Mythical administrative cost savings of socialized health-care

Megan with another good post:

...while people commonly think of administrative costs as "wasted", in fact, they are an important part of the market system. As Alex Tabarrok points out, and I have myself from time to time, many of the arguments in favor of national health care are literally socialist. And no, I am not using that term to apply to "anyone who is in favor of redistribution" or "government programs". But consider the following common arguments:

National health care will be cheaper because we will reduce administrative overhead
National health care will reduce wasteful competition in the form of me-too drugs
National health care will reduce wasteful competition in the form of advertising and other marketing expenses
National health care will allow us to rationally distribute care to where it does the most good rather than the current messy, wasteful hodge-podge
National health care will use resources for production instead of profits
National health care will achieve economies of scale in purchasing and record-keeping
People will not overuse free goods because there are hard limits to desired consumption

These were all arguments advanced in favor of socialism. Contrary to popular conservative belief, socialists were not unfamiliar with either the incentive problems of communism (people will not work hard if there's no benefit to doing so) or the Hayekian argument about the value of prices, aka the Socialist Calculation Problem. Rather, smart socialists thought that they could overcome these problems with a combination of status competitions (Hero of the Soviet Union, Second Class) and massive efficiencies gained by wringing all that fragmented, wasteful competition out of the system. Economists who would be ashamed to make these sorts of arguments about Proctor and Gamble or the used car market suddenly start parroting these things as if they hadn't been thoroughly discredited by the last seventy years.

But why were they discredited? That list looks really, really good on paper, even to my jaded libertarian eyes. A lot of the answer lies in the reason that we don't like monopolies--even though that list is just as true of monopolies as it is of the government. Monopolies, government or private, are risk averse, slow to innovate, and generally run things for the benefit of themselves rather than their customers. Hamstringing them with regulations can limit measurable outcomes, like excess profit-taking, but not unmeasurable ones, like the people who might have been cured by a drug the system didn't invent. And the political system introduces its own problems. As Robert Heinlein pointed out years ago, systems that have only positive feedback loops tend to fail catastrophically.

My critics will want me to explain why, then, Europe can do it cheaper. The answer is threefold. First, most European nations have better governance than we do--the American political system is a Public Choice disaster. Second, they pay people less money in a way that's hard to replicate here (and even if it wasn't, would be a one time savings that wouldn't check the rate of growth). Third, we're still driving quite a bit of product innovation. Our messy, organic, wasteful, unfair, irrational system allows experimentation, and they cherry pick the best results. If we stopped doing this, their system would stop looking so good.

For some details, here's the WSJ on nationalized rationing:

Take the United Kingdom, which is often praised for spending as little as half as much per capita on health care as the U.S. Credit for this cost containment goes in large part to the National Institute for Health and Clinical Excellence (NICE). Americans should understand how NICE works because under ObamaCare it will eventually be coming to a hospital near you. NICE has established the principle that the only way to control health-care costs is for this panel of medical high priests to dictate limits on certain kinds of care to certain classes of patients.

For example:

1. In March, NICE ruled against the use of two drugs, Lapatinib and Sutent, that prolong the life of those with certain forms of breast and stomach cancer.

2. This followed on a 2008 ruling against drugs -- including Sutent, which costs about $50,000 -- that would help terminally ill kidney-cancer patients.

3. In 2007, NICE restricted access to two drugs for macular degeneration, a cause of blindness. The drug Macugen was blocked outright. The other, Lucentis, was limited to a particular category of individuals with the disease, restricting it to about one in five sufferers. Even then, the drug was only approved for use in one eye, meaning those lucky enough to get it would still go blind in the other.

4. NICE has limited the use of Alzheimer's drugs, including Aricept, for patients in the early stages of the disease.

5. NICE rejected the use of Kineret, a drug for rheumatoid arthritis.

6. NICE rejected Avonex, which reduces the relapse rate in patients with multiple sclerosis;

7. NICE rejected Lenalidomide, which fights multiple myeloma.

NOTE: Private U.S. insurers often cover all, or at least portions, of the cost of many of these NICE-denied drugs.

NICE has also produced guidance that restrains certain surgical operations and treatments.

8. NICE has restrictions on fertility treatments.

9. NICE has restriction on procedures for back pain, including surgeries and steroid injections.

10. Several young U.K. women developed cervical cancer after being denied pap smears by a related health authority, the Cervical Screening Programme, which in order to reduce government health-care spending has refused the screens to women under age 25.

Update: Megan has a follow-up sigh