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Head of Medicare Cites “Extremely High Level of Waste”

December 4th, 2011 · No Comments · Economics

Ouch. This would appear to handily refute the non-intuitive argument Krugman made (and bloggers parrot) about the imagined efficiency of Medicare and Medicaid.

The New York Times reported yesterday:

The official in charge of Medicare and Medicaid for the last 17 months says that 20 percent to 30 percent of health spending is “waste” that yields no benefit to patients, and that some of the needless spending is a result of onerous, archaic regulations enforced by his agency.

“…The government, unlike many private health insurance plans, is working in the daylight. That’s a strength.”

The official, Dr. Donald M. Berwick, listed five reasons for what he described as the “extremely high level of waste.” They are overtreatment of patients, the failure to coordinate care, the administrative complexity of the health care system, burdensome rules and fraud.

If his estimate is right, Medicare and Medicaid could save $150 billion to $250 billion a year by eliminating waste, which he defines as “activities that don’t have any value.”

(emphasis mine)

Some of us thought these efficiency arguments seemed fishy all along. A line I used to hear frequently from my professors was “intuitively, we know that…” One of the things we intuitively knew was that incentives matter (greatly). When you don’t have incentives for efficiency, you won’t get it. Market-based entities that can literally vanish from existence if they aren’t competitive have that incentive. Government agencies do not. Neither do banks that are “too big to fail.”

I’ll quote one more time from the econ text Public Finance and Public Policy by MIT’s Jonathan Gruber:

“Correspondingly, a large literature finds that when state-owned companies are privatized, efficiency improves dramatically, and a smaller company is required to produce the same level of output. Mueller (2003) lists 71 studies that compared the performance of state-owned companies: in only 5 of these studies did state-owned companies outperform their counterparts in terms of efficiency.”

MIT. 66 out of 71 studies. Ex post facto analysis. Common sense. Personal experience (I have worked in both government and private offices.) I call this case closed.


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