Sunday, June 28, 2009

Medicare admin costs

I've read a few advocates of single-payer care cite the fact that Medicare has lower administrative costs than private insurers as evidence of the virtues of government-managed care. The argument is essentially that government can bring new efficiencies to health care that the private sector is incapable of. This statistic may be misleading, however, as Tom Bevan explains:
The explanation is really quite simple, and it's provided here by Robert Book of the Heritage Foundation. The statistic cited by Alter and Krugman uses "administrative costs" calculated as a percentage of total health care costs (For Medicare it's roughly 3 percent and for private insurers its roughly 12 percent).

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.
When a more apples to apples comparison is used, Bevan notes that Medicare's performance is inferior:
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.
Greg Mankiw meanwhile, states -- perhaps a bit glibly -- that "True, Medicare’s administrative costs are low, but it is easy to keep those costs contained when a system merely writes checks without expending the resources to control wasteful medical spending."

Update: More here:
But lower administrative costs do not necessarily mean greater efficiency. Indeed, the Congressional Budget Office analysis last year chastised Medicare's lax attitude on this front. "The traditional fee-for-service Medicare program does relatively little to manage benefits, which tends to reduce its administrative costs but may raise its overall spending relative to a more tightly managed approach," it noted on page 93.

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