06 July 2009

Medicare More Efficient Than Private Insurance

Why are administrative costs so much lower for Medicare, a single payer system for the elderly, than they are for private insurance companies?

Not because claims are large per beneficiary in Medicare.

The Heritage Foundation claims that private insurance companies spend $56 dollars less per beneficiary on administrative costs than Medicare ($453 v. $509), but that is a tiny difference considering how many more health care transactions Medicare must approve and pay for per beneficiary than a private insurance company handling a pool of basically healthy non-elderly children and adults.

Medicare Advantage plans are private insurance serving the elderly population. So this is a case of different systems serving similar populations. (Medicare Advantage clients are probably somewhat healthier than the average senior, but the average cost of their health care is still very high.) If costs depended mainly on number of people, these plans should have low administrative costs as a percentage of spending. They don’t — their numbers look like those of private insurance in general.

Meanwhile, other countries have Medicare-like systems that cover low-cost as well as high-cost individuals. Canada’s system is actually called Medicare. So this is a similar system covering a different, lower-cost population. If costs depended on the number of people, Canada should have high administrative costs; in fact, its numbers look like those of American Medicare (actually even better.)


[T]he 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.

The flip side of this analysis is that administrative cost savings from going to something like a single payer plan are on the order of 5-9% of the total on a one time basis. Another big chunk of savings could result from an end to cost shifting to "able to pay patients" from "unable to pay patients."

These savings are significant, but the final sentence quoted above (in italics) is mostly wrong. Much of the difference from the OECD has to do with the fact that OECD countries are paying its providers less for the same services, using more cost effective providers (clinics and primary care physicians, instead of emergency rooms), and offering prevention instead of cure to low income people. The lower provider cost has something to do with the improved bargaining position of a single payer system vis-a-vis providers compared to a fractured set of insurers vis-a-vis providers.

Two systems that work better than the American model are the French and Dutch systems.


Anonymous said...

Despite the author's computations, my experience indicates that I am better served in a private fee-for service medicare advantage plan. I pay no premium and, except for trivial amounts as part of some test costs and co-payments to physicians and hospitals, my medical expenses are covered. If the total of my payments should exceed a certain annual limit, all further expenses would be covered. This is much better coverage than Medicare plus my former gap policy gap policy at a much lower cost. It is not believable that my private insurer can offer this if his administrative costs are higher than Medicare's.

Andrew Oh-Willeke said...

I don't think anyone is suggesting that Medicare Advantage is bad from the customer's perspective. But, the way the Medicare Advantage Plan is drawn means that it is a money loser for the government compared to an ordinary plan -- unless the private insurance company is cutting a better deal with providers than Medicare does, or has unduly generous deal with Medicare.

Anonymous said...

but that is a tiny difference considering how many more health care transactions Medicare must approve and pay for per beneficiary than a private insurance company handling a pool of basically healthy non-elderly children and adults.

I'm not sure this is actually true. Firstly, most private insurers also offer c-plus, which means that for that population (which can be very large) they are seeing almost as many transactions as the government (since they are covering coinsurance, etc.).

Further, while younger people are healthier, I've been personally surprised at just how high utilization is among those 40-65; I'll go look tomorrow, but I'm not sure it's really all that much lower than 65+. There's almost no such thing as a working population in the US that's healthy.

Most of medicare's supposed administrative advantages are fishy, if not fictional. The government does a great job pushing costs onto the private sector, including the administrative costs it pushes onto providers, and customers.

I'm sure you're aware, but many people aren't, that much of the reason MA insureds are more expensive is because insurance companies code much more aggressively than fee for service doctors. You can make a case this is exactly what the insurance company is supposed to do under the system as it is designed - maximize the amount of value for their customers. So are they being less efficient, or more?

To me its another lesson on how screwed up incentives help screw up the system.


Michael Malak said...

Private insurance companies spend more preventing fraudulent claims. Better to pay the administrative overhead than to pay the fraud overhead.

Anonymous said...

Nice post