Blog Post: Hayek and Healthcare Administrative Expenditures (not at all wonkish)

Would a single-payer national health program, at the end of the day, truly be sleeker and slimmer than our bloated and fragmented semi-private system? Not according to Dr. Michel Accad, who takes on this important single-payer talking point in his blog post posted last week on KevinMD, “Will single-payer really reduce administrative waste?”

Given that savings from reduced expenditures on billing and overhead are a core argument that single-payer advocates (myself among them) employ to advance our cause, the piece caught my eye. To quote the proposal of the Physicians’ Working Group for Single-Payer Insurance (of note, I’m active in the organization Physicians for a National Health Program, which was behind the proposal), published in JAMA in 2003:

Our multiplicity of insurers forces US hospitals to spend more than twice as much as Canadian hospitals on billing and administration; forces US physicians to spend vast amounts on billing; and nourishes a panoply of business consultants, coding software vendors, and other satellite business.

So had a new study been published demonstrating, contrary to all existing data, that private insurers somehow had lower administrative costs than Medicare? Had Canadian expenditures on healthcare administration somehow suddenly vaulted ahead of that of the United States?

No, neither had come to pass (not surprisingly). In fact, Dr. Accad doesn’t really deal with any of the literature about the administrative efficiency of different types of health care systems. Instead, he employs a “Hayekian perspective” to make the argument that central economic planning is inherently inferior to an atomized free market where individual economic actors buy and sell, rationally relying on their intimate knowledge of local market circumstances. “Only in a decentralized system,” he argues, “of decision making, where price fluctuations can adjust to the reality of needs and provisions, are major gluts and shortages avoided.” (i.e. no one knows the business of bread making better than the bread maker, etc. etc.).

Now on the one hand, it’s a bit quixotic to invoke the political philosophy of a neoliberal economist to argue against what is essentially empirical point, i.e. that the United States spends more on health care administration than nations that have a single-payer system.

For it clearly does. To review, one 2003 study published in the New England Journal of Medicine found that the US spent about three-times as much as Canada on health administration ($1,059 vs. $307 per capita, in 1999). More recently, a study published in Health Affairs found that the US had the highest hospital administrative costs among eight high-income nations (an astronomical 1.43% of GDP spent annually on hospital administration in the US, as compared to 0.41% in Canada).

Closer to home, Medicare – a single-payer-like system for older Americans – has an administrative overhead around 2%, as compared to the 13.6% in overhead and profits of privatized Medicare Advantage, which is run by private insurers.

I could quote my favored political philosophers here to counter Accad’s quotes from Hayek, but it’s really all beside the point. “The question,” as the Princeton health care economist Uwe E. Reinhardt put it in a post on the issue in New York Times, “is how long American health policy makers, and particularly the leaders of our private health insurance, can justify this enormous and costly administrative burden to the American people and to the harried providers of health care.”

To be fair, Dr. Accad makes a good point ridiculing the extraordinarily complex and “byzantine scheme of codification” used by Medicare (and followed by private insurers) for billing purposes. “[A] CPT code 99204-21 (new patient visit, E/M coding level 4, prolonged service) associated with ICD-9 code 786.50 (chest pain, unspecified),” he notes, “hardly conveys any real knowledge and cannot possibly be a basis on which relevant decisions can be made or value established.”

No, it can’t, but that’s not what such codes are used for: they’re used to determine reimbursement. But they don’t have to be – and that’s where the administrative savings come in.

Under a single payer system (as PNHP’s proposals describe), hospitals would receive a global lump sum budget to pay for all operating costs; there would be no need to monitor services used by individual patients, tabulate costs, or hire debt collectors. Indeed, hospital billing could largely be eliminated from the ledgers of hospital operating expenses.

Simplified fee schedules, capitation, or salaries – without bonuses or penalties for more or less health care use – would be used to reimburse providers in the outpatient sector. The name of the game would be “[s]implicity, simplicity, simplicity!”, as one prominent New Englander put it in his important defense of a national single-payer system, Walden.

I share what I sense is Dr. Accad’s bitterness at onerous documentation obligations. But a universal system would make much of that documentation irrelevant, and therefore unnecessary. It would therefore be a win both for practitioners and for the public (though it would admittedly be a loss for many others, including those who profit from the system’s inefficiency, e.g. the health insurance industry).

“Reducing administrative waste” may or no not be the heady revolutionary slogan that today’s millennial physician-activists are looking for, but it’s no less true for that – whatever the unrelated musings of Hayek or Henry David Thoreau.

Note: Updated to note that the “global lump sum budget” is described in PNHP’s proposals.   

Note 2: A version of this post has been published on