Transaction Costs: The American Way

(Photo: shane_d_k)

(Photo: shane_d_k)

The rest of the world likes to say that everything in America is big: the cars, the CO2 emissions, the buildings, even the hamburgers. The farce at the U.S. government’s website for enrollment in health insurance under the so-called Affordable Care Act (ACA) shows that we also supersize our transaction costs.

In a news report from NPR, Alaska Public Radio Network, and Kaiser Health News, even a computer programmer who had also created websites needed many attempts over many weeks to use the site to enroll for health insurance. And she still awaits the enrollment confirmation (with luck in the new year, said the radio version of the report). If it arrives, she gets affordable health insurance ($110 instead of $1200 per month), but then still has the joy of dealing with an insurance company and the claim paperwork.

This waste is not inevitable. I lived for 12 years of my life in England. The first few years were as a baby, but during the 9 years that I remember, I spent 1 hour dealing with health forms — mostly to register myself at a local medical practice. Even my medical records from infancy were still on file two decades later (though a decade later they burned up in a warehouse fire).

The Alaskan in the news story probably spent that hour on her first attempt to register for health insurance. In contrast, the U.K.’s National Health Service, by insuring everyone under one roof, eliminates these issues.

In a 2010 comparison of health care in Australia, Canada, Germany, the Netherlands, New Zealand, the United Kingdom, and the United States, the U.K. system was rated as the most efficient, and the U.S. system the least efficient. Some of the gap lies in our absurd transaction costs.

Leave A Comment

Comments are moderated and generally will be posted if they are on-topic and not abusive.



View All Comments »
  1. ANTTI says:

    Its question about aims and objectives really. Public health care systems try to allocate resources they have efficiently. While ones ran by insurance companies try to maximize profit by getting low risk customers and avoiding high risk ones.

    The feet dragging comes because they have multiple criterias they need to look and check. Those also can change all a time. They wont totally automate it because everything can’t be defined. On the other hand they can’t hire lot of people handling the forms because it wont be cost effective.

    So there will be this low paid person, propably a bit older woman, going through forms and looking latest criterias. And collecting information and maybe cross checking it in each case the information. She propably has deeper knowledge of the area but is overworked because bosses dont want to hire new people because cost. And if they can the the turnover can be really high still because its really hard and fast paced work. But not well paid.

    Thats why it may take weeks. Most Western world insurance claims are handled in above manner.
    Only very simple(like car insurances) can be automated and done fast.

    Standardized form of insurance, propably public, is the most cost effective and simple solution. Anything that goes to private insurance side will generate tsunami of paperwork because they want to balance the risks with profits.

    Thumb up 5 Thumb down 4
    • Pshrnk says:

      Funny how some who claim to worship at the altar of efficient markets theory are also those most opposed to efficient health care financing. Would that Friedman and Hayek could return and personally explain the error of theuir crony capitalist ways.

      Thumb up 5 Thumb down 2
  2. James says:

    Couple of points here. First, being a computer programmer does not make it easier to navigate most web sites. Quite the opposite, in fact: in addition to the difficulties caused by web site designers designing to the lowest common denominator, add the frustration of knowing exactly how easy it would have been to do it right in the first place.

    Second, note that the transaction costs are mostly for dealing with insurance companies, and are much the same for auto or homeowner’s insurance. (I was rear-ended once: the other driver’s insurance took nearly a year, with much hassle, to finally pay off my claim.) On the other hand, the few times I’ve had to deal with medical providers – or more frequently, veterinarians – I’ve found them perfectly happy to take a credit card with no hassle at all.

    Well-loved. Like or Dislike: Thumb up 14 Thumb down 2
    • James says:

      Expanding on my own comment a bit, imagine what the cost of car ownership would be if every little bit of maintenance & repair had to be funneled through an insurance company. Time for an oil change? Take it to the auto emergency room, spend an hour filling out paperwork, then pay $200 and argue with the insurance company about your deductible. Need new tires? Well, you’d better fill out the insurance company paperwork and get the operation pre-approved, or you’re paying for it yourself.

