Medicare vs. Private Admin Costs: Let the facts stand

By Ralph Weber CFP®, ChFC®, CLU®, REBC®, and Dave Racer, M.Litt*

Many health care reformers cite Medicare’s administrative cost as a reason to drop private insurance and move to a government-managed health care system. Depending on who makes the claim, Medicare’s administrative cost estimates range from 1.5% to 12%. In much the same breath, these reformers claim that private insurance companies spend 10% to 50% on administration.

The real administrative cost of Medicare and private health insurance relies on how one defines administrative expense. The estimated cost of administering Medicare, for instance, often excludes overhead items that are not only common to private health insurers, but to all businesses. These different ways of accounting confuse an honest evaluation of the government’s Medicare administrative cost.

So what constitutes an administrative expense? Where can one find real, honest numbers with which to make an intelligent comparison?

Governments across the country have turned to HMOs and managed care to resolve health system problems. Yet, do the most common administrative cost measurements include the high cost of administering managed care, compounded by CPT codes and other billing codes, the cost of billing a host of different insurance companies, and all the other normal business accounting practice cost? These additional – and unnecessary – costs add tens of billions of dollars to the health care bill; a sorry waste of money when there is a less costly, workable solution available (and it is not Medicare).

The best way to measure administrative cost is also the simplest: Take the total dollars spent on health care and subtract how much actually gets to the providers (doctors, hospitals, etc.). The difference is administrative cost.

The health care spending “bible” is the endless set of statistics from the Centers for Medicare and Medicaid (CMS). CMS tables provide a detailed, line item description of how each dollar is spent.

One spending line item on the CMS tables is tiled “Government, Administration and Net Cost of Private Health Insurance.” This is the line item so often quoted out of context when proponents of government medicine are trying to understate the costs of government administration. For private insurers, this line item includes the cost of administration, marketing, research, premium taxes, facilities, equipment, insurance and reinsurance losses, as well as profit.

The CMS data for government spending include additional line items that fall below the “Administration” line: “Government Public Health Activities, Research, and Structures and Equipment” (see Table 1). If CMS separated these same costs for private insurers in the same manner as it does for government plans, it would be a fairer way to compare the two; but it does not, and that fact goes ignored.

Table 1

			Private Insurance	Government Healthcare
Non Patient Care costs
	Government Administration and Net Cost of Private Health Insurance		x	x
	Government Public Health Activities			x
Investment
	Research			x
	Structures and Equipment			x

 

To shed light on real administrative cost of public versus private health care requires computing the actual per capita cost in absolute dollars. Table 2 shows such a comparison.

Table 2

Costs as percentage of expenses			Private Insurance	Medicare	Medicaid		Government	Grand Total
Number of enrollees			201,991	41,375	39,554		91,884	299,106
Total cost in millions			775	431	329		1,036	2,241
	Cost per Capita		3,837	10,422	8,328		11,272	7,493
Patient care costs			680	410	304		851	1,878
	Medical Loss Ratio		87.79%	94.99%	92.29%		88.32%	86.67%
Non Patient Care costs			12.21%	5.01%	7.71%		11.68%	13.33%
	Government Administration and Net
	Cost of Private Health Insurance		12.21%	5.01%	7.71%		5.74%	6.95%
	Government Public Health Activities						6.19%	2.86%
Investment
	Research						3.68%	1.89%
	Structures and Equipment						2.26%	4.49%

 

If one assumed from Table 2 that Medicare administrative cost is just 5.01%, compared to 12.21% for private insurance, it might seem that Medicare is administered at a significantly lower rate. However, comparing the percentage of cost for activities not directly related to patient care paints a far different and truer picture: Private insurers’ non-patient care costs are 12.21% compared to 11.68% public healthcare. Yet, this still leaves out vital data.

Table 3 shows the cost of care in dollars per capita and leads to the truth. Considering “Government Administration and Net Cost of Private Health Insurance” in isolation, the net cost of administering Medicare is 11% greater than that of private insurers on a per capita basis. Including all non-patient care cost indicates that public healthcare administration is 281% greater than that of private insurance administration. This assessment still does not include the cost of collecting taxes, nor does it include the providers’ cost of complying with insurance billing and collection requirements.

Table 3

Per capita in absolute dollars			Private Insurance	Medicare	Medicaid		Government	Grand Total
Number of enrollees			201,991	41,375	39,554		91,884	299,106
Total cost in millions			775	431	329		1,036	2,241
	Cost per Capita		3,837	10,422	8,328		11,272	7,493
Patient care costs			3,368	9,900	7,683		9,257	6,280
Non Patient Care costs			468	522	642		1,317	999
	Government Administration and Net		–
	Cost of Private Health Insurance		468	522	642		648	521
	Government Public Health Activities		–	–	–		698	214
Investment			–	–	–		–	–
	Research		–	–	–		415	142
	Structures and Equipment		–	–	–		255	337

 

Americans have always been mistrustful of the concept of “government efficiencies” (the ultimate oxymoron). The idea that government can manage health care more effectively and more efficiently is counter-intuitive, and for good reason: The facts show it is not true.

Let the facts stand, and in so doing, let us quit considering the nonsense of a government-run health system. Instead, let us move toward the kind of reforms that will unlock the power of American consumers, and watch effectiveness and efficiencies fall into place.

About the authors

Ralph Weber is a Canadian expatriate, now a Tennessee-based health insurance design consultant, and CEO of Route Three Benefits, Inc. Also the founder and CEO of MediBid Inc., A free market online medical shopping portal for transparency in pricing.

Dave Racer is a speaker, writer, publisher and co-author of Your Health Matters: What you need to know about US health care (Alethos Press LLC, 2006), FACTS: Not Fiction – What really ails US health care (Alethos Press LLC, 2007), and Why health care costs so much: The solution – Consumers (Alethos Press, 2009).  See Alethos Press.

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Notes:

CMS expenditure data taken from Table 4, and table 6, National Health Expenditures, by source of funds and type of expenditure: Calendar year 2007. Last accesses January 18, 2009

Enrollment data taken from CPS Annual Demographic Survey Table HI01. Health Insurance Coverage Status and Type of Coverage by Selected Characteristics: 2007. Last Accessed January 18, 2009,