Free Markets, Free People


Busting Medicare’s “Low Overhead Advantage” Myth

One of the favorite arguments of the government health care crowd is the supposed Medicare low overhead argument – i.e. Medicare is more efficient than private insurance because its overhead is so much lower than private administrative costs.

It goes like this:

But the administration of Medicare is a miracle of low overhead and a model, despite all the fraud and abuse, of what government can do right. Three percent of Medicare’s premiums go for administrative costs. By contrast, 10 to 20 percent of private-insurance premiums go for administrative costs. Roll that figure around on your tongue. When you swallow and digest it, you’ll understand that any hope of significantly reducing health-care costs depends on a public option.

Right now, the Medicare average is 3% and private insurance averages 12%. But Tom Bevan points out, some of that difference is an apples and oranges comparison:

But here’s the catch: because Medicare is devoted to serving a population that is elderly, and therefore in need of greater levels of medical care, it generates significantly higher expenditures than private insurance plans, thus making administrative costs smaller as a percentage of total costs. This creates the appearance that Medicare is a model of administrative efficiency. What Jon Alter sees as a “miracle” is really just a statistical sleight of hand.

Furthermore, Book notes that private insurers have a number of additional expenditures which fall into the category of “administrative costs” (like state health insurance premium taxes of 2-4%, marketing costs, etc) that Medicare does not have, further inflating the apparent differences in cost.

However, when you make an apples to apples comparison, Medicare comes out much worse than private insurance:

But, as you might expect, when you compare administrative costs on a per-person basis, Medicare is dramatically less efficient than private insurance plans. As you can see here, between 2001-2005, Medicare’s administrative costs on a per-person basis were 24.8% higher, on average, than private insurers.

So, contrary to claims of Alter, Krugman, and President Obama, moving tens of millions of Americans into a government run health care option won’t generate any costs savings through lower administrative costs. Just the opposite.

Make sure you click through and check out the real Medicare administrative costs as compared to private industry.

Then there’s waste fraud and abuse. Did you happen to catch that little hand wave at “fraud and abuse” in the first quote touting Medicare’s efficiency? What, pray tell, is one of the primary jobs of an administive system? Would you imagine it to be the elimination of fraud and abuse – or said another way, to ensure that the company pays legitimate claims and avoids fraudulent and unnecessary payments?

How efficient is a system which is awash in both fraud and abuse? And, without profit, what incentive do they have to eliminate it?

John Stossel takes that part of the “Medicare efficiency” myth apart:

But there’s a bigger point – the connection between “low” administrative costs and staggeringly HIGH levels of fraud and waste. As Michael Cannon at the Cato Institute and Regina Herzlinger at Harvard Business School have pointed out, much of the 10 to 20 percent of private insurance administrative costs goes to preventing fraud. Private insurers, you see, care about whether or not they lose money. Medicare, with its unlimited claim on the public purse, does not. It’s only taxpayer money, after all.

The results are predictable, but breathtaking nonetheless: an estimated $68 billion (with a B) in outright Medicare fraud every year (About $3 billion in Miami-Dade county ALONE.) On top of that, according to well-respected Dartmouth researchers, roughly a third of Medicare’s total $400 billion annual spending goes to procedures which were medically unnecessary.

That’s, on average, 68 billion every year. Imagine a private insurance company surviving with loss figures like that. But as Stossel points out, without an incentive to eliminate fraud and abuse, it continues year after year after year, with politicians and Medicare administrators tut-tutting but never really doing anything about it.

That is the reality of Medicare’s efficiency. It is also the probable model any future health care insurance run by the government. Efficiency is an illusion brought about by a statistical sleight of hand and ignoring the systemic waste, fraud and abuse of Medicare.

~McQ

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8 Responses to Busting Medicare’s “Low Overhead Advantage” Myth

  • There is also the matter of Medicare keeping it’s future obligations off the books.  The reality here is that Medicare, along with Medicaid and Social Security are the big three driving the government’s unsustainable level of debt.
    Put those obligations on the books and Medicare becomes a train wreck no matter what the overhead is.

  • I’m at the point where I’m hoping that we run out of money sooner rather than later.  This is followed by the realization that it will just be used as an excuse by whoever is in power to justify economic measures that are even more stupid.

  • How does Krugman have any ‘credibility’ left?  With the crap he’s been spouting the last week or so, you’d think he would dragged into the street to be tarred and feathered…

  • Medicare’s total costs per patient are also higher than private insurers’. Does that mean that it is less efficient overall, or just that its patients are far less healthy? If you don’t need care, you generate no claims, and therefore no costs. I don’t get Bevan’s argument.
    That said, I don’t understand just how it is that Medicare’s admin costs are such a low fraction of the total. I’d love to see comparative pie charts that break things down. Here’s the state taxes, here’s marketing, here’s fraud patrol, here’s “true” admin, etc.

    • Medicare’s total costs per patient are also higher than private insurers’. Does that mean that it is less efficient overall, or just that its patients are far less healthy?

      That actually supports Bevan’s point. The way that Alter is computing overhead costs is as a percentage of total costs. Because Medicare has much higher costs, partially due to the fact that it covers older and less healthy patients, the cost for actual treatments is a much higher percentage of the total cost than administrative costs, even if the administrative costs are the same for both Medicare and the private insurers,

      For example: Old Coot goes to the doctor for treatment of his numerous age related illnesses. The administrative cost for setting it all up is $1000 and the total cost of care is $100,000. The administrative costs are therefore 1% of the total cost of care. OTOH, Young Buck goes to the doctor for treatment of the torn ligament he got while playing basketball. The administrative cost for setting it all up is $1000 and the total cost of care is $10,000. The administrative costs are therefore 10% of the total cost of care.

      This is the reason for Bevan’s argument that the better indication of administrative costs is the total spent for administrative costs by the program versus the # of patients treated, rather than the formula Alter uses.

  • JOHN STOSSEL – “[A]ccording to well-respected Dartmouth researchers, roughly a third of Medicare’s total $400 billion annual spending goes to procedures which were medically unnecessary.”

    Well, The Annointed One has already dealt with that. Recall that, under his brillian plan, the gubmint is going to have “standards” to determine EXACTLY what sort of care should be given for various diseases, ailments and maladies, in other words, what bare minimum procedure will “work” for a majority of cases. And so, PRESTO! No unnecessary procedures, because doctors will be told a priori what they can and can’t do to treat their patients.

  • Admin costs aren’t just the cost of “setting it up”. For young and old, public and private, there is an admin cost for each prescription filled, for each doctor visit, for each procedure. That’s why the per capita cost doesn’t tell you much.

  • If you would like to follow more about the health debate and the waste and abuse of the system, go to http://www.ilovebenefits.wordpress.com

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