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November 05, 2012 9:33 AM Are Health Insurance Companies “Unproductive”?

By Mark Kleiman

Brad DeLong claims that health insurance and finance are “at best, completely unproductive.”

Shifting an extra three percent of GDP into health care administration was a huge mistake. What the extra three percent of people working in health care administration are doing was working for insurance companies trying to find ways not to pay for the treatment of sick people. They are not only not producing anything useful, they simply increase risk and fear–and make people scared that if they do go to the doctor they then will not understand the bill they get and will not be able to pay it.

Well, yes and no. Yes, health insurers try to prevent health-care expenditure. Often this comes at the expense of sick people.

But if the health insurers don’t stand between the health care industries (hospitals, doctors, pharmaceutical companies, medical-equipment vendors, nursing-home operators) and their ambition to consume 110% of GDP, who will? If we don’t want sick people bargaining with their doctors, someone else has to. Whether that “someone else” works for a public agency or a private insurer, there’s going to be conflict. And it’s not at all obvious that cheaping out on administration, as Medicare and Medicaid do, is actually the best way to run the system.

As Malcolm Sparrow has pointed out, a noticeable fraction – 5%? 10%? – of total health-care expenditure is flat-out stolen. Not wasted: stolen, by billing for procedures never performed and equipment never delivered. Getting control of that problem requires spending money on “health care administration.”

That’s not to say that reducing the paper-shuffling in health care isn’t a social objective: only that it isn’t a simple proposition.

[Cross-posted at The Reality-based Community]

Mark Kleiman is a professor of public policy at the University of California Los Angeles.