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August 06, 2007


Over at TAP, Roger Bybee interviews Dr. Steffie Woolhandler, one of the founders of Physicians for a National Health Program, on the desirability and achievability of single-payer health care. I don't find the interview terribly convincing on either count, but Woolhandler's diagnoses of why HMO's failed, what will happen to the Massachusetts' reforms, and what's wrong with Health Savings Accounts are all compelling. This, too, is interesting, on the oft-heard administrative savings argument:

You performed a study showing that about 31 percent of health spending in America goes to administrative overhead and profit. If 20 percent is accounted for by the insurance companies, what explains the rest? Is it, as critics like Paul Krugman say, the strategy of "denial management" followed by insurance companies, where they've bloated their staffs so that they can challenge more claims by both providers and patients?

The remainder of the overhead comes from doctors and hospitals. Part of it is in response to "denial management," but the big portion is just needing a high baseline level of paperwork and administrative support to deal with all the different insurers. In my little practice, you have to deal with all the different insurance companies, different co-payments, different deductibles, and different formularies [listings of approved prescriptions].

Right. There's just an extraordinary amount of paperwork involved in dealing that many payers who're all negotiating different rates, denying different services, offering different insurance packages, and forcing different lines of communication. It's staggeringly inefficient.

As for why we'll all support single-payer when the time for reform comes, Woolhandler says, "There will be a lot of debate, but when people fully understand the economics of healthcare, there will be more support for single-payer." Any political strategy that relies on people "fully understan[ing] the economics of health care" is in trouble.

August 6, 2007 in Health Care | Permalink


I thought this was the most interesting bit in the interview:

our plan calls for reconversion [of hospitals] to non-profit status.

That's radical. I like it - I think it's abominable that people have such poor economic training that they think that hospitals can be run like any other widget factory - but I doubt it will get much traction. Too many folks have the unshakable belief that EVERYTHING is just a widget factory in a different form, and that if someone isn't making a profit then your venture is just worthless. See also public education and public transportation.

Posted by: NonyNony | Aug 6, 2007 2:52:34 PM

In Gar Lipow's excellent formulation:

"The problem with insurers is like the problem with cockroaches; it's not what they eat, it's what they spoil." (Quote may be inaccuarte as I can't find the original comment on MaxSpeak, but it's close.)

I'm not certain why a non-profit hospital, run for the benefit of the doctors, is "better" than a for-profit hospital, run for the benefit of the shareholders. Neither is necessarily designed to be most beneficial for patients.

Posted by: SamChevre | Aug 6, 2007 2:57:19 PM


I actually had major qualms with the three issues you cited: HMOs, Massachusetts and HSAs.

On HMOs, Woolhander writes:

What happens with HMOs is that they're interested in making money, and the easiest way is the cherry-picking of enrollees and seeking subsidies from Congress. Holding down costs just isn't their priority. Besides, they got a lot of pushback from hospitals and doctors over bossing them around on costs. Managed care is kaput. History has shown managed care doesn't work.

A very incomplete and subsequently inaccurate picture. HMOs did do a good job of holding down costs in the mid-90's; utilization review and restricted physician choice were two of the primary means of achieving it. However, there was substantial push-back from society at large and consequently HMOs stopped constraining costs so severely. The issue, whether its HMOs or single-payer, is that Americans don't like to be told "no" when it comes to health care consumption.

On Massachusetts,

I think the Massachusetts bill, the Romney plan, is a hoax. It won't get us to universal coverage. The fundamental assumption is that the uninsured have enough money to buy insurance policies, that they can buy their way out of the predicament. If they had the money, they'd already have insurance! They don't have money in the first place. Someone my age, in their 50s, and making over $29,400 a year, would get no subsidy. The cost of that premium would be $4,200 a year, but along with that there's a $2,000 deductible before any coverage begins, co-pays, and co-insurance after that first $2,000.

Massachusetts Democrats acknowledged prior to the bill's passage that the specific income levels proposed in the bill were probably too strict, but Romney was unwilling to budge. They decided to pass then, and change later, a reasonable legislative strategy-- the criticism above is either/both ignorant of this fact and unreasonably inflexible to future changes to the Massachusetts plan. (It'll cost more money, but Mass Dems proposed higher required contributions from small businesses-- the primary driver in Romney's refusal to budge on this issue)

On HSAs:

Health spending works on kind of an "80/20" rule, where most spending is on a minority of people with chronic or crisis needs. So most health spending is for a relatively small group of people within a given year. With Health Savings Accounts, the front-end costs are paid, but you can't control the costs of people who are really injured or really sick.

