Administrative Costs of Medicare

So which matters?

Presumably we’d want per person for comparable people which neither measure offers. I imagine any person that is comparable in age and medical condition to a Medicare beneficiary that is paying with private insurance is going to be a very different sort of person than the one that relies only on Medicare.

I have no doubt that administrative costs of private insurance are higher than they should be. But it seems likely that this is a result of all the policies that encourage third party payments (tax subsidies to employer-provided health insurance, for instance), and does not point to public insurance as the answer. Separate insurance from employment and see what happens to admin costs when private insurers really compete in the market place.

Our post was mainly a rebuttal of the ridicuolous claims by Paul Krugman and Robert Reich that Medicare is actually efficient and that our whole health care system would be moe effcient if everyone were in Medicare.

“Percentage sounds (naively) like a better measure than absolute cost.”

Why? What possible reason is there for this?

Insurance administration is almost entirely composed of fixed costs per person (though with a slope that isn’t 1). It really doesn’t cost much more administratively to insure sick people than healthy ones, so it goes without saying that as people age the % admin will go down, without anything actually being more efficient.

If you’re Medicare, and you aren’t looking for fraud and are bent on paying the doctors as fast as you possibly can, insuring a sick person is not more expensive than a healthy one at all. Does that make it more efficient?? If your only criteria is blowing money out the door as fast as you possibly can, then maybe, but most rational people wouldn’t consider that a worthy goal.

I’ve done per-member-per-month (PMPM) comparisons of admin between private companies and medicare. My finding was actually that they were about the same, give or take a bit. Why does spending $30 a month on a 35 year old super inefficient but spending the same amount on a 65 year old super efficient? It doesn’t make any sense.

You know what people who think medicare is efficient should do? Add the amount of fraud medicare incurs to it’s admin, since fraud is straight up waste. Guess who wins the efficiency game then?

Here’s another explanation for why using % of income (or claims) can be a spectacularly bad measure of admin efficiency.

Let’s say Medicare actually decided to tackle all that fraud that goes on. To do so, it increases admin 20%. Holy cow, 20%, that’s around two billion dollars more in admin! That must mean it’s much less efficient.

But it get’s worse. As a result of the increased admin expenditures, it reduces fraud by HALF. That’s at least 12 billion dollars in savings.

So what happened is that Medicare recipients saw no (or insignificant) change in quality of care, doctors got their payments, and taxpayers saved 10 billion dollars. But when you go to calculate Medicare admin %, the numerator will be larger, and depending on your measure, the denominator might be smaller, making for significantly higher admin as a %. Then people will all wail and nash their teeth at how much less efficient Medicare is.

(As a side note, when the Affordable Care Act initially added the minimum MLR, the joke among actuaries was “well, time to fire the fraud team!” because that directly results in a smaller admin % of total).

The entire health care reform debate – from death panels to insurance across state lines to “efficient” Medicare – was face-smashingly stupid.