Medicare Is More Efficient If You Ignore Its Inefficiencies

One of the most common arguments made by advocates of single-payer health care is it's a more efficient way of financing care. Its administrative costs are lower, the argument goes, which means that more of the money spent on the program goes to actually paying for care rather than marketing expenses and corporate profits. The problem with this argument, as National Center for Policy Analysis President John Goodman points out in Health Affairs, is that when you look at all the costs involved in administering the program, it's just not true:

What about the claim that Medicare's administrative costs are only 2 percent, compared to 10 percent to 15 percent for private insurers? The problem with this comparison is that it includes the cost of marketing and selling insurance as well as the costs of collecting premiums on the private side, but ignores the cost of collecting taxes on the public side. It also ignores the substantial administrative cost that Medicare shifts to the providers of care.

Studies by Milliman and others show that when all costs are included, Medicare costs more, not less, to administer. Further, raw numbers show that, using Medicare's own accounting, its administrative expenses per enrollee are higher than private insurance. They are lower only when expressed as a percentage – but that may be because the average medical expense for a senior is so much higher than the expense for non-seniors. Also, an unpublished ongoing study by Milliman finds that seniors on Medicare use twice the health resource as seniors who are still on private insurance, everything equal.

Ironically, many observers think Medicare spends too little on administration, which is one reason for an estimated Medicare fraud loss of one out of every ten dollars of Medicare benefits paid. Private insurers devote more resources to fraud prevention and find it profitable to do so.

It's hard to defend the efficiency of any program that, according to the government's own estimates, makes nearly $50 billion in bad payments every year (a figure that doesn't even include bad payments in the prescription drug program). And as Goodman points out, higher administrative costs can sometimes actually lead to greater efficiency. One of the ways that Medicare has historically been able to lower its total administrative spending is by skimping on fraud prevention. I say historically because in coming years, fraud prevention will probably be more difficult for private insurers thanks to regulations included in last year's health care overhaul that require insurers to cut back on certain types of administrative expenses.