Krugman Flunks Health Econ 101

It’s painful to read Paul Krugman when he writes about health care. Makes you wonder how he ever won the Nobel Prize. Previously, he made the absurd claim that in repealing health reform Mitt Romney would allow “tens of thousands” of people to die. In his latest venture into the field, about which he knows embarrassingly little, he has this to say:

  • Mitt Romney, as president, would make “savage cuts” in Medicaid.
  • This is unfortunate because “Medicaid has been more successful at controlling costs than any other major part of the nation’s health care system.”
  • Medicaid achieves this efficiency (a) “partly by having much lower administrative costs than private insurers” and (b) because “Medicaid is much more effective at bargaining with the medical-industrial complex.”
  • Romney wants to slash Medicaid, in part because of Republicans’ “general hostility to anything that helps the 47 percent — those Americans whom they consider moochers who need to be taught self-reliance.” (Some Republicans? No. Apparently, all Republicans!)

I’ll pass on the last claim, except to note that the “Roosevelt coalition” was not a coalition that wanted to help poor people. It was a coalition of self-interested parties (including lots of racists and bigots) who desired to use the coercive power of the state to pursue their own interests, regardless of the impact on others — especially poor people. I will also note that by almost every measure those on the right are less selfish and care more about their fellow man than those on the left, as a general rule.

Tomorrow is Election Day.

What evidence is there that Medicaid outperforms every other part of the health care system in holding down costs? Krugman tells us that:

According to the best available estimates, the average cost of health care for adult Medicaid recipients is about 20 percent less than it would be if they had private insurance. The gap for children is even larger.

But isn’t that because Medicaid pays less than every other payer? Of course. On average, Medicaid pays physicians who treat Medicaid patients only about 59 percent of what a private insurer would pay for the same service. In New York, Medicaid pays even less — about one-third of what private insurers would pay.

Don’t Medicaid enrollees have to wait longer to get care because it pays less? You bet they do. In fact when you add the time price of care to the money price of care, Medicaid may be the most expensive health plan around. Also, health care delayed is often health care denied.

Krugman, however, asserts that Medicaid is more efficient because it has lower administrative costs than private insurance. He appears not to know that two-thirds of Medicaid enrollees [see here, page 13] are in private health insurance plans under contract with state governments!!!

His assertion that Medicaid “bargains” with the provider community is ludicrous. Medicaid doesn’t bargain with anybody. It sets a price and providers take it or leave it. Unfortunately, almost one-third of physicians leave the money on the table and are refusing to take any new Medicaid patients. Moreover, if this were a desirable way to hold down costs, we don’t have to enroll everyone in Medicaid to achieve it. We could just impose price controls on the whole health care system and let everyone pay Medicaid rates.

[Of course, real economists know that the social cost of something is not the price we pay. It is the opportunity cost of the resources needed to produce it. In the case of medical care, as long as we have the same doctors, nurses, hospital personnel, etc. performing the same services, price controls do not lower costs, they shift costs — from patients to providers. In fact price controls actually increase the social cost of care — as the time price of waiting rises to ration a scarce resource.]

What about Romney’s “savage cuts” in Medicaid? For the last 40 years or so health care spending in the United States has been growing at the rate of growth of gross domestic product (GDP) per person plus 2 percentage points. As Chris Jacobs notes, Romney proposes to cut that excess growth in half for Medicaid. In other words, Medicaid would grow at GDP plus 1percent rather the 2 percent. But this is identical to the proposal made by president Obama’s own deficit reduction commission, headed by Alan Simpson and Erskine Bowles. It is also the same growth path proposed by other bipartisan proposals: Ryan/Rivlin, Domenici/Rivlin, and Ryan/Wyden. [See the chart below.]

More importantly, to pay for ObamaCare, the Affordable Care Act [ObamaCare] would slow the rate of growth of Medicare almost to GDP per capita plus 0%!!!!  In other words, if Romney’s proposed cuts in Medicaid are “savage,” then Obama’s cuts in Medicare spending are twice as savage!!!

Democrats often point out that the House Republican budget (Paul Ryan’s plan) envisions spending almost exactly the same number of dollars on Medicare that the Obama administration proposes spending. True enough. But the spending cap under ObamaCare is enforced by lowering payments to providers — so much so that one in seven hospitals will leave the Medicare system in the next eight years and seniors will have increasing difficulty finding doctors who will see them, according to the best estimates of the Medicare actuaries. Ryan, on the other hand is free to find better ways of meeting this target, including relying on competition and market incentives. Further, Romney has not endorsed the Ryan budget. In fact, Romney has not endorsed any cap on Medicare spending at all.

