Costs: Medicare vs. private insurers

I don't like to simply copy and paste from other peoples' articles, but I thought this meme was important enough to echo. From Paul Krugman's blog, a discussion of the assertion by the Heritage Foundation that the lower administrative costs of Medicare (less than 2% of expenditures) are actually higher than the administrative costs in private plans if measured on a per-capita basis. According to Heritage, the key is realizing that the expenditures in Medicare are higher per capita (they're a population which requires more care), so the percentage ends up being lower.

The key to rebutting this assertion comes from their own framing of the issue. If the two populations are not comparable (necessary to their argument) then it helps to find two populations which are. Luckily, we have the Medicare Advantage program, which serves a population comparable to Medicare, and which is run by private insurers. From Jacob Hacker:

These administrative spending numbers have been challenged on the grounds that they exclude some aspects of Medicare’s administrative costs, such as the expenses of collecting Medicare premiums and payroll taxes, and because Medicare’s larger average claims because of its older enrollees make its administrative costs look smaller relative to private plan costs than they really are. However, the Congressional Budget Office (CBO) has found that administrative costs under the public Medicare plan are less than 2 percent of expenditures, compared with approximately 11 percent of spending by private plans under Medicare Advantage. This is a near perfect “apples to apples” comparison of administrative costs, because the public Medicare plan and Medicare Advantage plans are operating under similar rules and treating the same population. (And even these numbers may unduly favor private plans: A recent General Accounting Office report found that in 2006 Medicare Advantage plans spent 83.3 percent of their revenue on medical expenses, with 10.1 percent going to non-medical expenses and 6.6 percent to profits—a 16.7 percent administrative share.)

The CBO study suggests that even in the context of basic insurance reforms, such as guaranteed issue and renewability, private plans’ administrative costs are higher than the administrative costs of public insurance. The experience of private plans within FEHBP carries the same conclusion. Under FEHBP, the administrative costs of Preferred Provider Organizations (PPOs) average 7 percent, not counting the costs of federal agencies to administer enrollment of employees. Health Maintenance Organizations (HMOs) participating in FEHBP have administrative costs of 10 to 12 percent.

In international perspective, the United States spends nearly six times as much per capita on health care administration as the average for Organization for Economic Cooperation and Development (OECD) nations. Nearly all of this discrepancy is due to the sales, marketing, and underwriting activities of our highly fragmented framework of private insurance, with its diverse billing and review practices.

As I've said before on health care, if you want your premiums to be applied to improving your health and not to inefficiencies then you should support H.R. 676. Even a fully functional, national public insurance option may be acceptable as a compromise, as long as its ultimate goal or effect is to gracefully, gradually, but inexorably drive the inefficient health insurance companies out of the market. This is especially important if a large public investment will be made in the plan; I want my tax dollars going toward improving public health, not padding the profits of private corporations. In the end, given the facts, it's really that simple.