Are health insurance companies “unproductive”?

Not entirely; someone has to keep health care providers’ hands out of our pockets.

Brad DeLong claims that health insurance and finance are “at best, completely unproductive.”

Shifting an extra three percent of GDP into health care administration was a huge mistake. What the extra three percent of people working in health care administration are doing was working for insurance companies trying to find ways not to pay for the treatment of sick people. They are not only not producing anything useful, they simply increase risk and fear–and make people scared that if they do go to the doctor they then will not understand the bill they get and will not be able to pay it.

Well, yes and no. Yes, health insurers try to prevent health-care expenditure. Often this comes at the expense of sick people.

But if the health insurers don’t stand between the health care industries (hospitals, doctors, pharmaceutical companies, medical-equipment vendors, nursing-home operators) and their ambition to consume 110% of GDP, who will? If we don’t want sick people bargaining with their doctors, someone else has to. Whether that “someone else” works for a public agency or a private insurer, there’s going to be conflict. And it’s not at all obvious that cheaping out on administration, as Medicare and Medicaid do, is actually the best way to run the system.

As Malcolm Sparrow has pointed out, a noticeable fraction – 5%? 10%? – of total health-care expenditure is flat-out stolen. Not wasted: stolen, by billing for procedures never performed and equipment never delivered. Getting control of that problem requires spending money on “health care administration.”

That’s not to say that reducing the paper-shuffling in health care isn’t a social objective: only that it isn’t a simple proposition.

Author: Mark Kleiman

Professor of Public Policy at the NYU Marron Institute for Urban Management and editor of the Journal of Drug Policy Analysis. Teaches about the methods of policy analysis about drug abuse control and crime control policy, working out the implications of two principles: that swift and certain sanctions don't have to be severe to be effective, and that well-designed threats usually don't have to be carried out. Books: Drugs and Drug Policy: What Everyone Needs to Know (with Jonathan Caulkins and Angela Hawken) When Brute Force Fails: How to Have Less Crime and Less Punishment (Princeton, 2009; named one of the "books of the year" by The Economist Against Excess: Drug Policy for Results (Basic, 1993) Marijuana: Costs of Abuse, Costs of Control (Greenwood, 1989) UCLA Homepage Curriculum Vitae Contact:

23 thoughts on “Are health insurance companies “unproductive”?”

  1. Reading Brad DeLong’s post in its entirety, I don’t think he disagrees with the benefits of having healthcare expenditures managed in a way (whether by insurance companies or a single-payer system or non-profit organizations) that prevents healthcare providers from gouging patients. His problem seems to be with that part of the health insurance industry that prevents healthcare providers from gouging patients by doing the gouging itself and pocketing the proceeds.

    His bigger point, that the administrative overhead of health insurance in America has lots of costs and very few benefits associated with it, stands regardless. Whatever the shortcomings of the NHS, my GP here in Scotland has precisely zero specialized medical billing assistants/clerks; he simply has no need for such employees. My old doctor’s practice in Michigan had two, last I checked, just because of the complexities of having to deal with the various plans offered by various insurers. Duke University Hospital has 1,300 billing clerks for 900 hospital beds. And that’s just at the healthcare providers’ end, not counting all the wasted hours going into insurers and their employees cooking up and administering these absurdly complex and impenetrable healthcare plans that rarely serve the purpose of a useful differentiation between insurers and more often are simply traps for unwary patients. Preventing dishonest doctors from siphoning money off would be a worthwhile raison d’être for health insurance companies; fleecing patients, as Brad DeLong points out, not so much.

    A close friend of mine will have her first baby in April next year. They found out recently that coinsurance for delivery will get her and her husband close to bankruptcy. She may have to worry about whether she can afford an epidural. (My parents are currently trying to get them to accept an interest-free loan.)

    1. Maybe your friends should think about moving, even just temporarily. (I’m not sure where though. Maybe Harold would know?) They might have enough time to do it. Our system blows. I am sorry for their added stress to what should be a happy time.

      1. I’m not really worried. My parents are pretty affluent (both tenured professors) and don’t mind giving to friends rather than an anonymous charity for a change, the question is more to have my friend and her husband take the money without their pride being hurt. No American likes taking alms.

        My bigger point is more that in a developed country, people shouldn’t depend on charity for basic healthcare needs (also related: why our abortion rates are so damn high).

    2. If she’s low-risk, and midwifery is legal in their state, it’s usually substantially cheaper than hospital delivery.

    3. Dear Republicans, If you crush the American middle class for 30 years, making it harder and harder to afford everything including the cost of childbirth, don’t be surprised if their fertility rates drop and your base shrinks.

  2. I am confident that Professor DeLong does not advocate that NOBODY “stand between the health care industries . . . and their ambition to consume 110% of GDP.” His point, I think, is that America’s current private health insurance system does a bad, non-cost-effective job of it. Even if we assume single-payer off the table, we could and should move to one of the many more successful systems to be found elsewhere in the developed world. Some of those even rely on a private insurance industry. ACA is a hard-won first step in that process.

