Adminstrative costs: Medicare vs. insurance companies

February 19th, 2009 | by Brian Schwartz |

Advocates of “Medicare for All” like to point out that Medicare’s lower administrate costs justify a government-run health insurance program that everyone is eligible for.  Even if the costs were lower, it’s a non-sequitur.   First off, administrative costs can be good.  Medicare pays for just about everything, resulting in much waste.  Second, if Medicare is run better, then why don’t its advocates compete in the (unfree) insurance market by introducing an insurance product based on Medicare’s allegedly good practices. (That is, w/o forcing taxpayers to fund it…)

And finally, can one compare administrative costs of Medicare to insurance?   Not easily, say the authors of a PricewaterhouseCoopers study, The Factors Fueling Rising Healthcare Costs 2008 (page 8):

Private administrative costs are sometimes compared to Medicare’s administrative costs without reference to the significant differences in the two programs and their target populations. Medicare administrative costs as a percent of total costs are estimated to be approximately 5 percent as compared to an estimated 13 percent for private plans. To start, they enroll very different populations with different costs per enrollee. On a per capita basis, Medicare monthly costs are about $750 per beneficiary compared to roughly $350 per member per month in private plans.

The differences go far beyond the underlying costs of the two programs. Private insurers develop a range of products; sell them to an under-65 population; develop and support provider networks; promote wellness and prevention; offer disease management services; access to health information; and offer consumer support services related to choice of providers, treatment plans and value. Traditional Medicare primarily provides basic coverage to designated populations, seniors and persons with disabilities, without health management services, provider networks, or consumer choice of benefit packages. Private plans frequently pay state and local taxes from which Medicare is exempt. Similarly, private plans meet state imposed “risk based capital requirements” as well as pay appropriate returns to investors. Medicare is financed not only through premiums, but through taxation and government borrowing. The comparison is complicated further because some of Medicare’s cost of capital—for example, the interest cost of the share of national debt due to Medicare spending—is not included in the calculation of the program’s administrative costs.

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  • Dave
    The 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
  • Anthony Costello
    The ratio of administrative costs to non administrative costs seems unimportant compared with total cost per capita. It is hard to find good data, but from what I can find, the average cost per year for each Medicare recipient, despite the gae difference, is less than the average care per individual for family based employer provided insurance. And yet it appears from several surveys that Medicare recipients are more satisfied with their health care. Odd?
  • YouDontKnowYourself
    Looks like you're going to get what you asked for: public v.s. private insurance here we go!


    Not quite. A "public" plan will be able to raise money with taxes. The politicians who want this should quite their jobs and go into the marketplace with their idea. Start a company, or a charity. Don't use government to compete with private citizens.
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