      See the point? With cars, we insure only for major losses. With medicine, somehow people have gotten the expectation that everything should be covered, not just major things. And naturally, that adds transaction costs.

      Well-loved. Like or Dislike: Thumb up 6 Thumb down 1
      • Pshrnk says:

        Three years ago a rock broke my windshield. I called about replacement and was told it would cost $795. I said, “Are you kidding me 795 for a Toyota Corolla?” She asked, “You are going to use your inurance aren’t you?” When I replied “no” she said, “then we can do it for 199″. And we wonder why health care costs are so high.

        Well-loved. Like or Dislike: Thumb up 9 Thumb down 0
  3. NZ says:

    Some people fear that the first iteration of Obamacare was DESIGNED to fail so that people would become frustrated (the ACA was a compromise that didn’t go far enough anyway, right?) and instead call for a simpler single-payer system to replace it–the system that Obama and the Democrats wanted all along.

    The more rational and articulate conservatives dismissed this fear as paranoia. But is Sanjoy Mahajan out to help prove that the paranoid people had good reason to worry?

    Well-loved. Like or Dislike: Thumb up 9 Thumb down 3
    • Rob says:

      From the beginning, this was pretty clearly a case where the compromise was worse than either alternative. Before ACA, most of the problems in American healthcare were caused or aggravated by the dominant model of employer-provided health plans (NOT insurance). ACA attempted to fix all of these problems by extending that model. A fully socialized system would be more efficient and offer more freedom than the mess they handed us with that “compromise”. It is literally impossible for me to believe that nobody in the Democratic Party saw this coming.

      DESIGNED to fail? Probably not. Still, I have a hard time believing that anyone on the left expected it to succeed as is and it is perfectly reasonable to assume that the Obama camp had a step 2 in mind from the beginning.

      Thumb up 4 Thumb down 0
  4. Nathan says:

    I’m sorry, I love Freakenomics, and prefer the rational discussion of issues that economic analysis allows. So I’m greatly disappointed that they would allow a blog post to compare the costs associated with two completely different products with the presumption that the difference is transactional costs. This is lazy and not worthy of this website or Freakenomics.

    Well-loved. Like or Dislike: Thumb up 16 Thumb down 10
  5. Trish says:

    What a strange collection of facts and anecdotes garbled together with no coherent theme.

    Let’s see if I can follow his train of thought.

    Fact: The US pays more per capita in health care than other countries.

    Assumption: Paying more for a category of goods or services is less efficient, regardless of the quality or quantity of goods and services provided.

    Unsupported fact: One woman would pay less with a subsidized plan than she would with an unsubsidized plan

    Assumption: If the taxpayers pay for a large portion of the costs of insuring an individual, that reduces the overall cost of health care. Health care costs are not dependent on the quantity or quality consumed.

    Fact: It is difficult and time consuming to register for Obamacare.

    Anecdote: He lived in the UK and only spent an hour on paperwork.

    Assumption: The amount of paperwork required of the consumer is the cause of the transaction costs of the health care system, even though these opportunity costs are not included in the cost survey he cites.

    Overall conclusion drawn by author: Transaction costs are the primary driver of the differences in per capita costs for health care in various countries.

    My conclusion: He has no idea what he is talking about, but got to use some cute little buzzwords and link to wikipedia.

    Suggestions for the author: Do some research on the financial position of the UK health system. Do some research on the availability of the newest medical technology in the UK. Try comparing the use of expensive technology (like an MRI) for routine injuries in the US to the use in the UK. Determine the proportion transaction costs play in the overall cost for health care. Examine access to the national health systems by non citizens in the nations cited. Examine difference in the route to citizenship (and therefore access to the health care system) in the nations cited.

