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March 22, 2007

American Health Care

Tyler Cowen with a piece in the NYT about the US health care system and why changing it to a single payer system might not be all that good an idea. Mark Thoma excerpts the piece and provides some Paul Krugman quotes in refutation.

Over and above the arguments being used here there's one I don't see, originally raised by Arnold Kling I think (maybe Brian Caplan).

When people talk about the cost of the health care system in the US they (rightly) note that money  is spent on marketing  and other overheads associated with raising the money to keep the system fed.

However, when they look at the costs of a single payer system, mysteriously, the costs of raising those funds disappear. Now the actual direct costs of raising tax money are not large. However, we know that all and any taxes distort behaviour, leading to there being substantial costs associated with any taxation.

Now this is only a question, not a statement, but is a single payer system actually any cheaper, once the deadweight costs of those taxes are taken into account?

(Also worth pointing out to those agitating for a single payer system in the US. The French system, the one that is generally rated as being number 1 globally, is neither single payer nor single provider. In fact, it is markedly less generous than either Medicare or Medicaid).

March 22, 2007 in Health Care | Permalink


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There has been a lot of intelligent commentary during the past week on the pros and cons of single-payer health care, particularly from the Economist’s View, Tim Worstall, and Health Care Economist. One comment from the latter raises an important iss... [Read More]

Tracked on Mar 27, 2007 9:57:32 PM


"some Paul Krugman quotes in refutation"

Err - Krugman makes some reasonable contrary points to Cowen, but I wouldn't say they amounted to a 'refutation' - indeed, quite the contrary.

Tim adds: Apologies. Mark Thoma thinks they refute, not necessarily myself.

Posted by: Bruce G Charlton | Mar 22, 2007 4:23:03 PM

The process of switching to single-payer would involve eliminating the subsidy on employer-provided insurance which is one of the largest tax expenditures. In other words, we are incurring that deadweight loss right now through the exclusion, there need not be much additional deadweight loss.

Tim adds: I'll need a little more convincing about that. The idea that a tax deduction causes the same distortions and deadweight costs as a tax collection doesn't seem right to me. Happy to be put right if that is indeed the case but doesn't, on hte face of it, seem likely to me.

Posted by: j | Mar 22, 2007 5:49:49 PM

Hi Tim, thank you for pointing out that the French system is not single payer.

Question: can you explain 'deadweight costs'? Thanks.

Tim adds: When we impose a tax on something, as well as raising money, we change people's behaviour. For example, an income tax changes the amount of work people do. Deadweight costs are those costs that come from these effects. We might not be able to see them, but they are there.

Posted by: MSK | Mar 22, 2007 6:16:28 PM

Fortin & Lacroix 1994 Journal of Public Economics estimate that the marginal revenue dollar raised costs between $1.39 and $1.53

"In this paper we extend the concept of marginal cost of public funds (MCF) to incorporate tax evasion in the labour market. MCF values are also computed from various tax reforms applied to the Province of Québec (Canada 1985). For this purpose, a utility-based labour supply model that allows for both regular and irregular work activities is used. At the benchmark situation, the MCF associated with an increase in marginal income tax rates ranges between $1.39 and $1.53 depending upon whether we consider rationing or not. Moreover, the presence of the irregular sector accounts for between $0.02 and $0.05 of this MCF. Although small in magnitude, the impact of the irregular sector increases rapidly with the level of marginal tax rates."

Posted by: Jack | Mar 22, 2007 7:02:29 PM

Tim says: "When people talk about the cost of the health care system in the US they (rightly) note that money is spent on marketing and other overheads associated with raising the money to keep the system fed."

Tim describes marketing as an 'overhead' associated with raising money. This is to completely misunderstand what marketing is in the contemptuous way a Guardian reader would. Marketing is fundamentally to do with understanding what the market needs and figuring out how to supply it (profitably). It is NOT an overhead. It's the whole point of an organisation. Marketing is how private sector suppliers work out what their customers need and it is organisations like the NHS which are fundamentally poor at marketing that have more wasteful overheads as they don't provide what is needed or provide things that customers wouldn't choose.

Don't confuse marketing with promotion and advertising - these are only a small part of the mix.

Posted by: HJHJ | Mar 22, 2007 9:01:51 PM


I can understand your pique over the likening the "marketing" function to those of promotion and advertising--names given to business propaganda. But you'll have observed that (at least very extensively here in the U.S.), the "M" word is very frequently just considered a somewhat tonier synonym for its blatant cousins.

