The Truth About Medicare’s Administrative Costs

via: Heritage

Now that Al Franken has been seated in the Senate, Sen. Chuck Schumer (D-NY) is now telling reporters he sees no need for the left to compromise on their demands for a government-run “public option” health care plan. Proponents of the public plan, like Schumer, believe government-run health care is needed “to keep the insurance companies honest,” because they believe private insurance companies have higher administrative costs than a government-run health care system would. The explanations for why liberals believe this are as numerous as they are erroneous: government is more efficient than the private sector; private insurance companies spend too much on marketing; executive compensation is too high; private firms fight too many claims; and, of course, private health care seeks too much profit.

But like many core beliefs of the left, the claim that government-run health care has lower administrative costs than private care is just plain false. New York Times columnist Paul Krugman, for example, likes to cite data showing that Medicare only spends 3% of its total outlays on administrative costs compared to 14-22% for private care. The numbers themselves are correct, but measuring administrative efficiency by a percentage of total costs is completely useless. Heritage fellow Robert Book explains:

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.

A much more accurate way of capturing each system’s true administrative costs is by a per-patient basis. When this is done, government-run health care’s administrative costs are routinely higher than private care. In the years from 2000 to 2005, Medicare’s administrative costs per beneficiary were consistently higher than that for private insurance, ranging from 5 to 48 percent higher, depending on the year. This is despite the fact that private-sector “administrative” costs include state health insurance premium taxes of up to 4 percent (averaging around 2 percent, depending on the state)–an expense from which Medicare is exempt–as well as the cost of non-claim health care expenses, such as disease management and on-call nurse consultation services.

Without their lower administrative cost talking point, the left knows their justification for government run health care in a time of dangerously high deficits evaporates. That is why Paul Krugman has now attacked Book’s findings twice on his personal blog. In neither effort does Krugman ever refute that per-patient is the better metric nor does he cite any data to refute Book’s per-patient conclusions. Read both posts. And read Book’s responses. This is one liberal myth we can put to bed.

Quick Hits:

  • Health care overhaul legislation from President Barack Obama’s congressional allies would create a federal insurance czar with sweeping new powers to oversee medical plans nationwide.
  • Bank bailouts and recession-fighting measures are exploding the debt of the world’s most affluent nations, sending debt levels to at least 114 percent of gross domestic product in 2014, more than triple the 35 percent of the main emerging economies including China, the International Monetary Fund forecasts.
  • Fitch Ratings downgraded California’s bond rating to BBB, just above junk status.
  • Democrats admit that their cap and trade bill is a job killer.
  • According to Gallup, Americans, by a 2-to-1 margin, say their political views in recent years have become more conservative rather than more liberal, 39% to 18%, with 42% saying they have not changed.
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