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News of the Day ... In Perspective


New study on Medicare’s hidden administrative costs

It is frequently asserted that Medicare’s administrative costs are only 2%, compared with more than 20% 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%. Private sector costs, calculated in a comparable way, are 8.9%, or 16.7% 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% 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.

Additional information:

“Paying for Medical Care,” AAPS News, October 2005

“Medicare Bankruptcy Date Moved Up Seven Years,” News of the Day, Mar 23, 2004.

“Bankruptcy,” AAPS News, March 2005

“Insurance meltdown,” AAPS News, February 2003

“Why the United States Should Reject Socialized Medicine (a.k.a. `Single Payer’) and Restore Private Medicine,” October 2003


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