Would a Government Health Monopoly Reduce Administrative Costs?
In fact, President Obama has made this claim several times. This statistic about Medicare’s low administrative costs has become one of the linchpins in the argument for a “public option” on health care. The only problem, not surprisingly, is that it’s hogwash.Of course, this sort of static analysis ignores other efficiency advantages of a competitive market. Competition in the market drives costs down and quality up, creating benefits that Medicare reaps, in spite of it being a government monopoly. Take away the competition, and there isn’t much incentive to produce health care more efficiently. There also isn’t much reason to provide better care, or use new technologies, since government can be guaranteed to be slow to allow or pay for them.
The explanation is really quite simple, and it’s provided here by Robert Book of the Heritage Foundation. The statistic cited by [liberal columnists] Alter and Krugman uses administrative costs calculated as a percentage of total health care costs (For Medicare it’s roughly 3 percent and for private insurers it’s roughly 12 percent).
But here’s the catch: because Medicare is devoted to serving a population that is elderly, and therefore in need of greater levels of medical care, it generates significantly higher expenditures than private insurance plans, thus making administrative costs smaller as a percentage of total costs. This creates the appearance that Medicare is a model of administrative efficiency. What Jon Alter sees as a “miracle” is really just a statistical sleight of hand.
Furthermore, Book notes that private insurers have a number of additional expenditures which fall into the category of “administrative costs” (like state health insurance premium taxes of 2-4%, marketing costs, etc) that Medicare does not have, further inflating the apparent differences in cost.
But, as you might expect, when you compare administrative costs on a per-person basis, Medicare is dramatically less efficient than private insurance plans. As you can see here, between 2001-2005, Medicare’s administrative costs on a per-person basis were 24.8% higher, on average, than private insurers.
So, contrary to claims of Alter, Krugman, and President Obama, moving tens of millions of Americans into a government run health care option won’t generate any costs savings through lower administrative costs. Just the opposite.
This confirms two things most Americans already know: 1) government is rarely, if ever, more efficient than the private sector, and 2) if something sounds too good to be true, it almost always is.
So even if the administrative cost differential was what liberals say it is, it would not be nearly enough to justify a government monopoly.
But it’s not what liberals say it is.