A few weeks ago, economist Arthur Laffer published an article in the Wall Street Journal called “The 30-Cent Tax Premium.” In it he lamented the fact that Americans must spend significantly more than $1 in order to provide $1 of income-tax revenue to the federal government. The direct result of a convoluted tax code riddled with loopholes and complexity, tax-compliance costs alone consume some $431 billion annually. Even more is wasted as a result of people changing their economic behavior to fit the tax code.

That’s a lot of money, but it pales before what we’ve done to undermine the affordability of our own health care system. If this were a game of poker, health care’s administrative overhead expense could see the tax code’s wasted $431 billion and raise it another $320 billion. That’s right, the U.S. will spend nearly three-quarters of a trillion dollars on health care paperwork in 2011. The cost will consume one-third of every single dollar that Americans will spend, tax, or borrow to pay for health care. If health care administration expense were its own country it would be the 18th largest economy in the world. And not one penny of that vast sum will be spent on caring for patients or preventing disease.

Like the tax compliance industry, the health care administration business has grown so large that it has become one of the country’s largest employers. The number of non-clinical health care personnel has skyrocketed over the past 40 years. In 1970, there were 1.5 managers and support staff per physician; there are now about 5.7 administrators for every doctor. While tax compliance employs “more workers than are employed at the five biggest employers among the Fortune 500,” medical paperwork employs as many workers as the top ten. That’s nearly five million people. In health care, the bureaucracy really is expanding to meet the needs of the expanding bureaucracy.

The irony, of course, is that all of this extra complexity and expense ends up costing far more than it saves. Over $500 billion each year in health care administration expense could be eliminated while actually improving care and reducing costs. Scrapping the government-mandated “RBRVS” payment system and simply paying health care providers hourly for their time would save over $50 billion per year. Covering all Americans under a system that utilizes health savings accounts, transparent pricing, and free market forces would save hundreds of billions more. Because excess administration costs produce no health care benefits, every dollar saved will directly reduce health insurance premiums and taxes.

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