rates for providers of Medicare services. The long-term budgetary impact could be quite different if those provisions were ultimately changed or not fully implemented.

In other words, the plan would reduce the deficit if it were carried out as written, but there is good reason based on historical experience to be skeptical that it would be.

Let me try to put CBO's point in a more familiar setting:

Your friend Joe, who says he wants to lose weight, asks you for an extra slice of pie after dinner. Naturally, you are doubtful about the wisdom of the request.

"Ahem, Joe," you whisper, "Aren't there a lot of calories in that?"

"Yes," he says, "but the pie is part of a larger plan. I am committed not only to eating that slice of pie but also to going to the gym every day for the next week and spending at least half a hour on the treadmill. The exercise will more than work off those extra calories."

"But that's what you said last week, when you asked for an extra piece of cake. And you never made it to the gym."

"Yes, I know," Joe replies ruefully, "but this time I really mean it....Can you please pass the pie?"

The Fair Tax

A reader asks:

Professor: Could you shed some of your wisdom on the Boortz/Linder tax plan, the FairTax.

As I understand it, the so-called Fair Tax plan calls to raise a substantial fraction of U.S. federal tax revenue with a retail sales tax. It is one form of a consumption tax. Many economists—and I include myself among them—believe that consumption taxes are better than income taxes because they do not discourage saving. (See this previous post on the topic.)

Some tax experts tell me that a large retail sales tax, such as that envisioned by the Fair Tax, may cause problems in compliance. That is, if a retail sales tax has a high rate, retailers will find ways to evade. One solution to this problem is to collect the tax throughout the various stages of production, rather than all at once at the final sale to the consumer. This is what a value-added tax does. From an economic standpoint, a retail sales tax and a value-added tax are equivalent, but the value-added tax may raise fewer problems in compliance.

I should note that there are other ways to implement a consumption tax in addition to a retail sales tax and a value-added tax. Some of these other administrative mechanisms give policymakers more parameters to vary the degree of progressivity. Examples include the Hall-Rabushka version of the flat tax and the Bradford X-tax.

One possible complaint about a retail sales tax or a value-added tax is that these tax systems are proportional (or "flat"), rather than progressive, as a function of consumption. That "defect" can be remedied to some degree by giving people a lump-sum grant financed by the flat consumption tax. In that case, the overall system would be flat in marginal tax rates but progressive in average tax rates.

Cowen on Charitable Giving

In today's NY Times, economist Tyler Cowen describes recent research on charitable giving. His take:

DONORS to charities, it seems, do not behave rationally. Increasing evidence shows that donors often tolerate high administrative costs, fail to monitor charities and do not insist on measurable results....

donors often give to charities for reasons of pride. Monitoring a charity means worrying about the wisdom of contributing to that charity. Many donors would instead prefer simply to feel good about their generosity and thus they deceive themselves into thinking that all is going well. Furthermore, many donors seek a sense of affiliation and wish to be a part of large and successful organizations — the "winning team," so to speak. Again, these donors do not focus on how, or if, they actually end up improving the world.

Somehow, I suspect that Adam Smith would not be surprised. If anyone finds just the right Smith quotation, please post it among the comments.

Feldstein on Gasoline

My Harvard colleague Martin Feldstein is clever. In today's Wall Street Journal, he is too clever by half.

Marty proposes that the government set up a system of "tradeable gasoline rights" to reduce gasoline consumption. Here is how he describes it:

In a system of tradeable gasoline rights, the government would give each adult a TGR debit card. The gasoline pumps at service stations that now read credit cards and debit cards would be modified to read these new TGR debit cards as well. Buying a gallon of gasoline would require using up one tradeable gasoline right as well as paying money.

The government would decide how many gallons of gasoline should be consumed per year and would give out that total number of TGRs....

A key feature of these gasoline rights is that they are tradeable. Individuals with more TGRs than they need could sell the excess, while those who want to use more gallons than their allocation would have to buy extra TGRs. The gasoline companies could act as clearing houses for these trades, using their gasoline pumps to sell TGRs in the same way that they sell gasoline or to buy TGRs in exchange for the cash needed to purchase gasoline. Other institutions like banks could also trade TGRs for cash.

As I am sure Marty would agree, this system is functionally equivalent to an increase in the gasoline tax, with the tax revenue rebated lump-sum to the public. I have said many times that I like the idea of higher gasoline taxes, but Marty's scheme leaves me cold. Do we need to create a new administrative bureaucracy because politicians are afraid to use the word tax? I hope not.

Mass Health Care

Massachusetts has recently passed a health care plan aimed at achieving nearly 100 percent insurance coverage of its citizens. It has received widespread support among both Republicans and Democrats. In today's Wall Street Journal, economist Arnold Kling takes it on.

The elected leaders of Massachusetts have come up with a novel solution for the vexing problem of paying for health care: abolish the laws of arithmetic. Their new plan is a perfect illustration of what happens when politicians approach a problem unconstrained by reality.

The plan includes tax incentives and penalties for employers and individuals to get everyone covered by a health-care policy. It also promises affordable health insurance for people with modest incomes, under a program yet to be negotiated between the state and private insurance companies. Nevertheless, three numbers stand out: $295, the annual penalty per worker a company must pay to the state if it does not provide health insurance; $0, the deductible on the typical state-subsidized health-insurance policy under the plan; and $6,000, the average annual expenditure on health care for a Massachusetts resident....

The question is this: What insurance company will provide coverage with $0 deductible, at an annual premium of $295, for someone whose health care costs on average $6,000 a year? The numbers imply losses of over $5,700, not counting administrative costs. To subsidize zero-deductible health insurance, state taxpayers might have to pay out about $6,000 per recipient.

There is no reason to expect firms to rush to offer a policy to uninsured employees. It makes more sense for them to pay their $295 penalty and hand the health-insurance problem back to the individual -- and ultimately to the taxpayers of Massachusetts.

I don't know enough about the issue to judge whether Kling is right (but as a long-time reader of his blog, I can attest that Kling is a smart guy) .

For the opposite point of view and more information on the bill, click here.

Update: Economist Tyler Cowen has a more favorable reaction to the plan than does Kling:

To me the Massachusetts plan sounds messy and fragmented....That all being said, the Massachusetts plan is better than I would have expected. I am not convinced that the plan will work out badly, at least relative to feasible alternatives.