Rhoads: What Administrative Savings?

Jared Rhoads of the Lucidicus Project has written another OpEd, which I am reposting here with his permission. His topic is the myth of administrative savings under government-run "single payer" systems:

What Administrative Savings?
January 17, 2009 by Jared M. Rhoads

Many people seeking national healthcare reform -- particularly those on the political left -- believe that the United States should adopt a single-payer insurance system, similar to that of Canada's. Proponents say that single-payer systems achieve lower per capita healthcare expenditures because they eliminate "wasteful and unnecessary" business practices such as advertising and screening of new applicants, and that this lowers administrative costs. By empowering the government to pay all health insurance claims, they say, we could simplify paperwork, standardize billing procedures, and consolidate many other activities entailed in processing claims. In other words, if we would just leave the business of health insurance to the government, we could get the same great care we have always had, except at a much lower cost.

But do single-payer systems really achieve lower expenditures through operational efficiency, or is something else going on in this picture?

At first glance, the argument regarding administrative costs may seem plausible. After all, businesses are always trying to reduce costs by building economies of scale, so what could be more economical than having one payer for the entire nation? And statistics do show that per capital spending on healthcare is lower in many countries with single-payer systems. For example, in 2005, Americans on average spent $6,401 on healthcare, versus $3,326 for Canadians -- a difference of over three thousand dollars per person per year.

What pundits and politicians fail to disclose, however, is that the reduction in administrative costs by and large does not account for this difference. In fact, it doesn't even account for most of the difference. According to an article in the New England Journal of Medicine, administrative costs totaled an estimated $1,059 per person annually in the United States versus just $307 per person in Canada.[1] That's a difference of just $752, or about 23 percent of the difference. So where does the rest of the alleged savings come from?

In effect, Canada's relatively low per capita rate of expenditure comes not from reducing paperwork, but from using the financial grip of the government to withhold care.

Consider how the Canadian system works. Canada uses a global budget system in which government officials dictate to hospitals how much they will be allowed to spend in a given year. Looking at variables such as patient volume, supply costs, and inflation, they come up with a projection -- i.e. a wild guess -- for how much it will cost to treat all of the patients who come for care. Each hospital receives a lump-sum payment (or is put on a schedule of recurring payments), an amount of money that must last until the next round of guessing and granting.

When the money runs out, as it predictably does each time, care slows to a crawl. In order to defer or reduced costs, hospitals put patients on long waiting lists or substitute lower quality services (e.g. giving x-rays or ultrasounds in lieu of higher-resolution but more expensive MRI scans). In short, if you are a patient in Canada and need an expensive procedure, you had better hope that the facility is either early in its budget cycle and therefore still awash in money, or that it has deprived enough other patients the services that they need so there is still a ration left for you.

One of the most the perverse things about any socialized system of healthcare, including Canada's, is that the less the system does for its patients, the better its financial performance looks on paper. For instance, if a hospital withholds care from a patient long enough, the patient may give up and travel over the border to get their diagnostic test, surgery, or other procedure done elsewhere. In terms of the hospital's pocketbook (and therefore also the nation's pocketbook), this scenario goes down as an unseen and unaccounted-for personal expense, not an expenditure. Or, perhaps the patient on a six-month waiting list for hip surgery simply dies while waiting. In that scenario, there is no cost to the system at all.

Whatever the case, national expenditure figures of single-payer systems can be set as low as government officials desire, because what ultimately determines how much care patients receive is what the government is willing to fund -- not how much patients want to spend or how much their physicians recommend they spend. (And even if patients wanted to pay out of their pocket for faster or better care by their own doctor, in many cases it is illegal to do so.) Quality and access to care can always be sacrificed to create the illusion of a government-run system that is low-cost and efficient because they are much more difficult to measure and compare.

The notion of administrative efficiency as the primary source of savings is nothing but a shabby cover story to hide the rationing inherent in a single-payer system. Most people wouldn't trust (or allow) a government official to set a budget for what they spend on dry cleaning in a year, yet with a little rhetoric and some confusing statistics, they are willing to hand over control of their own healthcare. Rather than emulating our neighbors to the north and instituting a top-down, centralized system in which the government makes decisions about how much care each person should get, Americans ought to demand the freedom to pay for as many or as few services as they desire, and to keep for themselves whatever they do not spend.

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1 Woolhandler, Campbell, and Himmelstein. "Costs of Health Care Administration in the United States and Canada" N Engl J Med 2003;349(25):2461.