It is frequently asserted, especially by groups such as Physicians for a National Health Program (PNHP), that a “single payer” (government) system could “save” enough money on administration to buy coverage for all the uninsured.
The basis for the assertion is the claim that Medicare spends only 2% to 3% of its outlays on administration, compared with private plans’ alleged costs of 20% to 25%.
In fact, data from the Congressional Budget Office (CBO) shows that insurance companies spend at least 50% less on administration than government does on its health programs. (The Congressional Budget Office Reports: Comparing health care admin cost: who’s less costly?)
CMS (Centers for Medicare and Medicaid Services ) divides spending data into care (paid to doctors, hospitals, pharmacies, and others for patient care) and non-care (everything else). For 2009, CMS projects spending on care at $2.13 trillion, and non-care at $424 billion or 16.7% of total spending.
Of the $879 billion projected to be paid in 2009 by private insurance, CMS estimates $128 billion for non-care—12.7%. For all public programs except Medicare, the comparable percentage is 26%, without adjustment for the taxes and assessments paid only by private insurers. Unlike Medicare, other public programs—Medicaid, SCHIP, Veterans Administration, and military programs—are internally administered.
Medicare is externally administered by private companies; its non-care costs are 5.7%. If it were administered like other government programs, administrative cost would increase by $1 trillion over the next 10 years.
There are many reasons why private companies have higher non-care costs for their private plans than for Medicare:
- Private insurance plans must pay government taxes and assessments up to 5% of premiums. When these are factored out, the real net cost of private administration is less than 10%.
- CMS excludes the cost of its own employees who enroll recipients, perform outreach and education, handle customer service, and do auditing and other functions. Private plans include these in overhead.
- Private plans have on average a higher number of claims to process for a given amount of expenditure.
- Insurance companies have to collect premiums. The IRS does that for Medicare.
- Private companies do underwriting; their premiums have to cover their costs. Medicare deficits have to be covered by taxpayers.
- The cost of servicing the public debt is not included in Medicare costs—and Part B is 75% subsidized by general revenues, not beneficiary premiums.
Greg Dattilo and Dave Racer conclude: “Though one has to dig for the truth, the CBO report makes the case: Competition in a private health insurance market saves tens of billions each year that government agencies would waste on administrative cost.”
Benjamin Zycher of the Manhattan Institute for Policy Research also notes that it costs the economy more than a dollar to send a dollar to Washington (Wall St J 10/29/07). The lowest plausible assumption for the excess economic cost of the tax burden, 20%, would raise the cost of delivering Medicare benefits to at least 24% to 25% of Medicare outlays, and a more realistic estimate to about 52%, or four to five times the net cost of private insurance.
Other facts to remember about Medicare administration:
- The information given on their “customer service” hotlines about their own rules is inaccurate 85% of the time.
- The threshold for investigating fraud by carriers is about $200 million.
- Physicians are subjected to career or life-destroying audits, civil monetary penalties, or criminal prosecutions, over what should be simple billing disputes (Libby RT, The Criminalization of Medicine: America’s War on Doctors, Praeger 2008, reviewed in J Am Phys Surg, summer 2008).