Two things are clear. America needs universal health care. And the transition from the current system to one that covers the uninsured will be costly. It may be unaffordable if we begin with the assumptions that buttress the Obama-Biden plan to guarantee "accessible health coverage for all."

Readers of this blog know that I have been an Obama supporter since before he was his party's nominee. His election has put me on cloud nine. But oddly, the policy area I know most about is the one where Obama's position has me the least enthused. I hope that Obama will move quickly on relatively easy issues that have already been the object of legislation sponsored by Democrats: expansion of the State Children's Health Insurance Plan (SCHIP), regulations to bar insurance companies from excluding patients with pre-existing conditions, and permission for Medicare to bargain with pharmaceutical companies. But although I see access to health care as a right, my concerns about the new Administration's route to that goal are so serious that I would not mind seeing another priority, such as energy independence, move to the top of the agenda while the health care proposals are reworked.

To be sure, any thoughtful observer would favor Obama's approach over the alternative recently presented by the Republicans. Subsidizing portable individual policies, as John McCain proposed to do, would have bankrupted employer-based health insurance via "adverse selection," with healthy young people opting out of workplace plans, leaving those who actually need care behind to be covered, if at all, at ruinous cost. The Republican plan's principal advantage was its absurdity; it was so destructive that it stood no chance of enactment. But being better, a status that the Obama-Biden approach earns easily, is not the same as being good.

I hope to assess Obama's proposals, the ones he campaigned on, in a series of two or three postings, beginning today with a quick look at why American health care is so expensive. (In a later posting I will also give the flavor of a small-group meeting I attended with one of Obama's principal advisors on public health policy.) Expense matters because Obama expects to pay for expanded coverage through cost savings. According to his campaign literature - you can download a detailed statement here - more efficient health care delivery will allow for the incorporation of more subscribers in relatively painless fashion, even in the face of a shrinking economy, ballooning national debt, and underfunding of the insurance we already underwrite, Medicare and Medicaid.

But will efficiency bring big benefits? The argument that Americans overpay for health care begins with contrasts to data from advanced nations that have universal coverage. Our total spending is on the order of $2.3 trillion, a figure that is said to have us laying out about $480 billion in excess of what Western European nations spend. In other words, we're paying over 20 per cent more than we should.

Where that extra money goes is no mystery. Our system is burdened by administrative costs attributable to competing private insurance plans. Some of that cost comes in private plan profits, at least 12 billion dollars a year siphoned out of the system and into insurers' pockets. Insurers also hold back large reserves (some not-for-profits have been criticized on these grounds); the income on these funds is on the order of another $8 billion. But the real problem concerns administrative complexity. Overhead for private insurance plans is on the order of 13 per cent. In comparison, Medicare, Medicaid, and national health plans like Canada's spend under three and sometimes as low as one per cent on overhead. In addition, complex administration imposes burdens outside the insurance companies. Hospitals spend huge sums billing insurance and trying to optimize reimbursement. Doctors waste hours with insurance forms. Altogether our excess administrative costs have been pegged at $350 billion. In these models, the indirect expenses attributed to providers are probably underestimates.

If you total and then factor out the figures I have just cited, you find that America's excess health care costs (above our competitors') are $110 billion, or well under five percent of our annual expenditures. Should it surprise us that our costs are five per cent higher than Europe's? We have a more complex population. We have dense slums and vast rural areas. Our drug abuse problems are outsize. Our society is violent and rich in firearms. Perhaps a five per cent premium is not unreasonable. And if the denominator in the population figure undercounts illegal immigrants, the difference in per capita expenditures might be small indeed.

Our system has other known inefficiencies related to the lack of a rational, universal insurance system. Clinics see patients for repeated brief visits instead of long comprehensive visits, so that they can bill for each aspect of complex care. Patients without insurance delay care and require treatment for advanced illness. Insurers scant prevention; the subscriber you ignore today may, when ill, be covered by another vendor. We have none of the bargaining advantages, in terms of drug costs, of a national health system. And we pay the direct and indirect expenses, including unnecessary laboratory testing, associated with a draconian malpractice claims system that few competing nations would tolerate.

No one argues that the American health care system gives good care to the uninsured. In the long run, once we absorb the expenses for care that uninsured patients have delayed, we might cover many of them at a cost that is not much in excess of what gets spent on their behalf via public clinics and hospitals' free services. But if you begin with the premise that our per capita spending on actual care (as opposed to claims administration and profit) is comparable to that of our competitors, and if you then take into account the external, structural inefficiencies, you would have to assume that what goes on in the operating suites and consulting rooms is reasonably efficient - on a par anyway to what countries with centralized insurance systems have achieved.

But that is where the Obama plan expects to find its windfall to fund a transition to near-universal coverage: increased efficiency. This odd strategy, to leave hundreds of billions-with-a-b of dollars on the table and to gamble on savings from changes in what doctors do, is presented as if it were the height of economic, technological, and managerial sophistication. In truth it is a sign of Realpolitik, or lack of muscle — fear of rocking the boat when it comes to insurers and insurance policies. No one knows whether money can be wrung out of the system by rationalizing care delivery - there is little evidence that Europe and Canada have done so. Finally, Obama's advisors must know that they are risking spending their political capital on an unproven solution out of fear that they cannot lead the country where it needs to go if we are to have affordable, universal coverage: a single-payer system.

In a subsequent posting: The limitations of the plan -- and its prospects.

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