  3. Is there any evidence that US heath insurers – as opposed to European and Japanese health officials – do actually bargain with medical providers to keep costs down? Their main strategy semms to be to pass costs on and select for a healthy insured pool.

    The most recent budget I could find for the brutally effective British NHS NICE was GBP 73m in 2011.

    1. I’d love to see that evidence too. My guess is, for big employer groups, they probably do serve some mildly useful role (though one easily replaceable by a non-profiteering body). For individuals, they seem to just make numbers up and charge as much as they can.

      The whole pricing system though seems to be so fantastic, I wonder how solid any evidence could be. To judge a discount, you’d have to know the “true” cost first.

    2. I have no evidence, but my understanding is that they do bargain vigorously with hospitals and large medical practices. Of course, their primary weapon is the threat of excluding the provider from their network. That means, in turn, that the largest insurers have the most clout and can get the best deals, reducing competitiveness in the market for health insurance. Smaller companies have a hard time competing, since they must pay providers more. The issue then becomes not whether insurers hold down costs, but to what degree the savings are captured by the insurer rather than the patient.

    3. There’s a lot of evidence that they bargain to keep *their* costs down, but how that translates to system costs is unknown. For instance, if you can postpone certain classes of intervention until a patient is eligible for medicare, you’ve done brilliantly as an insurance company, but not so well as a nation and even worse for morbidity and mortality.

  4. Categorical error. They are extraordinarily productive. Their product is unearned profits for their corporate masters. And at this task, they excel. Judging them by a task at which they have no interest (easing the pain and suffering of the injured and ill) is wrong.

  5. Why is it “not at all obvious that [spending less]/(cheaping out) on administration, as Medicare and Medicaid do, is actually the best way to run the system”? Don’t you have to prove that it’s productive to spend more on administration rather than the other way around? And that type of proof is woefully limited/non-existent at the macro level – e.g. I challenge you to find a correlation between improved health outcomes and administrative costs that favors the U.S. system vs. other health care systems globally. Why is it naturally assumed that the spending is productive cost-savings vs. semi-monopoly rent-seeking? Where is your evidence? Also, why no mention of the VA system?

    This is not to say that health insurers are pure bad actors, nor that they don’t (or can’t) play a role in helping to reduce fraud or control costs. But you can’t just assume that, without providing evidence of the % value added. This post read like an apologia for insurance companies, and that’s unfortunate.

  6. Obviously there’s some level of administrative cost that’s a good idea. But. Let’s remember that the insurance industry and the health-care-provision industry are only adversaries in a few tiny slices of their existence. As long as increased costs can get passed through to customers in the form of higher rates (or a larger covered pool), they’re good for the insurance industry, because a bigger pot to skim means more profit. Furthermore, since insurance companies have to invest those premiums somewhere while waiting to pay them out (or not) a vibrant health-care sector means a good place to park their money.

  7. I am wondering if there as any hope for a law that says simply “The ratio between the minimum and maximum charges for the same procedure that a health care provider charges different classes of clients shall not exceed 3 to 1.” This gouging of uninsured and under-insured patients has got to be illegal at some level.

    Another simple law, of course, is one that says “Rates for all procedures shall be published in advance.” Can’t even get that passed.

  8. “it’s not at all obvious that cheaping out on administration, as Medicare and Medicaid do, is actually the best way to run the system.”

    Actually it is pretty obvious that cheaper methodologies, such as single payer, ARE the best way to run the system. Just compare the results. The US spends vastly more on administration than other developed countries with no better and often worse results.

  9. @And it’s not at all obvious that cheaping out on administration, as Medicare and Medicaid do, is actually the best way to run the system.” I beg to differ. I think it is obvious, not a priori but obvious to all other reality based commentators. The CMS not only cheaps out on administration, it also pays providers less. The cost of private health insurance to health care consumers is not just the huge added administrative cost (including the salaries of the people health care providers pay to fight the insurance companies) and the profits (which are not theft and not gravy but necessary if insurance companies are to have equity which is necessary for them to insure). It is also the lower bargaining power with providers.

    Look over here (Europe). Longer life expectancy and lower infant mortality at half the cost. Only part of that is administrative costs. Much of that is the huge rents going to health care providers who can bargain with insurance companies. Believe me it isn’t because public adminstration is more efficient here, or because we public employees work harder, or because none of us has gold ingots hidden in his basement.

    The only case for private health insurance is that we want the people fighting health care providers to be weak and divided to create the provider profits which finance and motivate R and D.

    Private health insurance has been tried. It has clearly failed. I don’t see how their can be any further debate on the topic within the reality based community.

  10. Health insurance became good business in these days. They are confusing people by providing different types of policies. Most of the people don’t getting full benefits by their insurance policies.

  11. I don’t know that they’re unproductive, but they certainly don’t have people’s beset interests at heart. They’re there to make money, plain and simple.

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