Saturday, June 27, 2009

Would a Government Health Monopoly Reduce Administrative Costs?

From Tom Bevan of Real Clear Politics, an debunking of statistics that claim to show that government health care has lower administrative costs than does private insurance.
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.

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.
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.

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.

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12 Comments:

Blogger Nick said...

There is one other significant administrative cost that Medicare does not have... enrollment costs. Medicare is comprised of people who turned 65... and its automatic. In fact, the Medicare roles come from the Social Security system. They don't have to deal with collecting premiums, or dealing with enrollment, etc.

If there were to be a "public option" that was not mandatory of all citizens (in other words, in competition with private insurance), then they'd have to deal with collecting premiums, and filling out insurance forms, and you know... costly administrative stuff.

6:57 AM  
Blogger Jack Lohman said...

I have a tendency to not trust "think tanks" that were specifically set up to cater to one segment of ideology, like right or left wing, and receive funds from (in Heritage's case) the insurance and other industries to push their agenda. I tend to trust more the people at Harvard and Johns Hopkins.

See "Costs of Health Care Administration in the United States and Canada" (Steffie Woolhandler, M.D., M.P.H., Terry Campbell, M.H.A., and David U. Himmelstein, M.D.) (by New England Journal of Medicine and www.pnhp.org)

But that said, "administration" and "overhead" are often used interchangeably and inappropriately. The cost to process a claim is roughly the same in both cases (perhaps $5). But with Medicare you submit and you get paid. With privates they go trough a nurse "gatekeeper" and she determines whether the doctor is ordering properly, and if not, rejects the claim. The doctor must then spend 15 minutes on the phone justifying it, or if it is small he'll write it off and cost-shift it.

The total cost of the insurance bureaucracy is about 31% of total costs, and that includes the extra billing personnel and administration needed at the clinics and hospitals. (Compared with about 9% overall with Medicare.) Private is higher because insurers must extract dollars from their premiums to offset high CEO and Executive salaries and bonuses, shareholder profits, actuarial fees, gatekeeper costs, marketing costs and broker commissions, and even the lobbying costs and campaign contributions that they must pass on to the patient. It's pretty hard for a private company to compete with a government plan that has none of that.

And yes, your trusty politician gets a piece of your private healthcare dollar.

The 3.5% often attributed to Medicare "administration" costs includes WPS's take, and I don't know if it also includes CMS in DC.

This is one segment of industry where private is more costly than public. Private Medicare Advantage costs taxpayers 17% more than public Medicare and usually includes cherry-picking and lemon drops and denial of care.

Nothing is easy...

Jack Lohman

http://SinglePayer.info

8:00 AM  
Blogger John McAdams said...

I have a tendency to not trust "think tanks" that were specifically set up to cater to one segment of ideology, like right or left wing, and receive funds from (in Heritage's case) the insurance and other industries to push their agenda. I tend to trust more the people at Harvard and Johns Hopkins.

Oh, my!

Do you know how naive that sounds?

Academics have a strong ideological bias. They not only have a strong bias toward government and against private markets, academics who study health care tend to have self selected themselves into that field because they want socialized medicine.

Also, medical journals are run by people who have an ideological stance. The New England Journal of Medicine most certainly does.

11:07 AM  
Blogger Jack Lohman said...

Oh wow! Then I'll just have to believe Heritage even though my 40 years in the health care industry tells me the academics are correct. Silly me.

5:54 PM  
Blogger John McAdams said...

Then I'll just have to believe Heritage even though my 40 years in the health care industry tells me the academics are correct.

Plenty of people with 40 years in the health care industry believe that Heritage is correct.

Regardless of who is correct, invoking liberal academics in support of a liberal policy simply isn't a good argument.

9:05 PM  
Anonymous Anonymous said...

"Regardless of who is correct, invoking liberal academics in support of a liberal policy simply isn't a good argument."

But it makes a good argument if you invoke right-leaning think tanks in an argument against a liberal policy.

You see, Jack, JM has NO years in the health care industry and that entitles him to pick and choose whom to believe. But you're just naive to trust academics over think-tanks with a clear ideological bent. That's the way the game is played on this blog.

10:08 PM  
Blogger Jack Lohman said...

Yea, regardless of who is correct, why are you attacking the liberals while ignoring the reasons private administrative costs are higher. Isn't that the crux of your post? And besides, a single-payer system would be an "insurance" monopoly, not a health monopoly. Doctors and hospitals remain private. Only your beloved insurers would be on the outside looking in.

4:09 AM  
Blogger John McAdams said...

And besides, a single-payer system would be an "insurance" monopoly, not a health monopoly. Doctors and hospitals remain private.

In name only. He who pays the piper calls the tune.

A government insurance monopoly could dictate anything it wanted to nominally private hospitals and doctors.

But that, in fact, is what you people want.

8:42 PM  
Blogger Jack Lohman said...

He who pays the piper calls the tune. A government insurance monopoly could dictate anything it wanted to nominally private hospitals and doctors.

Yea, if I had a choice between politicians writing the rules or CEOs whose salaries and bonuses are improved by their ability to deny patient care, I'll take the politicians any day. I can unelect him, but probably won't have to because he's on the same system as the rest of us.

11:52 AM  
Blogger John McAdams said...

Yea, if I had a choice between politicians writing the rules or CEOs whose salaries and bonuses are improved by their ability to deny patient care, I'll take the politicians any day.

But the reality is that Americans get good care, and people who have to depend on politicians for their care don't.

If the insurance provider I have (through Marquette) started limiting access to care in the way bureaucrats do under socialized medicine, Marquette would simply get another insurance carrier.

4:29 PM  
Blogger Jack Lohman said...

But the reality is that Americans get good care, and people who have to depend on politicians for their care don't.

That is absolute hogwash. I'm on Medicare and the politicians don't control my care. My doctor does, and he could be the same doctor you have. But you are obviously very happy that (a) you have a job, and (b) your employer provides decent health care, and (c) at least for the moment. Except for the doctors that teach medicine and know better, I know few professors that are unhappy with their Cheney-care. You need to get out into the real world.

And maybe you should read the free online book at MakingAKilling.org

4:50 PM  
Blogger Jack Lohman said...

Well, John, did I lose you, or do you just turn it off when someone has decent arguments? My last comment seemed to just die in your moderation.

8:31 PM  

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