June 25, 2009
Medicare Administrative Costs Are Higher, Not Lower, Than for Private Insurance
by Robert A. Book, Ph.D.
WebMemo #2505
Many advocates of a public health plan--either a "single-payer" plan or a "public option"--claim that a public health plan will save money compared to private health insurance because "everyone knows" that the largest government health program, Medicare, has lower administrative costs than private insurance.....
.....However, on a per-person basis Medicare's administrative costs are actually higher than those of private insurance--this despite the fact that private insurance companies do incur several categories of costs that do not apply to Medicare.....switching the more than 200 million Americans with private insurance to a public plan will not save money but will actually increase health care administrative costs by several billion dollars.
Fuzzy Math
Medicare patients are by definition elderly, disabled, or patients with end-stage renal disease, and as such have higher average patient care costs, so expressing administrative costs as a percentage of total costs gives a misleading picture of relative efficiency. Administrative costs are incurred primarily on a fixed or per-beneficiary basis; this approach spreads Medicare's costs over a larger base of patient care cost.
Even if Medicare and private insurance had identical levels of administrative efficiency, Medicare would appear to be more efficient merely because of an artifact of the arithmetic of percentages--Medicare's identical administrative costs per person would be divided by a larger number for patient care costs.
Imagine, for a moment, that Fred and Jane each have a credit card from a different bank. Fred charges $5,000 a month, and Jane charges $1,000 a month. Suppose it costs each bank $5 to produce and send a plastic credit card when the account is opened. That $5 "administrative cost" is a much lower percentage of Fred's monthly charges than it is of Jane's, but that does not mean Fred's bank is more efficient. It is purely a mathematical artifact of Fred's charging pattern, and it would be silly to compare the efficiency of bank operations on that basis. Yet that is how many analysts compare Medicare with private insurance...........
http://www.heritage.org/Research/HealthCare/wm2505.cfm
Bookmarks