A little more nuance here. HSAs, alone won't accomplish much. As we've discussed before, if they were implemented in a more reasonable fashion and supplemented with tools that empowered consumers (e.g. price/quality transparency) they could impact both the "80" (preventative medicine) and the "20" (wasteful spending).

Posted by: wisewon | Aug 6, 2007 3:23:17 PM

The naivete of Woolhandler's statement is sort of endearing, but unfortunately the real-world consequences of that sort of thinking are dire. The Achilles heel of so many well-meaning liberals is their twin assumptions that: 1) once everyone has been provided with a full set of facts, everyone will have the same policy preferences, and 2) once everyone (or at least a strong majority) agrees about what the policy should be, that policy will somehow magically become the law of the land.

Assumption #1 shows a fairly profound lack of understanding of human nature, and assumption #2 shows an equally deep naivete about the political process. (And btw Woolhandler should read Mancur Olson's classic The Logic of Collective Action if she wants an extremely compelling theoretical argument about why popular policies don't automatically, unproblematically get adopted).

I'll add one more thought: if knowing more about health economics = support for single-payer, then how come so many economists are strongly opposed to single payer? Guys like Gary Becker and Kevin Murphy, who've forgotten far more economics than I will ever learn, are implacably, irrevocably opposed to single-payer. In fact, I wouldn't be surprised if they thought the entire health care system should be privatized.

It's not that they don't understand all the economic arguments in favor of single-payer and other types of health care reform -- they certainly do. It's just that, ideologically, they believe that the market is always (or almost always) the institution that best meets human needs and that will promote human liberty and economic growth. Regulation, in their view, tends to stifle innovation, which in turn slows economic development and human progress. Though some people are undoubtedly worse off under the current system, in the long-run unfettered markets are best for human welfare. (Partly because they believe that, without unfettered markets, we'd never have the miraculous, life-saving innovations we've seen in medical technology).

Do I agree with this argument? Hell to the no! But it is a serious argument and a lot of economists accept it. As Dani Rodrik argues here in this wonderful post:
there are basically two types of economists, and the anti-single-payer guys tend to be what he calls the "first-best" group.

I think the most interesting thing Rodrik says in that post is that "these disagreements are often grounded not in economics per se, but in strongly held prior views about the world in which we live in." Exactly. It's your basic prior ideological orientation that determines what group you fall into. It's only after that you'll grok to the many plausible economic arguments on either side that support your point of view.

Posted by: Kathy G. | Aug 6, 2007 3:53:13 PM


In reading Rodrik's piece-- I had a slightly different take. The "second-best economists" believe that the "market outcome can be improved by well-designed interventions"-- that's far from single-payer.

I'd put myself in this group-- recognize the numerous market imperfections that exist in health care, and believe that a fair amount of regulation is necessary to make this market work better-- not a government takeover of the industry itself.

Posted by: wisewon | Aug 6, 2007 4:09:37 PM

But I didn't say that the second-best group would necessarily be for single-payer. What I did say is that the anti-single-payer economists would tend to be in the first-best group.

To clarify, I think the first-best group would tend to be more hostile to regulation and more friendly towards regulation, whereas with the second-best group it would be the opposite. But that's a pretty loose categorization and it doesn't preclude being a first-best economist yet supporting regulation, etc., etc.

Posted by: Kathy G. | Aug 6, 2007 4:20:06 PM

Whoops! Meant to say "the first best group would tend to be more hostile to regulation and more friendly towards *privatization*".

Posted by: Kathy G. | Aug 6, 2007 4:21:28 PM

Getting back to convincing people to support single-payer: unlike economists, people facing a possible lack of access to health care don't care all that much about the nobility of the market. All Democrats really have to do is tap into the deep, and utterly reasonable, fear that most Americans have of
dying, being hurt, or suffering for lack of care. Middle-class prosperity, up till now, has kept healthcare costs doable for a sizeable chunk of Americans, but that's going downhill, fast. Not even the insurance companies pretend that costs will do anything but go up. Combined with a rocky economy and job insecurity, this is the kind of thing that keeps debt-saddled, family-supporting Americans up at night.

In short, you don't have to parse the policy for voters; you have to convince them "What we have is better than a) what our oppenents propose and b) what you have now."