    Well-loved. Like or Dislike: Thumb up 25 Thumb down 7
    • Alex in Chicago says:

      Correct. The reason the United States Pays the most for healthcare in the world is because we are one of the only countries in the world that respects patent rights, and doesn’t threaten companies/etc with being cut out of the market/losing rights/etc if they don’t pay terribly discounted rates.

      The reality is that the USA is subsidizing all those other countries, without us there would be NO reason to innovate in the medical field.

      Thumb up 8 Thumb down 11
      • Ian Woollard says:

        Actually, the evidence is that it’s mostly the other way around, under the US system drugs companies have no incentive to see if existing drugs can work for other diseases; to produce a new drug that they can patent is much more profitable.

        Meanwhile with government run health systems using an existing drug is *much* more cost effective, so it pays for the government body to actually try the experiment and measure how well it works; and if it does they can just hand out cheap older drugs. Drugs companies basically never do that, because it eats their profits.

        This also works with new drugs as well, if the drugs work they will usually reduce overall costs (but the drugs companies will still do that research anyway).

        Basically having a single payer makes them want to, and more able to reduce costs, having lots of cost-plus drugs companies and insurers tends to push costs only upwards.

        Thumb up 3 Thumb down 4
      • Alex in Chicago says:

        Ian, cost cutting isn’t the only useful form of innovation. There are other things…like actually developing new products.

        Only in America does a new product generate significant returns. Everywhere else you only get the marginal cost + a small amount refunded.

        Thumb up 5 Thumb down 1
      • Phil Persinger says:


        I’ll think you’ll find that much of the development of medical technology– including drugs and drug therapies– occurs in universities and research hospitals both in the US and abroad. It’s not necessary to invoke the profit motive to explain scientific/medical innovation– and perhaps not even correct to do so.

        Thumb up 3 Thumb down 3
      • brazzy says:

        Complete nonsense. Pharma companies’ R&D costs are completely dwarfed by marketing expenses. And both are driven up (relative to the benefit) by the patent system: most of the “innovation” happens in making small modifications to old drugs so you can get a new patent, and then you drop a few billion on ads and bribes to doctors to ensure that people get the new, patented and expensive one rather than the old one that works just as well but whose patent has run out and is sold much cheaper by the competition.

        Thumb up 0 Thumb down 0
    • Pshrnk says:

      Trish, I suggest you do some research on longevity and health care outcomes and health care outcomes per dollar spent! Read today’s news about Zetia not decreasing mortality…old news actually but so often ignored at the cost of billions per year. Availability of expensive technologies is not a plus if they do not improve health, longevity, or quality of life. In fact ready availability of marginal or useless medical technologies waste money and harm health.

      Thumb up 3 Thumb down 0
      • Trish says:


        You’re making my point. Our easy access to advanced technology increases our costs. In the aggregate, it’s not efficient to do an MRI for every sprained wrist, but when it’s your child, you don’t want to take the kid home and “see if it gets better in a week or two”. However, if an insurance company would try to ration MRI’s to sprained wrists that don’t get better after a week of rest, Americans would scream. Instead we are moving towards a system when your sprained wrist doesn’t get looked at unless it’s still hurting a month later and your doctor’s office can’t afford an MRI machine anyway because reimbursement rates are low.

        My complaint with ACA is that it’s based on the idea that if someone other than the consumer pays for the medical procedures, costs will go down.

        Well-loved. Like or Dislike: Thumb up 5 Thumb down 0
      • Phil Persinger says:


        I think you’ve missed Pshrnk’s point, which is that the US health-care system is not yielding good results because, in part, technology is being employed willy-nilly without regard to outcomes.

        And as to your complaint about the ACA: how is the current health-care system different in its assumptions? (I am a firm believer in single-payer, by the way. I’m just asking….)

        Thumb up 1 Thumb down 3
      • Trish says:


        How is the US system “not yielding good results”? People come from all over the world to use our medical system. They apparently believe it works great. Does anyone travel to the UK for medical procedures?

