Hidden overhead costs: is Canada's system really less expensive?

Prologue: Canada’s provincial health insurance scheme is a source of endless fascination to policymakers advocating health system reform. Whether one is an advocate or a or a detractor of Canada’s plan us a model for the United States, an important issue that engages the antagonists is how much it costs to operate compared with America’s pluralistic and mostly private health insurance approach. The measurement of such administrative expenses by various parties has brought to policymakers attention the trade-offs that exist whichever way a system is organized. However, there is no consensus on the nature and magnitude of these trade-offs. In this paper, Patricia Danzon, the Celia Moh Professor of Health Care Systems and Insurance at the University of Pennsylvania’s Wharton School, examines the overhead costs of alternative health care systems, asserting that existing comparisons are grossly misleading. She compares overhead costs under monopoly public insurance and competitive private insurance markets in general but draws on actual experience in Canada and the United States for empirical evidence. Darzon concludes that private health insurance has built-in incentives to minimize its total overhead costs, while public health insurance constrains total budgets but ignores real social costs, including the time patients must wait for treatment and the lost productivity that results. Darzon holds a doctorate in economics from the University of Chicago. She turned to health economics while working at The RAND Corporation from 1973 to 1979. Danzon is the author of a book entitled Medical Malpractice: Theory, Evidence, and Public Policy (Harvard University Press). She also coauthored a paper published in Health Affairs (Spring 1991) entitled “A Plan for ‘Responsible National Health Insurance’.”