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Culture War Roundup for the week of January 9, 2023

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The massive growth in "administrators" has been one of the factors responsible for education cost inflation far in excess to the general economy.

Well, turns out the same problem exists in health care too. The data is clear. If people can carve out a comfortable but ultimately superflous sinecure for themselves and get away with it, why wouldn't they? That part is obvious. What I don't understand is why everyone else lets them, whether in healthcare or education. Because the rest of us end up footing the bill.

The first issue is the principle agent problem. "The rest of us" aren't in charge of hiring and firing them, their boss is. And for the most part their boss doesn't suffer negative consequences of having them around, because they do mildly useful administrative work which makes the boss' life slightly easier. Nowhere near enough to justify their full salary, but enough for the boss to justify a numerical increase on their budget spreadsheet.

In most businesses, this is partially, but not fully, countered by economic incentives. Shareholders in a company demand profit, and customers demand lower prices, and these can't be fulfilled simultaneously except by cutting costs. Companies with more slack: ones with natural monopolies or regulatory advantages or just temporarily on an upswing, are much more vulnerable to administrative bloat because there is less of this pressure. Look at all the cushy but low-productivity positions in the tech industry in the past few years, it's because they have so much slack that people can afford to waste someone else's money. The investors are unlikely complain or even notice that they only earned $1 billion this year when by all rights they should have earned $1.2 billion, while the difference between +$100 million versus -$100 million is going to cause heads to roll.

The situation in healthcare, at least in America, is broken in a slightly different way than just having lots of money though. It's this weird trifecta between the healthcare provider, the insurance companies, and the customers. Rather than customers shopping around for products they like, and declining or substituting a different good if costs are too high, demand is unpredictable and drastic. Bam, health problem happens, person goes to the nearest hospital, gets treated, and then gets a bill afterwards. Further, they don't even pay the bill themselves, they forward it to an insurance company who pays most of it and makes the customer pay some "deductible" which is usually not tied to how much the treatment actually costs. So the demand is highly inelastic. If healthcare prices rise the same number of people are going to have healthcare problems, and although some of them might choose not to get treated, that's a really bad outcome. And even if a customer manages to get to a cheaper more efficient healthcare provider, they're unlikely to see the benefits because of how insurance works.

All of this means that everything is much less tied to the normal economic incentives that keep prices low. Each hospital has something like a small local monopoly over their area and can raise prices and afford bloat with little consequence.

The second issue is that not all of the administrative work is bloat, from a local perspective. The weird adversarial relationship between insurance companies and healthcare providers necessitates a lot of administrative work that isn't productive on a global economic scale but is locally useful to their employer. If the provider hires someone who increases the success rate of convincing the insurance company to pay for treatment that already happens by a small amount, they might bring in an extra $200k a year, which justifies a salary of $100k a year and earns $100k profit. But if the insurance company hires a similar person who lowers the probability by the same amount, that justifies a salary of $100k for that person and when considered alone is a $100k profit for the insurance company. But these two people cancel each other out, and then net effect to the economy is that $200k extra is being used up on administrative salaries. Rinse and repeat until the marginal effect of such people decreases enough that the companies are no longer incentivized to hire more of them, and now there's millions of dollars going down the drain in a way that is locally rational for each company, but globally wasteful. It's a classic public goods dilemma.

Add in a bunch of nonsense legal regulations that exist for ostensibly good purposes but probably don't actually justify their costs, and you have even more demand for locally rational but globally wasteful administration.


The entire system is a mess and needs to be destroyed and replaced with... something. National healthcare fixes the second problem but not the first. Maybe that's good enough? The primary complaint about nationalizing anything is that it causes the first problem: prices are decoupled from economic incentives so nobody is incentivized to reduce bloat. We already have that problem in healthcare, and I don't nationalizing it would make it much worse, so I'm tentatively in favor, but if possible would prefer a privatized system that somehow fixed both problems (I have no idea how though).