“In 2003 Medicare spent less than 2 percent of its resources on administration, while private insurance companies spent more than 13 percent.”
Source: Paul Krugman and Robin Wells, The Health Care Crisis and What to Do About It, New York Review of Books, Volume 53, Number 5, March 23, 2006.
This implies that a massive 11% of private insurance companies expenditure goes on pure transaction costs (monitoring, enforcement, litigation etc etc).
Krugman and Wells aregue that the two main problems of the US system are:
- Its lack of universal coverage
- Its extremely high per capita cost of healthcare provision (compared to other countries developed countries)
With regard to the second item they argue that much of the massive differential in per capita costs of health care in the United States is due to the uniquely high level of private (rather than public) provision in the US system. This is for two reasons. First, centralized, public provision, results in much lower transaction costs compared to private provision. Second, centralized, public providers can bargain more effectively with suppliers to obtain lower prices. As evidence for the first point they state:
The cost advantage of public health insurance appears to arise from two main sources. The first is lower administrative costs. Private insurers spend large sums fighting adverse selection, trying to identify and screen out high-cost customers. Systems such as Medicare, which covers every American sixty-five or older, or the Canadian single-payer system, which covers everyone, avoid these costs. In 2003 Medicare spent less than 2 percent of its resources on administration, while private insurance companies spent more than 13 percent.
At the same time, the fragmentation of a system that relies largely on private insurance leads both to administrative complexity because of differences in coverage among individuals and to what is, in effect, a zero-sum struggle between different players in the system, each trying to stick others with the bill. Many estimates suggest that the paperwork imposed on health care providers by the fragmentation of the US system costs several times as much as the direct costs borne by the insurers.