Comments (29)

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  1. Ken says:

    John, you are right. Krugman doesn’t know anything about health care.

  2. Cindy says:

    There’s so little clarity about what the candidates’ respective health care plans are. For the average American, it’s difficult to assess such specific and complex policy proposals. Too often, the debate is oversimplified to “one candidate will give you care; the other will not.”

  3. YF says:

    Very well-crafted response, Dr. Goodman.

    Two more points to add: First, simply looking at the current cost per enrollee in medicaid vs the cost of an enrollee in private insurance shows that the Medicaid enrollee is much more expensive. Same goes for Medicare compared with private insurance with common benefits.

    Second, Medicaid’s alleged ‘low’ administrative costs are also tied to the high rate of fraud — GAO found it to be around 10 percent I believe.

  4. JME says:

    The Medicaid administrative costs never take into account the full costs that the private sector uses when accounting for full overhead and admin costs. They do not include things like marketing and outreach, rent and utlitities, IT costs,etc. because these are somehow “free” for govt. and never full personnel costs. That creates all kinds of other problems but that is a longer story of govt. inefficiency that we can discuss another day.

  5. Peter Ferrara says:

    Great post, John. Ryan actually has not proposed any cuts in Medicaid at all. What he is proposing is to extend the same block grant reforms that worked so well for AFDC in 1996 to Medicaid. Under the incentives of those block grant reforms, two thirds of those dependent on the program left for work and earned higher overall incomes as a result. That reduced program costs after 10 years by 50 percent from where they would have been otherwise. But it would not be accurate to characterize that as cutting the program by 50 percent. That savings resulted because under the new reform incentives the program operated more efficiently than before and the poor were better off. The estimated savings from extending the block grants to Medicaid would similarly arise from the improved block grant incentives and the poor would be better off because current Medicaid is really an institutionalized means of denying the poor critical health care.

  6. Robert A. Hall says:

    Unfortunately, Krugman has given up being an economist to be a polemist for the progressives, regurgitating Obama campaign talking points as they grow desperate. I hope with good cause. Saturday, I had the opportunity to hear Dr. Goodman speak, and on the flight home read about a third of his new book “Priceless.” Both not to be missed. I will link to this from my Old Jarhead blog. (

    Robert A. Hall
    USMC 1964-68
    USMCR, 1977-83
    Massachusetts Senate, 1973-83
    BA Political Science, MEd History
    Author: The Coming Collapse of the American Republic
    All royalties go to help wounded veterans
    For a free PDF of my 80-page book, write tartanmarine(at)

  7. YF says:


    To be fair, the trust funds do reimburse other government agencies for the work they do.

    If you look at the latest trustees report, they note that administrative expenses are in fact reimbursed to the IRS, DOJ etc.

  8. Kyle says:

    Krugman’s editorials turn my stomach. Using a nobel prize as a soapbox.


  9. Ralph F. Weber, AEP, CLU, REBC says:

    Since the “media” does not report the news, they attempt to make the news, I consider them entertainers. That’s what Krugman is, an entertainer, who is clued out to basic economic principles

  10. Buster says:

    Krugman was long considered a candidate for the Nobel Prize in Economics for his groundbreaking work on trade theory and competitive advantage. However, some years ago there was speculation that Krugman was hurting his chances of winning due to his political soapbox rhetoric, which was unbecoming for an academic. Within a few years this view began to fade as American foreign policy became unpopular in Europe – especially among the elites. Krugman was a harsh critic of George Bush — the man many European elites held responsible. At that point Krugman’s political soapbox may have become an asset that boosted his odds of winning. One has to wonder: did members of the Nobel Committee want to make a political statement by empowering Bush’s biggest critic?

  11. John Seater says:

    @ Buster:
    Irrespective of the the motives of the Nobel committee, Krugman really did deserve the prize for his work on international trade and economic geography (a field he more or less invented). Krugman’s political rhetoric should have had no bearing on the decision, whether the rhetoric was popular or unpopular. Whether the rhetoric actually did matter or not is something I don’t know.