        One of the promises of Obamacare was that it would lower healthcare costs. It does not. It merely moves the consumer further from the payment for services than in our current system. In other words, it takes a fault of our current system and makes it worse. At least in our current system there are copays, etc. to try to contain costs.

        A single payer system will never work until we close our borders and take away citizenship by birth. I don’t imagine either will happen, but single payer systems rely on limiting access to citizenship and coverage.

        Thumb up 2 Thumb down 1
      • Phil Persinger says:


        Thank you for your comments.

        Clearly we disagree a bit on the nature, provision, purpose and standards of quality health care.

        Much major medical care is of an emergency and near-emergency nature– no chance for shopping around or going overseas– and I will agree with you that in this regard things in the US are pretty damn good. However, your unstated assumption that medicine is poorly practiced elsewhere is unfounded. Medical standards abroad are approaching and in some cases surpassing what is available in this country. This is a good situation, I think.

        It seems, however, that many Americans do go abroad for medical treatment– for reasons of cost and with no fear for quality. I will happily match your anecdotal evidence of the waves of the sick and infirm washing upon our shores with stories of my own on the increasing flow going the other way. Still, I’ll grateful for any figures which show how many folks are coming into this country for treatment, for which treatment and for what cost.

        It’s in routine medical care, however, that the US has the real problem relative to other countries in standard metrics such as life expectancy, infant mortality, etc. Access to primary-care physicians is basic to improving performance in these areas and the market, such as it is, provides powerful incentives for new doctors to enter the specialties.

        I’m not sure I follow your criticism of the ACA but I think right now any criticism is premature: we won’t know how effective the ACA will be in providing insurance, lowering costs, etc., until it’s fully implemented. I am doubtful that the ACA will be as effective in any of these categories as a true single-payer system, but I imagine (and hope) that it will be better than the unbalanced system we have now.

        Your linkage of immigration with health-care insurance is interesting, but you’ll have to show how your concerns with single-payer in that regard are any different– or more dire– from the problems we have or would have under our current system. If anything, a single-payer system– or even the ACA– should benefit (theoretically) from a (theoretically) younger immigrant population.

        Thumb up 1 Thumb down 2
      • Trish says:


        The drivers for our cost differential is beginning of life and end of life care. We’ll spend millions to extend life by a few minutes, hours, days or months. This is not efficient. In theory, it makes sense to allocate medical resources based on quality of outcome, but in reality, when it is your child diagnosed with a terminal illness, you want every possible treatment utilized, at any cost. Do we really want to use our healthcare resources efficiently, if this efficiency is heartless?

        Our infant mortality rates suffer because of our expensive intervention into troubled pregnancies/early births. If a pregnancy ends or a newborn dies in the first 1-7 days (depending on reporting standards), this is NOT counted in infant mortality rates. If we didn’t offer NICU resources to babies born under, say, 5 pounds, our infant mortality rates would be much better. Is this what we want? If you look at a breakdown of our infant mortality rates by birth weight, you’ll find that it’s the low birth weight infants that drive these numbers. And increased infant mortality affects our life expectancy negatively. Efficiency sounds like a great idea, until you are a parent of a low birth weight infant. Perhaps these statistics alone are not the best metric to determine quality.

        To cover your other points:

        – When Americans travel to other countries for medical procedures, it’s because of cost. When foreigners come here, it’s for quality.

        – We can apply basic economic principles/research to the ACA to get an idea of how it will impact us. 1. Individuals act in their own best interests. 2. Individuals spend more when spending someone else’s money than they do when spending their own. 3. Reducing the financial benefits of practicing a profession reduces the incentive to enter the profession. I could go on. Do I need to?

        – A lifetime of free healthcare for your child increases the incentive for anchor babies. No country with single payer insurance grants citizenship automatically to a child born to non-citizens. Some restrict granting of citizenship to immigrants who are healthy. I don’t see the US moving in that direction.