And if you avoid over-wonking, single-payer is much simpler to understand than a constellation of HSAs, state plans, Medicare, etc. etc. Honestly the words "our way has less paperwork and guarantees that you'll have care forever" almost do it for you. However much Americans hate rising taxes, it's quite likely they hate insurance companies more.

Posted by: emjaybee | Aug 6, 2007 4:41:08 PM

Kathy G, well stated. Far too many people equate Liberalism with a refusal to recognize the profound effect of ideology on politics, either out of idealistic wish fufillment or an inability to deal with the bare knuckled realities such knowlege implies.

Posted by: WB Reeves | Aug 6, 2007 4:45:51 PM

Have some fun the next time you're asked for your insurance card by responding, "You still accept cash, don't you?" You'll be alternately amused and appalled by the response, "But, then, we don't know what to charge you." For me, right there (!), that is one of the major downfalls of our current multiple-payer system. How do consumers of medical services make rational decisions about health care if they don't even know what a unit of some kind of health care costs? Never mind make rational decisions about health insurance plans!

Posted by: mk | Aug 6, 2007 5:00:30 PM

Jeebus Cripes!

Do informed people really believe that 20% of healthcare spending is accounted for by insurance company admin and profit?

Health insurers have admin costs of around 12-15%. They make roughly 3-6% profit, and the Medical expenses are around 80-85%. But that doesn't mean that admin plus profit equals 15-21% of healthcare expenditures! Health insurers account for less than half of healthcare spending.

When you count (a) government programs and (b) out of pocket expenses, insurers cover only about 1/3 of healthcare spending. When you also include self-insuring companies (nearly half the commercial insurance market), health insurers actually account for closer to 25% of all spending. But ignoring that last complication and going with the 33% estimate, the total direct contribution of private insurance to total overhead is around 6%, 1% of which is insurance company profit. This is not debatable, folks. It's in every public database you care to look at.

If every American were insured through a private health insurer, and there were no economies of scale or streamlined benefits, then we would indeed see roughly 20% of all healthcare costs going to private insurers rather than to pay for medical expenses. But that's not the world we live in.

I don't question the 31% figure...that's supported by the evidence. But of that 31% the large majority is administration and profit by non-insurers: hospitals, pharma, med devices, physician groups, nursing homes, etc.

Note also that total admin costs in Canada are around 17%. Their insurance overhead is in the low single digits, but their total admin is in the high teens. So don't think that we're going to get our healthcare costs in line just by going single payer. That will only knock it down by maybe 15%. We'll still be far and away the most expensive and wasteful medical system on earth, because of our unconstrained FFS system.

That's where most of the savings are. It frustrates me to no end that most progressives ignore this entirely.

Posted by: jd | Aug 6, 2007 8:18:16 PM

I wrote that last comment in rant mode. I hope the points were clearly articulated enough, because the content is important.

It's perfectly true that going single payer will reduce overhead, but it's not going to be nearly the savings people are led to believe. Other nations pay their providers less and engage in less wasteful spending on "wow" technologies that don't actually improve health outcomes. That's where they get most of the savings.

Oh, and also the people in those nations tend to be healthier. This is another failure of our medical establishment, actually, because FFS providers here are not paid to keep people healthy. So, they make only the barest of efforts to get people to engage in the behaviors that will keep them healthy.

I remember being shocked when I discussed my cholesterol results with my physician recently, which for the first time were above the normal range. She didn't say a word about changing diet. I had to ask, and then she went through a quick list of do's/don't's as though on autopilot. And why not? She's not paid to keep me well. She's paid to treat me when I'm sick. We have a sick care system, not a health care system (I'm far from the first to observe this, but it both the left and right seem to find the idea suspicious and disquieting).

Posted by: jd | Aug 6, 2007 8:29:52 PM

Just to echo jd's comments. His numbers on the US system are dead on. I didn't notice it before, but its pretty shocking to read the comment below was part of this article when its so wrong... they perhaps meant just among health insurance companies, but that is clearly not what was written.

You performed a study showing that about 31 percent of health spending in America goes to administrative overhead and profit.

Posted by: wisewon | Aug 6, 2007 8:50:42 PM


To be clear, the 31% figure for total healthcare admin is plausible to me, so long as it includes admin for hospitals, physician offices, pharma, etc.