  12. Jared says:

    Nice response John. I’m surprised that something as blatantly incorrect as Krugman’s piece could actually get play in the NY Times, but then again, maybe I shouldn’t be so surprised. It’s laughable that he contends Medicaid “barains” with anybody; Medicaid doesn’t bargain, they declare.

  13. Jackson says:

    The NYT has lost most credibility due to their employment of rediculous columnists like Krugman.

  14. William Hallman says:

    Why wonder about Krugman? So did Gunner Myrdal, Al Gore and the European Community.

  15. Gerald Clarke, M.D. says:

    Not too mention that the clinic of choice for Medicaid patients is the Emergency Room- since there are no financial penalties in selecting this most expensive route of care…

  16. Raymond Wooldridge says:

    I know a little old lady on Medicaid. She needed to see a dermatologist and called 10 physicians on the Medicaid approved list. None would see her. A call to Parkland resulted in an answer which was that they could only help her if she had a referral from a physician. And Mr. K. calls that efficient?

  17. vikingvista says:

    “one in seven hospitals will leave the Medicare system in the next eight years and seniors will have increasing difficulty finding doctors who will see them”

    Is reducing voter demand for a disastrous and unsustainable government scheme a bad thing?

  18. Jack Shapiro says:

    Krugman and the rest of the left wing economists at Princeton are still having wet dreams about World War II when the federal govt and their economic boards,controlled the economy from top to bottom including price and wage control as well as asset allocation. They dream that some day the nation will realize they are the smartest,most virile, and fairest of all creatures and return the economy to the academic superstars.God help us if they ever succeed. They are control freaks who think real people are not smart enough to run their own lives but have to depens on ubermenschen. There methods have been tried in the last century. It resulted in the five year plan, the gulag, the great leap forward , national socialism and the worst calamIty in human history. Free markets and individual liberty are an anethema to these over educated clowns.

  19. David Ozgo says:


    I must disagree. It is painful to read Krugman when he writes about anything, not just about healthcare.

  20. Stanley Feld says:

    Paul Krugman is absolutely wrong and irresponsible. No wonder the NYT is going broke.

    John is spot on.

    Stanley Feld M.D.,FACP, MACE

  21. Jennifer says:

    He has proven over and over and over…and over…not to know anything about the American health care system. Who is he trying to impress?

    On another note, excellent song pairing!

  22. Mr. Econotarian says:

    I don’t get it – your graph is for Medicare, but Krugman is talking about Medicaid.

    There are some graphs regarding Medicaid per ACA, baseline with ACA repealed, and the House budget plan here:

  23. Bob Kramer says:

    Maybe only doctors should be allowed to comment, and in all due respect, maybe you need to be included as well.

  24. Uwe Reinhardt says:


    Nice music. I remember when you were still a Democrat and sang this along with the Clinton crowd after they won in 1992

    Good memories!


  25. Alex says:

    I can’t stress how tired I am of Krugman and his ilk.

  26. Paul says:

    Krugman is the equivilant of a terribly strong drink. Smart people know to stay away, but plenty of folks dive in without thinking.

  27. seyyed says:

    in such a polarized country it makes sense that he would make outrageous claims to appeal to one group of people. There needs to be more people that are willing to take a reasonable looks at both proposals for health care and assess the merits of each

  28. wanda j. jones says:

    John and Friends–For those who have watched and read Krugman for many years, it can just seem easy to label him a crank of some kind. But if someone comes to him fresh, a clearer picture can emerge; 1) Needy enough to create drama through outrageous pronouncements, 2) devoid of humor that indicates good mental health, driving his thoughts through a cloud of fear, and 3) lofty–with a sense that only he is entitled to pronounce on any topic in his chosen scope of interest, exuding paranoia that his positions are not the Bible of the era.

    If he were being interviewed in a mental health clinic, the professionals would quickly judge that he lacked insight into himself and his position in the world, and was incapable of learning from others, negotiating positions, or appreciating that other assumptions might have value. I’m sure there is a code in the ICD for this. Krugman is to be treated tenderly as one would a suffering patient, and not yelled at or asked to trade insults and slogans for logic.

    He shares one trait with Obama that guarantees they will rise or fall together; both misrepresent the truth on a regular basis. Too bad for the rest of us.

    Wanda J. Jones, President
    New Century Healthcare Institute
    San Francisco

  29. Robert says:

    Zombie Krugman strikes again!