When you say marketing is "understanding what the market needs and figuring out how to supply it (profitably)," you're elevating that function to subsume the entirety of the entrepreneurial role. And, while marketing expertise may certainly be a widespread strength among some entrepreneurs, others of the type are quite devoid of such skills.

I should also add that both the marketing function and those of advertising and promotion share another similarity of function: that of being "costs of production," an economic category of costs expended for the purpose of increasing demand.

Posted by: gene berman | Mar 22, 2007 10:37:54 PM


I disagree. As Peter Drucker famously asserted: There are only two essential functions of business - Marketing and Innovation.

Everything else, he asserted, was just a cost of doing business.

The entrepreneur who doesn't understand or fails to service his market or lacks innovation will not succeed unless it is a plain lucky one-off.

Posted by: HJHJ | Mar 22, 2007 11:03:39 PM


As I thought I'd pointed out originally, we're just haggling over terms. You may be right that, in some circles or even entire regions of the world, your definition may be apropos; I'm merely pointing out that very many (whether a majority or not I couldn't begin to guess) understand the word in exactly the way you don't like: as synonymous with sales promotion. And, though it doesn't "prove" that my observation is any more "correct" than your own, such popular confusion over terms must be intensified by the tendency on the part of very many firms to give the "M" designation to just those units as are exclusively engaged in such promotion.

Further, though an admirer of Drucker, I differ with the idea that because he'd turned out a situation-appropriate bon mot, that such was elevated to a status of science or truth. To illustrate, I'll just "go him one better" and tell you that there's just ONE essential function of business: that of predicting the future. I could even claim superiority for my bit of wit on the solid basis that, while there are no business activities whatever that don't involve anticipation of future conditions, there are many that don't involve innovation (unless that term be stretched to mean ANY adjustment to future conditions).

Let me illustrate another way why the use of "marketing" to provide a dignified-ese synonym for "sales promotion" is actually a better bit of word usage than the one you suggest is more proper. Bear in mind that these are essentially STRUCTURAL distinctions within a business unit.

All business deals with two magnitudes of the market: SUPPLY and DEMAND (whose intersection at PRICE determines profitability. All businesses, to achieve/ increase profitability, must increase either one or both of those magnitudes with respect to their product(s). In trying to increase DEMAND for a given supply, the various techniques involve INCREASE in unit costs through which enhancements in receipts (sales X price) may occur. If enhancements in receipts are sought through increasing SUPPLY (and, possibly, lowering unit cost), no other way exists but to increase the total costs of production.

The "marketing" of which the common man speaks is concernd entirely with increasing sales (and/or price) and is simply one of the costs of production, as would be more attractive packaging, etc. The word as you use it, covers both views--that of supply as well as demand. Indeed, if I were to name such a function, I'd choose the term "business intelligence" and locate it within the usual activities of the principal entrepreneur or, in a large outfit, possibly partially, very
directly below; there could hardly be a more important function. But--my point here is that the word itself is rendered rather LESS useful in any meaningful way by attaching it to such principal function. Methinks Drucker was merely adopting the extremely parochial view, which, in its opposite manifestation, has the matronly housewife, putting on her hat and picking up her basket, announcing to all present, "Well, I'm off to go a-marketing."

Posted by: gene berman | Mar 23, 2007 1:51:56 PM

A state-run monopoly healthcare system like the one we have in Canada is NOT the answer. Up here, I get treated for "free", and usually the treatment is of high quality. However, many cutting edge treatments simply aren't available in Canada at all, forcing patients to look southward for solutions. Also, when certain government-provided services cannot cope with demand, the result it long waiting lists for treatment. With our single payer system, more often than not, there is no private option available even for those who can afford to pay out of pocket. Millionaires simply wait in queue along with people on welfare, until their name comes up. Great for equality, not so great for quality healthcare.

Also, it should be noted that a true single payer system (i.e. a state-run monopoly as we have here in Canada) really curtails innovation. Hospitals and surgery units are forced to be generalists, as opposed to specializing in specific areas, as opposed to private sector hosptitals and surgery centres, where specialization leads to expertise, innovation and economies of scale.

As for higher taxes, I think that part of it is somewhat overstated, given the high costs of healthcare provision in the US as it stands right now. I don't think that public expenditures on healthcare are much less in the US than they are in Canada. Costs aside however, if you want to improve access to quality healthcare in the US, look to Europe, look to Japan, look to Australia, but DO NOT look to Canada. We are a very BAD example.

Posted by: Raging Ranter | Mar 23, 2007 5:42:15 PM