If I read the original statement correctly, this is what they meant. On a second re-read, if the follow up statement was intended to say that 20% of 31% is accounted for by health insurer overhead (i.e. 6%), then this is roughly correct as well. As I wrote above, 6% of the total spending is about right.

But if that's what the original exchange meant, the claim is that 25% of healthcare dollars spent on overhead (31%-6%) are explained by defensive strategies to deal with "denial management" and the need to deal with multiple different insurers and different benefits, etc.

That seems high. Has anyone seen a comparison of the budgets for comparable hospitals in the US and other nations? I'm sure it would be fascinating, and would pretty clearly reveal how much admin savings we could squeeze on the provider side by going single payer.

Posted by: jd | Aug 6, 2007 9:08:54 PM


I was trying to say: But if that's what the original exchange meant, the claim is that 25% of healthcare dollars(31%-6%) are explained by defensive....

Damned percents of percents.

Posted by: jd | Aug 6, 2007 9:11:54 PM

Here's the article on the 31%


Woodhandler is talking about 31% across health sectors, not just insurance, so it does make sense. I misunderstood that before.

The more important point is that whether the amount of overhead that could be saved from single-payer is somewhere between 10 and 20% (that's extremely generous on the high end), those savings will be completely gone after 3-5 years of regular cost growth. Given that no Western health system has solved the cost growth issue (all have similar rates of growth), the focus should be on what's the best system for slowing cost growth-- which single payer systems have consistently failed to do-- because cost growth, rather than overhead is the larger problem with our health care system.

Posted by: wisewon | Aug 6, 2007 9:25:03 PM


I agree that we have to focus more on cost growth than on administrative savings. But to say that single payer systems have failed to stem cost growth is a bit misleading, in that they have done a better job than we have in the past 50 years. If you go back to the 50s, our medical costs were far more comparable to other nations.

Even if our average cost trend is only 1 percentage point more than theirs each year (and thus they are "similar"), that 1% compounds relentlessly and makes a big difference in 40 years. And that's pretty much exactly what has happened.

At this point, reducing the cost trend by 1 point is not going to solve our problems. Nor will removing 15 percent for admin and then reducing cost trend by 1 point. A far more radical solution is needed.

Posted by: jd | Aug 6, 2007 10:12:10 PM

Just as others state on average people don't go around using up medical resources for the fun of it, the same can be said for docs wanting to keep people sick to get paid. Ever heard of the tort system here. You think physicians honestly want to keep people sick? Ideas get tossed around about paying physicians more for getting there patients to live healthier. Take it one step further. Someone would have to be born on Mars to not know the dangers of smoking and obesity. Why not pay the people for being healthy not the physician.

Posted by: DIngo | Aug 6, 2007 11:32:06 PM

Compare tort systems of other countries as well when looking at the cost of healthcare here. It is hardly ever mentioned on this blog. Ever see a 20 million dollar verdict in France, Britain or Canada?

Posted by: Dingo | Aug 6, 2007 11:35:43 PM

Agree that administrative savings produced by single payer would be one time reductions, whereas the factors driving cost growth are trends. Ultimately, any system that contains cost will have to deny services.

Obviously, single payer can be structured like any other insurance policy to reduce cost (though perhaps, not, as Wisewon constantly reminds us, like a competing collection of all of them). Opponents plausibly argue that the political system will be more responsive to patient demand for coverage than to cost-control measures. I tend to think, though, that fear of taxation and mounting debt, together with the increased transparency of total health care spending available under a centralized system make the single payer option competitive with a regulated in this respect, and that the one time administrative benefits and the incomparable benefit of eliminating any trace of a profit motive to deny care make it worth.

Nonetheless, I will be satisifed with a regulated insurance market and a universal payer system other than the individual.

Posted by: RW | Aug 6, 2007 11:38:33 PM


I was speaking provocatively. I did not literally mean that physicians want their patients to be sick, only that they are not in fact paid to prevent them from getting sick. At least, not Fee for service docs in America. Incentives matter, and you sound like someone who understands that. So be consistent about it, and look at the effect that FFS reimbursement has on the practice of medicine when the market dictates.

Once I am sick, of course, the physician is paid to perform tests, procedures and therapies. I never suggested that physicians are motivated not to practice medicine, only that they are not financially motivated to practice prevention.

As for malpractice, have you not seen the data? It is a small fraction of total healthcare costs. This has been beaten to death. I grant that fear of lawsuits is an issue, but it is disproportional to the actual likelihood of lawsuits. Moreover, there is now abundant evidence that the best way to avoid a malpractice suit is NOT to order lots and lots of tests, but to (a) be nice to your patients and (b) quickly admit to any mistakes and show remorse if you can.

