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Tyler Cowen begs some intellectual honesty from his own side:

That said, people on my side of the issue should admit that we could lower overall health care costs (or at least slow their rise) by having a true single-payer plan and putting most doctors on fixed salaries in small cooperatives, thereby altering their incentives to spend on wasteful capital expenditures.  (How many years would it take for costs to fall?)  That's not, however, what we'll be getting, so beware the bait and switch.  Under any plausible health care reform scenario, health care expenditures in America will rise rather than fall.  If only we had a betting market on this...

Addendum: Here is Arnold's more direct reply

I'll bite:  nationalizing the health care system to an NHS style system would probably save money, at least in the short run.  Obviously, if you paid doctors at the GS-15 rate, the system would cost a lot less.

But this raises a lot of questions:

  • Is it politically feasible to put doctors on a GS-15 salary?  I don't see it happening; just look at the way that the AMA has skewed Medicare reimbursement rates.  And even if we did, I expect that over time you'd see a rather dramatic departure of top talent from the medical sector.  Some doctors are purely motivated by a desire to serve humanity.  Most aren't.  The government has a problem attracting the highest caliber workers because high-caliber workers do not want to be paid on a civil service scheme--not only because of the low average wage, but also because the system is set up to reward seniority and credentials, not talent. 
  • Are government systems good at innovation?  C'mon.  The only vaguely innovative government sector is defense, which achieves that innovation by wasting money by the barrelful.  Yes, yes, the VA computer systems.  Against which, I give you . . . the rest of the government.  I can make any idea look swell if I get to pick the single successful example and ignore the other failures.
  • Will an American national health care system look anything at all like the idealized version debated on the pages of liberal policy magazines?  No.  It will look like Medicare.
  • How much money do administrative costs suck out of our wallets?  There are a lot of administrative costs in the private sector.  Advocates for single payer like to argue as if the entire administrative overhead of private insurance companies is dedicated to denying valid claims and culling sick patients out of their files.  But given that administrative costs are only 15% of private spending, and that most administrative costs are boring things like negotiating with doctors and processing claims, any savings here is likely to be a rounding error in the budget.
  • How much of our capital spending is actually wasteful?  Today's wasteful capital spending is tomorrow's cheap MRI.

Most important to refute is the notion, common among less savvy healthcare advocates, that you can lower the total cost by lowering the average cost.  If you add a bunch of healthy young people to Medicare, you will lower the average cost.  But you will not lower the total cost unless you manage to spend less money on either the healthy young people, or the sick old people. None of the health care proposals this time around have a plan to spend less money on the sick old people.  And the healthy young people don't cost that much money.  Even saving a significant amount on their prescription drug bills and administrative costs, which you won't, will not generate any noticeable amount of extra cash for Fogeycare.

Right now, just about half the healthcare dollars spent in America come out of government coffers.  This is expected, in the not-too-distant future, to open up unsustainable holes in the budget. Single payer will patch those holes only if we can generate a dollar in reduced spending on the currently uncovered for every new dollar we want to spend on the sickly.  The three general proposals to do so are:

  1. Reduce administrative costs
  2. Squeeze out pharma profits
  3. Preventative care

With administrative costs only 15% of private spending, and pharma profits about 10% of the 10% of healthcare costs represented by drug spending, that had better be some amazing preventative care.  Unfortunately, there's little good evidence that preventative care actually saves money (it may save lives); for every kidney transplant you prevent, you spend a lot of money on diabetics who wouldn't have needed one.

The only way we are actually going to save money on the system is to do less stuff.  That is politically unpalatable.  About which I'm kind of glad.

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Megan McArdle is a columnist at Bloomberg View and a former senior editor at The Atlantic. Her new book is The Up Side of Down.

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