Wednesday, February 22, 2006

New Study Finds Medicare’s Administrative Costs Are Underestimated

(The appearance of this post was delayed by a malfunction)

It is frequently asserted that Medicare’s administrative costs are only 2 percent, compared with more than 20 percent for the private sector—and concluded that a “single payer” system would produce enough cost savings to cover all the uninsured. A study just released by the Council for Affordable Health Insurance (CAHI) shows that Medicare’s costs are underestimated, and private costs overestimated. Moreover, the additional private costs do return some value. If hidden administrative costs are added in, Medicare’s costs are seen to be about 5.2 percent. Private sector costs, calculated in a comparable way, are 8.9 percent, or 16.7 percent if commissions, premium tax, and profit are included.

Because the percentage is calculated as administrative costs divided by total claims, Medicare is favored because it covers older and sicker people with average claims of $6,600 per year, compared to $2,700 for privately insured persons. Correcting for this factor, Medicare’s administrative burden would be in the range of 6 to 8 percent for a population similar to that covered by private insurance.

Private companies spend more in scrutinizing claims before payment. Medicare relies more on post-payment investigation, and such costs are allocated to law enforcement rather than administration. While private insurers pay commissions to bring in premiums, the government forces employers to collect and process Medicare “premiums.” Additional costs of raising money for Medicare (such as interest on government debt and the cost of collecting the general revenues that subsidize Part B) are large but not estimated in the study.

CAHI concludes that the real issue is not which sector has the lower administrative costs, but which does the better job of providing good coverage for the best price. Even with the price controls imposed by the government, CAHI believes that the private sector provides much better value for money.

The study does not consider the administrative costs imposed on physicians and hospitals, the costs of fraud by carriers and providers, the economic consequences of the taxes required to support Medicare, or the other effects of Medicare on the medical market.


One of my medical correspondents adds:

No doubt,. if they were all considered, costs would far exceed private costs and profits as well:

1. Cost for "Joint Comission" and all the White Coat nurses on the "Compliance" payroll are not included.

2. Costs for employer to collect Medicare tax are not included.

3. Costs for "Medicare Fraud" investigations are included in Law Enforcement budget - not included.

4. Costs for "Private Insurance" to make up for below-cost Medicare reimbursement are not included.

5. My hospital had a "Corporate Integrity Agreement" because of "Medicare Fraud" - included a whole office of "compliance" -attorneys, high priced admninstrators; Lectures on "Compliance" etc.. Cost at least as much as alleged fraud. Not included.

6. Quite a number of Medicare claims are "denied" for no apparent reason at all - then paid following re-submission. Much extra work for billing companies. Costs not included.

7. Career Health Care Financing beurocrats and legislators who make new rules are already on the Government payroll. Costs not included.

This is just the "tip of the iceberg" .


For greatest efficiency, lowest cost and maximum choice, ALL hospitals and health insurance schemes should be privately owned and run -- with government-paid vouchers for the very poor and minimal regulation. Both Australia and Sweden have large private sector health systems with government reimbursement for privately-provided services so can a purely private system with some level of government reimbursement or insurance for the poor be so hard to do?

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