27 Jul 2006 Medicare for All? No Thanks, Part II

Posted at 11:25h in Articles, Blog by

More on AlterNet’s prescription of “Medicare for All” from our senior policy analyst David Hogberg:

Continuing my deconstruction of Joshua Holland’s AlterNet polemic in favor of single-payer health care, let’s now look at administrative costs.

Holland claims:

People grumble quite a bit about their private HMOs, but survey after survey — for years — have shown high levels of satisfaction among Medicare patients. Two percent of Medicare’s costs are administration and management while 20 percent of private “Medigap” plans are sucked up by administrative costs. Medicare, which doesn’t need to turn a profit, does that with a much sicker (and more treatment-intensive) population than private insurers deal with.

In that first sentence Holland seems to suggest (it’s not fully clear) that recipients of Medicare are much happier, on average, than those with private insurance.

Holland should check out the 2005 Consumer Assessment of Healthcare Providers and Systems (CAHPS) Survey (pdf). On a variety of ratings, the CAHPS survey shows that only slightly more people are dissatisfied with their private plans than are dissatisfied with Medicare — Medicare is hardly winning a popularity contest by a wide margin.

(And, for those thinking that government health care programs result in higher patient satisfaction, be advised: The worst patient satisfaction ratings are for Medicaid.)

Holland’s claims about administrative costs are even more misleading. As a policy study (pdf) from the Council for Affordable Health Insurance states, comparisons of administrative costs are inaccurate because:

The primary problem is that private sector insurers must track and divulge their administrative costs, while most of Medicare’s administrative costs are hidden or completely ignored by the complex and bureaucratic reporting and tracking systems used by the government.

Some of the administrative costs that are factored into private sector calculations, but not Medicare, include:

1. Collecting Revenue. What it costs employers and the IRS to collect the payroll tax needed to fund Medicare is not included in Medicare’s administrative costs.

2. Company Policy. While the salary cost of executives and boards of directors who set company policy are included in private sector administrative costs, the salaries of members of Congress and their staff members who set Medicare policy are not factored into Medicare’s administrative costs.

3. Management. The salaries of the folks who run the Centers for Medicare and Medicaid Services and the costs of the buildings where they work are excluded from Medicare’s administrative costs. No such luck for the private sector.

When such factors are included, Medicare’s administrative costs are over 5%, not 2%.

Furthermore, as the CAHI paper notes, Medicare’s lower administrative costs may actually reflect Medicare’s greater inefficiency:

Medicare calculates administrative costs as a ratio of identified administrative costs divided by claims. In 2003, the average medical cost for Medicare was estimated to be about $6,600 per person per year (because of the nature of Medicare’s beneficiary pool of older and disabled people), while the average medical cost for private health insurance, excluding out-of-pocket cost, was $2,700 per person per year. Because of the higher cost per beneficiary, Medicare’s method of calculation makes administrative costs, albeit unintentionally, appear to be lower than they really are. Indeed, if the numbers were adequately “handicapped,” they would be in the 6 to 8 percent range.

That paragraph suggests another important point about administrative costs: They are not necessarily superfluous. Administrative costs in the private sector are used to help keep costs down by stopping unneeded care. This lack of oversight is a big problem for Medicare. As Jonathan Skinner, Elliot Fisher, and John E. Wennberg pointed out in a paper for the NBER, “nearly 20 percent of total Medicare expenditures [appear] to provide no benefit in terms of survival, nor is it likely that this extra spending improves the quality of life.”

Or how about administrative costs used to prevent fraud? Medicare has been plagued by fraud for years, far worse than the private sector. Ultimately, what matters when evaluating administrative costs is whether they are cost effective. If you spend $1 million on administrative costs, you aren’t wasting $1 million if it reaps $2 million in benefits.

In sum, most estimates of Medicare’s administrative costs are inaccurate because they leave out important factors that are included in private sector calculations.

To put most of our population in Medicare would put them in a system that is lousy at weeding out unnecessary care and fraud — hardly a recipe for “efficiency.”

(To read David Hogberg’s first installment in this series, please go here.)

Labels: ,



The National Center for Public Policy Research is a communications and research foundation supportive of a strong national defense and dedicated to providing free market solutions to today’s public policy problems. We believe that the principles of a free market, individual liberty and personal responsibility provide the greatest hope for meeting the challenges facing America in the 21st century.