Insurance Arms Race

Paul Krugman describes a recent lawsuit ($) against UnitedHealth to illustrate several pathologies of the multi-payer insurance industry. Some choice quotations:

Our health insurance system, a system in which resources that could have been used to pay for medical care are instead wasted in a zero-sum struggle over who ends up with the bill...It's an arms race between insurers, who deploy software and manpower trying to find claims they can reject, and doctors and hospitals, who deploy their own forces in an effort to outsmart or challenge the insurers. And the cost of this arms race ends up being borne by the public, in the form of higher health care prices and higher insurance premiums.

He also notes an oversight in the McKinsey report that results in an understatement of administrative costs:

McKinsey's estimate of excess administrative costs counts only the costs of insurers. It doesn't, as the report concedes, include other "important consequences of the multipayor system," like the extra costs imposed on providers. The sums doctors pay to denial management specialists are just one example.

This is a frequent oversight and isn't taken into account by "medical loss ratios." Any proposal to cap or tax administrative costs inherently misses some of them if it focuses solely on the direct costs insurance companies pay to the exclusion of these indirect costs they impose on others. Comparisons between Medicare and multi-payer systems should account for both kinds of costs if possible, though the latter are more difficult to measure. For one study that does as good a job as any at estimating these costs, see: Administrative costs consume 31 percent of US health spending, most of it unnecessary. _{(Woolhandler, et al “Costs of Health Administration in the U.S. and Canada,” NEJM 349(8) Sept. 21, 2003).}