The Misleading Claim about Medicare Administrative Costs

by Don

A recent caller to Niel Young’s radio show, “The Advocates”, claimed that Medicare’s administration cost is much lower than for private insurance companies. But, Medicare’s formula for computing administration costs doesn’t include all the costs which government requires in the calculations for private companies. So the comparison is not valid, and the claim is misleading.

Medicare’s formula for administrative cost excludes more than half of its real costs: some management costs, policy setting costs, tax and fee collection services, costs of capital, and many services provided by other government agencies.

If you try to compare these administrative costs, Medicare has some advantages.  Medicare doesn’t have to compete for clients, seniors are forced by buy it.  Medicare doesn’t offer a wide variety of policies to meet different customer needs but which increase costs.  Medicare doesn’t have to pay state and federal income taxes, real estate taxes, regulatory fees and compliance costs, taxes on premiums, collection costs, capital costs, commissions to sales people, and essentially it does no fraud prevention.

Private companies provide extra value services increasing their costs: fraud prevention to keep premiums low, disease management to help patients, and policy choices to entice customers and best meet their needs. Private companies need to maintain adequate reserves to cover unexpected expenses and meet regulatory requirements, and earn a return for their shareholders. Medicare doesn’t have these costs.

Profits are not a big factor in private company administrative costs. The combined profits of the top 10 health insurance companies is about $12.7 billion. $12.7 billion is small compared with the $48 billion plus that Medicare loses to fraud annually.

Fraud, about 9 % of the Medicare budget, is a cost borne by every Medicare recipient and taxpayer. Every administration claims to reduce Medicare fraud, but none do. Medicare should stop fraud, even if it significantly increases its administration cost.

There are various studies that compare Medicare and private company administrative costs.  One study adjusts Medicare to include inappropriately excluded expenses and adjusts private company costs down to eliminate some factors not applicable to Medicare.  The result is that Medicare costs come in at 6-8% versus 8.9%.  The study comments that the private company provides extra value for the higher cost.

Another study acknowledges that there are a variety of ways to compare the administrative costs.  They claim the correct comparison results in private company administrative costs being less expensive than Medicare.

Comparing Medicare and private company administrative costs is like comparing apples to clocks. A fair comparison requires agreement on many complex factors: what constitutes administrative costs, how to adjust for differences like demographics, extra value services, fraud costs, and costs that government forces on private businesses, etc. Such an agreement seems unlikely.

What do you call something that is so misleading that it gives a totally false impression? Is it a lie? Is it simply misleading? Is it just taking advantage of people’s ignorance?

Whatever you call it, the claim that Medicare’s administrative expense is substantially less than private company administrative expense is so misleading as to create a totally false impression.

Don Ewing

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