        – There are other drivers behind our lagging life expectancy, such as our extremely unhealthy lifestyle. I do not think life expectancy and infant mortality by themselves are the best metrics for measuring quality of health care. While anecdotal evidence is not definitive, it can give us a hint that we are not using the right metrics. Where do those with unlimited resources go for treatment of serious illnesses? The US. That’s a pretty good predictor of quality.

        While this conversation has been interesting, Phil, I think I’m done commenting.

        Thumb up 4 Thumb down 0
      • Phil Persinger says:


        You focus on the glittering surface of the sea without regard for what churns beneath.

        I guess that makes you an optimist.


        Thumb up 0 Thumb down 2
  6. J1 says:

    Waste is not inevitable, but I’m not sure it’s relevant either. Lots of vendors are extremely efficient delivering an inferior product. Third party payment probably reduces efficiency and increases cost, but it doesn’t necessarily affect quality.

    The efficiency argument is also spurious given realities in the US; anybody who thinks more U.S. government involvement in any industry is going to reduce cost needs a drug test (preferrably covered by their policy…). The implicit argument that the US would spend less on healthcare under single payer reflects a detachment from reality only somebody completely unfamiliar with the US government could achieve.

    Some gripes with the article/post: The $1200 quote is a non-specific approximation (and apparently one of multiple quotes not presented for comparison), she doesn’t have insurance yet so there’s no guarantee it will cost $110/mo, and there’s no comparison of coverage, so we have no way of knowing whether the ACA policy is a better or worse deal. The report uses some odd, possibly incomplete standards. To take just one example, the “Effective Care” standard includes preventive (US is leader) and chronic care, in which the example cited to demonstrate how great the UK system is ” U.K. physicians are most likely to report it is easy to print out a list of all their patients by diagnosis” (?). I’m all for greater use of IT, but emergency care and single event treatments seem a little more important. I urge everybody to read the report; this is the sort of “study” being used to promote single payer. Check it out.

    Thumb up 5 Thumb down 3
  7. crquack says:

    It is instructive to consider the human costs of the UK NHS “efficiency”. Google “Mid-Staffordshire”, “Liverpool Care Pathway” or read any of the recent articles in the Daily Telegraph.

    I worked in the NHS for 9 years some 30 years ago. It was bad then but not as bad as I perceive it to be now.

    Thumb up 3 Thumb down 0
  8. Ivan Ransom says:

    Whenever a private corporate insurance enterprise is involved in any health service, the first priority will be to maximise profit. This will be achieved by any or all of the following: 1. Delay any payout to retain cash-flow 2. Impose restrictive, even “unwritten”, rules to avoid payout 3. Minimise payout using bureaucratic chicanery 4. Take punitive unjust legal action against weak, defenceless claimants to discourage other claimants 5. Collude with competitors to inflate premiums 5. Pressure medical professionals to take cheaper options even if less satisfactory 6. Reduce their office staff 7. Lower staff wages 8. Offer bonuses (payola) to “successful” sales agents. … And on it goes !
    Policing this “animal farm” is impossible. The victim is the consumer every time.
    Obamacare is a sad political compromise to keep the Free Market Loonies onside.
    Australia’s Medicare is halfway between Obamacare and Britain’s National Health Scheme and it has it’s problems, believe me.

    Thumb up 1 Thumb down 1
    • Trish says:


      You points 1-5 are illegal in the US. Health insurance is highly regulated.

      Thumb up 1 Thumb down 0
    • James says:

      In addition, points 1-4 are just as likely to happen in a government-run “single payer” system, as the bureaucrats try to make themselves look good.

      Your second point #5 is, in reverse, one of the reasons American health care is so expensive, as patients and doctors both have incentives to use the latest expensive technology “because the insurance will cover it”, instead of cheaper but equally good alternatives.

      Thumb up 1 Thumb down 0