Medicare’s Nominally Low Administrative Costs: Is it Really More Efficient?
A topic of debate that is closely related to the possible role of a public option is whether Medicare’s nominally low administrative costs – compared to private insurers – are in fact an indicator of increased efficiency . The kind of numbers typically cited are the following: private insurers have administrative costs in the range of 20% to 30%. and Medicare has administrative costs in the range of 2% to 5% .
A good fictional example of the claim that Medicare is highly efficient was the "Presidential Debate" on the West Wing between Matt Santos (played by Jimmy Smits) And Arnold Vinick (played by Alan Alda).
Those who are that Medicare is more efficient that private insurers argue, among other things, that healthcare insurance is an area where greater scale almost inevitable leads to substantially greater efficiency. Take, for example, the information systems that are used to manage all of the record-keeping, payment disbursements, etc. Medicare’s proponents argue that having 50 different private insurers separately develop 50 different information systems is inherently inefficient and wasteful. Instead, if just a single information system is developed, the costs of that single system can be amortized over many more transactions, vastly reducing the amount of administrative overhead.
Medicare’s supporters also cite the following issues in making their claims about the program’s efficiency:
a) No need to make a profit for shareholders.
b) Executives will not receive exorbitant compensation.
c) Few/no marketing costs, and little/no cost associated with individuals switching plans.
d) More efficient administration, in part because of greater scale.
While there may be some argument on some of these points, there is clearly some merit to most of them. To cite one obvious example, assume that an individual has private insurance through his/her employer, changes jobs, and has to go through a re-registration process with a new insurance company. There's clearly a cost to that process, but no readily apparent value-added in terms of the delivery of medical services. Or, assume that an individual has private insurance through his/her employer, loses this job, and has to select a private medical insurance plan, which he/she purchases through an agent. Assuming that this individual did not have an inappropriate insurance plan to start with, this process again involves considerable cost with no apparent
Those are argue that Medicare is not as efficient as the above-cited numbers suggest cite several issues to support their claim.
First, they suggest that Medicare often does not perform even basic administrative oversight to ensure that the claims it pays are legitimate. To support this argument, they cite examples like the following, summarized by the AP: “Sellers of wheelchairs, drugs, and other medical supplies collected as much as $93 million in fraudulent Medicare claims based on prescriptions from doctors who actually were dead, some for 10 years or more. a congressional investigation has found.” On this topic, the CBS 60 Minutes program did an investigation of Medicare fraud in October of 2009, calling it a $60 billion problem. The investigators interviewed one criminal who said that he had quit other illegal activities and was focusing on Medicare fraud because it was much easier and more profitable than any other illegal activity he knew of. The 60 Minutes also blamed Congress for setting rules that require such quick reimbursement of providers that there is no time to investigate whether a new provider is legitimate before paying the claim, and after claims have been paid to phony providers, it is often impossible to track them down.
So, Medicare’s critics say that if your administrative functions do not even include making sure that the doctor’s who are prescribing items are still alive, that can hardly be called administrative efficiency. In effect, they argue, any "administrator" can cut checks without spending much money.
Another item cited by Medicare’s critics is that Medicare’s serves a population, the elderly, that has a much higher usage rate of medical services. If one calculates administrative efficiency as a percentage of payments. they argue, any organization servicing a population with a high usage rate will tend to appear more efficient. The reason for this is that an organization that serves a population with low usage rates will incur certain fixed administrating costs for some individuals who spend very little on medical care, and these fixed costs as a percentage of total expenditures will, for those patients, be very high.
Conclusion: This isn't a very insightful conclusion, but there is obviously some truth to both sides in the debate. It would be an interesting research project to try to put some numbers to the specific components and issues described above.