When Theory Lies

In a post defending the value of higher administrative costs for health insurers, Alex Tabarrok makes a few totally confounding arguments, the first of which is to reject certain arguments about reduced costs out of hand because capitalism has “proved” more efficient than socialism. This is certainly true if you look at say, Soviet auto making, but it seems to have almost no bearing on the issue of health care. For example, in the American “capitalist” system, we spend a third more per capita as the closest country to achieve the same results. I think by virtually any definition of “efficiency,” spending more for the same product is not typically the desired result. Anyway, I found this head-in-the-sand defense particularly baffling:

Closely related to this point is the bizarre habit of taking about costs without mentioning benefits.  The implicit argument appears to be that administrative costs are simply waste – this is the ancient cutting out the middleman fallacy.  Administrative benefits, for example, reduce fraud and are a necessary consequence of making it easy for patients to get second and third opinions from different doctors.

Administrative benifets, with respect to private health insurers, also pay for finding ways to deny customers care, like rescission. They go into thorough investigations to find preexisting conditions to weed out unprofitable customers. They go into advertising and marketing budgets. They go into fighting law suits. Which is to say, whatever benefits administrative costs might confer in theory, in the actual world of health insurance, companies devote considerable effort and resources to a whole range of practices outside the core goal of providing health insurance. Of course, you can’t fault them: it’s not profitable to insure sick people, and for-profit companies seek profits.

By contrast, Toyota doesn’t spend money assiduously narrowing its customer base to draw customers who will buy only the most expensive models upfront, with cash. There are greater profits to be reaped by maximizing scale. This is simply not the case for a private health insurer. It’s simply one industry where objective fact belies a lot of economic philosophy. And it seems to leave a lot of smart people making silly arguments.


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