Myth 2: A public plan could save enough on administrative costs to provide coverage to all.

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:

Additional information:

9 thoughts on “Myth 2: A public plan could save enough on administrative costs to provide coverage to all.

  1. Pete Stark told me (15 years ago before he Gerrymandered out of my district) that single-payer (Medicare for all) would have <10% adm. cost, much less than profit (bad) insurance.

    When I replied that it cost ME many times as much, to keep from being jailed for a coding error, Stark just looked down his nose and stepped into his limo.

  2. The government will save money by reducing overhead expenses and more efficient administration???? Who in the world can possibly say that with a straight face??? Only a liar or a fool. Washington is still accurately characterized by JFK: A blend of Northern hospitality and Southern efficiency. I have yet to meet a government bureaucrat who can do as much work as I do in a day.

  3. President Obama just lectured us on the need to cut “unneeded tests” and to cut spending on health care. Sadly, he did not address one of the big causes of ordering such testing – the fear of litigation. I am not so ingenuous as to think that he will turn his back on his brothers and sisters in the Trial Lawyers’ Association. I do not expect him to honestly address this issue, but one can audaciously hope…

  4. Help me figure out some of this book keeping jargon, please:

    http://www.cms.hhs.gov/ReportsTrustFunds/downloads/tr2009.pdf
    The “2009 ANNUAL REPORT OF THE BOARDS OF TRUSTEES OF THE FEDERAL HOSPITAL INSURANCE AND FEDERAL SUPPLEMENTARY MEDICAL INSURANCE TRUST FUNDS” contains a chart on Page 50 that shows “administrative costs” and payments to the FBI, Justice Dept. and others.

    How are they fudging the numbers?

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  8. Medical loss ratios and expense ratios can be misleading.

    According to the CMS and US Census bureau, in 2005, the MLR for private insurance is 85.93%, Medicare is 88.32% and Medicaid is 68.88%, with the overall “government total” being 82.74%.

    What’s more revealing is the non medical costs on a per enrollee basis. Insurance is $484.62 per enrollee per year, Medicare is $1,871.35, and Medicaid is $2,113.60.

    Bottom line is that 10% of 10,000 is more than 20% of 1,000. They use percentages to mislead people.

    If an insurance premium is $500 per month, and admin is 10% ($50), let’s say you remove mandates, and increase the co pays and deductibles such that you reduce the premium to $250. Does it suddenly and miraculously cost only $25 to administer that policy? Hell no, your admin costs go up to 20%, and if you have an MLR mandate like they do in MN, your policy is not illegal to sell. So imposed MLR’s force premiums UP.

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