Politics & Policy

Medicare’s ‘Efficiency’

Private insurance has lower administrative costs.

Everybody “knows” that government agencies are more efficient than private health insurance at delivering medical benefits and services. After all, Medicare’s administrative costs, at roughly 2 percent of the cost of benefits, are lower than those of private insurance. In the first presidential debate, President Obama claimed that “every study has shown that Medicare has lower administrative costs than private insurance does.”  

Not so fast, Mr. President. Comparisons between Medicare and private insurance are misleading.

Let’s unpack the facts. The administrative costs of Medicare are usually calculated as a percentage of Medicare’s total costs. The cost of administering the program is compared with benefits paid. Presented in this fashion, the administrative costs are indeed relatively low.

But as health-care economist Robert Book explains, “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.” In other words, Medicare spends a lot of money on benefits, and these expenditures make its administrative costs look small in comparison. When administrative costs are viewed on a per-beneficiary basis, as in Book’s evaluation, and not as a percentage of total costs, Medicare’s administrative costs are seen to be slightly higher than those of private insurance, even though in private insurance these costs include money spent on non-administrative functions such as marketing.

Estimates of Medicare’s administrative costs also exclude the costs borne by health providers rather than the government. Medicare is governed by tens of thousands of pages of rules, regulations, and guidelines. Doctors, hospitals, home-health agencies, and nursing homes must, under threat of civil and criminal penalties, comply with this vast, mind-numbing, and complex regulatory regime. While more research is needed on the extent of these costs, a groundbreaking study by PricewaterhouseCoopers in 2001 found that for every hour of care delivered to a “typical” Medicare hospital patient, hospital officials spent roughly a half-hour complying with Medicare paperwork. Not one dime of these costs shows up in the Medicare budget, and in Congress and elsewhere these costs are routinely ignored.

Even so, Medicare’s administration — a flawed claims-paying machine– is plagued by tens of billions of dollars annually in waste, fraud, and abuse. As Jeffrey Anderson explained in The Weekly Standard, Medicare’s level of waste and fraud simply has no analogue in private health insurance. The Government Accountability Office has estimated that Medicare loses a staggering $48 billion a year through fraudulent or improper payments. Merrill Matthews points out that, whereas Medicare may be losing 10 to 15 percent in fraud, the rate for private insurers has been estimated to be only 1 to 1.5 percent.

In contrast to traditional Medicare’s deficiencies, can the private sector do a better job at delivering Medicare’s standard benefits? The Federal Employees Health Benefits Program, for example, is a time-tested premium-support system of competing private plans. Also, while providing Medicare’s standard benefits, Medicare Advantage plans have proven to be just as efficient, according to an article by Jeet Guram and Robert Moffit in the New England Journal of Medicine.

When the comparisons are appropriate, and all factors are considered, government-run health care is seen to be neither cheaper nor more efficient than private insurance. Claims to the contrary depend heavily on omissions of fact and other distortions. The president should know that. 

— Robert Moffit is a senior fellow, and Alyene Senger a research assistant, at the Heritage Foundation.


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