Saturday, December 6, 2008

Administrative Costs Alone By Insurers Would Pay For Universal Health Care

In Fridays New York Times article “Why Does U.S. Health Care Cost So Much? (Part II: Indefensible Administrative Costs),” it's revealed that universal health care in the U.S. would cost just about as much as the administrative costs of insurance companies. Wanna make a bet not one Democrat will mention this important point to argue for health care change?

In my previous blog post, I showed that America suffers from “excess spending” (in this context refers to the difference between what a country spends per person on health care, and what the country’s gross domestic product per person should predict that that country would spend) in its health care system. Here I will discuss one factor that drives up that spending: indefensibly high administrative costs.

The United States spends nearly 40 percent more on health care per capita than its G.D.P. per capita would predict. This excess spending amounted to $570 billion in 2006 and about $650 billion in 2008. The latter figure is over five times the estimated $125 billion or so in additional health spending that would be needed to attain truly universal health insurance coverage in this country.

One thing Americans do buy with this extra spending is an administrative overhead load that is huge by international standards. The McKinsey Global Institute estimated that excess spending on “health administration and insurance” accounted for as much as 21 percent of the estimated total excess spending ($477 billion in 2003). Brought forward, that 21 percent of excess spending on administration would amount to about $120 billion in 2006 and about $150 billion in 2008. It would have been more than enough to finance universal health insurance this year.

The McKinsey team estimated that about 85 percent of this excess administrative
overhead can be attributed to the highly complex private health insurance system
in the United States. Product design, underwriting and marketing account for about two-thirds of that total.

A more recent study of administrative costs in the American and Canadian health systems … in The New England Journal of Medicine in 2003. These authors estimated that in 1999, Americans spent $1,059 per capita on administration compared with only $307 in purchasing power parity dollars (PPP $) spent in Canada.

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