Fear of lawsuits, by the way, dovetails perfectly with desire for reimbursement when physicians order multiple (and unnecessary) tests and procedures. The motivations are often not so easy to tease out from each other, and physicians like to tell the former story about themselves much more than they like to tell the latter. If you are going to do something that is not in the best interest of the patient, it's too much cognitive dissonance to believe that you are acting to increase revenues. If you act to protect yourself from an unjust suit and you happen to get paid for it, well, that's what you deserve, right?

That's how it works, psychologically.

Posted by: jd | Aug 7, 2007 12:48:07 AM


Last decade its been the same +/- depending on the country of comparison. Going back to the 50's is really less helpful, a lot of things have changed since that time.

Posted by: wisewon | Aug 7, 2007 7:22:15 AM


Let's slow down. Dingo and I are speaking from experience here-- defensive medicine is not a ruse. Its a real problem. The financial incentives are subconciously there when the same doctor is involved in the "defensive follow-up" (visits, tests, etc.) but many times its a referral to another doctor/testing center where there is clearly no interest involved.

The best way to avoid malpractice is not to make mistakes. Once you've made a mistake, recent research does suggest what you said is very helpful. But defensive medicine is about trying to make sure that you don't make mistakes.

Posted by: wisewon | Aug 7, 2007 7:32:54 AM


I tend to think, though, that fear of taxation and mounting debt, together with the increased transparency of total health care spending available under a centralized system make the single payer option competitive with a regulated in this respect, and that the one time administrative benefits and the incomparable benefit of eliminating any trace of a profit motive to deny care make it worth.

A few things.

Fear of mounting debt? Really? Who? You and me maybe, but there's never been a politician knocked out of office because her hasn't taken debt seriously. Its the lack of fear that makes a single-payer very dangerous-- the debt is not transparent in any tangible way to citizens, whereas lack of immediate health care access would be.

Increased transparency-- I would argue that it would go down. The total system cost is clear today and has been for years-- CMS publishes the data, and its used widely in health policy circles. I'd argue the opposite-- the cost growth in much more transparent in today's system or a private system because people actually see increases YOY, a government system is its just $2 trillion this year $2.1 trillion next. Relates to comment above.

On the profit motive to deny care-- let's be clear-- someone needs a motive to deny care. In a UK/Canadian style single-payer system, the government takes on that motive, and restricts access prospectively, without any knowledge about specific patient needs and whether individual cost-benefit would make it worthwhile. In your presumed envisaged system, where we have government acting as one big insurance company (oversimplified, but I know where you are) you'd still need actual people who's job would be about denying unnecessary care on a case-by-case basis, unless you go with UK-Canada style (which would be much worse, IMO). So that person's job, i.e. "personal profit motive" is to deny care-- how is that any better/different? I'd rather have transparency on care denials, have insurers compete on having the lowest level of denial of care while holding down costs (its possible if the "winner" is best able to influence the demand of care via consumer education, co-pays and provider P4Ps).

Posted by: wisewon | Aug 7, 2007 7:47:07 AM

I don't understand why jd feels the numbers make going to a single-payer system seem weak or ineffective for the average American. Just saving the 6% on profits (of course these numbers don't include executive salaries and stock options) along with the fact that I will never have to worry about whether I have health insurance or not is enough for me to give the thumbs up to a government-run program. If the system also saves another 10% or so by reducing overhead all the better, but the reality is all I want to know is that I have coverage unfettered from my employer. I currently don't have any options on my health care a condition I am sure I share with a majority of Americans. I take what the company offers. It keeps dumping more and more of the costs on me, but what choice do I have? So if I go from a company-offered, single choice plan to a government-run single choice plan, I am already better off by being able to freely change jobs without having to factor in insurance. If it also can cost less by getting rid of the profit motive or by pooling me with the largest possible population, all the better and I bet over time my salary goes up (in line with the tax increase) as the company passes on the savings to me and my colleagues.

I say f*ck the market. Other countries have shown that reasonable government-run health care is not only feasible but the norm for the rest of the industrialized world. I know our program will start on rocky ground as the everyone will scramble to continue to make a profit off of me and my health, but once we get a program in place it will be hard to go back.

Posted by: Ricky | Aug 7, 2007 9:56:34 AM

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