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    by G. Keith Smith, MD One of the smartest people I have ever met is a property and contracts lawyer, someone from whom I have gleaned countless and valuable insights over the years.  He has advised me, among other things, …
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    Dr. Eck http://EckForCongress.com speaks to colleagues at AAPS 71st annual meeting on September 5, 2014.
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    Richard Amerling, MD presents at the 71st Annual Meeting of the Association of American Physicians and Surgeons, September 5, 2014.
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  • Ralph Weber Talks About Cost Shifting – Video September 17, 2014
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  • Here’s The Thing #4 Cost Shifting HD September 17, 2014
  • The Commoditization of Medicine September 17, 2014
    Parvez Dara, MD, FACP, MBA, author of http://jedismedicine.blogspot.com/, speaks at the AAPS 71st Annual Meeting in Charleston, SC.
  • The Progressive Train Wreck: From Medicare to HillaryCare to ObamaCare September 15, 2014
    Jane M Orient, MD presents at the AAPS 71st annual meeting, September 5, 2014, Charleston, SC.
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  • The Future Of Medicare September 14, 2014
    Lawrence R. Huntoon, MD, PhD presents at the 71st Annual Meeting of the Association of American Physicians and Surgeons, September 6, 2014, Charleston, South Carolina.
  • Unethical ABMS behaviors and the MOC Scam: How It Will Be Used to Control Medical Practice September 13, 2014
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    by Sue Redmond First, let’s ask where did the idea for the low diet come from? In the late 50’s and early 60’s the AMA worked on a theory and published a report that a low fat diet could help …
  • EHR: Remote Control – Craig M. Wax, D.O. September 12, 2014
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  • Evidence-Based Medicine as Junk Science — Twila Brase RN September 11, 2014
    Twila Brase, President of http://CCHFreedom.org outlines how so-called evidence-based medicine (EBM) encourages one-size-fits-all healthcare, is a tool for increased control by insurance companies and the government, and is detrimental to individualized patient care.
  • What ObamaCare Means for Patients September 11, 2014
    Kris Held, MD addresses the 71st Annual Meeting of the Association of American Physicians and Surgeons, September 4, 2014 in Charleston, SC.
  • Private Health Care is Individualized Care, Not Public Health — Richard Amerling, MD September 10, 2014
    AAPS President-Elect Richard Amerling, MD opens the 71st Annual Meeting, Sept. 4, 2014, Charleston, SC.

Medicare vs. Private Admin Costs: Let the facts stand

By Ralph Weber CFP®, ChFC®, CLU®, REBC®, and Dave Racer, M.Litt*

health care and medical care for the uninsuredMany health care reformers cite Medicare’s administrative cost as a reason to drop private insurance and move to a government-managed health care system. Depending on who makes the claim, Medicare’s administrative cost estimates range from 1.5% to 12%. In much the same breath, these reformers claim that private insurance companies spend 10% to 50% on administration.

The real administrative cost of Medicare and private health insurance relies on how one defines administrative expense. The estimated cost of administering Medicare, for instance, often excludes overhead items that are not only common to private health insurers, but to all businesses. These different ways of accounting confuse an honest evaluation of the government’s Medicare administrative cost.

So what constitutes an administrative expense? Where can one find real, honest numbers with which to make an intelligent comparison?

Governments across the country have turned to HMOs and managed care to resolve health system problems. Yet, do the most common administrative cost measurements include the high cost of administering managed care, compounded by CPT codes and other billing codes, the cost of billing a host of different insurance companies, and all the other normal business accounting practice cost? These additional – and unnecessary – costs add tens of billions of dollars to the health care bill; a sorry waste of money when there is a less costly, workable solution available (and it is not Medicare).

The best way to measure administrative cost is also the simplest: Take the total dollars spent on health care and subtract how much actually gets to the providers (doctors, hospitals, etc.). The difference is administrative cost.

The health care spending “bible” is the endless set of statistics from the Centers for Medicare and Medicaid (CMS). CMS tables provide a detailed, line item description of how each dollar is spent.

One spending line item on the CMS tables is tiled “Government, Administration and Net Cost of Private Health Insurance.” This is the line item so often quoted out of context when proponents of government medicine are trying to understate the costs of government administration. For private insurers, this line item includes the cost of administration, marketing, research, premium taxes, facilities, equipment, insurance and reinsurance losses, as well as profit.

The CMS data for government spending include additional line items that fall below the “Administration” line: “Government Public Health Activities, Research, and Structures and Equipment” (see Table 1). If CMS separated these same costs for private insurers in the same manner as it does for government plans, it would be a fairer way to compare the two; but it does not, and that fact goes ignored.

Table 1

      Private Insurance Government 

Healthcare

 
Non Patient Care costs        
  Government Administration and Net Cost of Private Health Insurance   x x
  Government Public Health Activities   x
Investment  
  Research   x
  Structures and Equipment   x

 

To shed light on real administrative cost of public versus private health care requires computing the actual per capita cost in absolute dollars. Table 2 shows such a comparison.

Table 2

Costs as percentage of expenses   Private Insurance Medicare Medicaid   Government Grand Total
Number of enrollees   201,991 41,375 39,554   91,884 299,106
Total cost in millions   775 431 329   1,036 2,241
  Cost per Capita   3,837 10,422 8,328   11,272 7,493
Patient care costs   680 410 304   851 1,878
  Medical Loss Ratio   87.79% 94.99% 92.29%   88.32% 86.67%
Non Patient Care costs   12.21% 5.01% 7.71%   11.68% 13.33%
  Government Administration and Net              
  Cost of Private Health Insurance   12.21% 5.01% 7.71%   5.74% 6.95%
  Government Public Health Activities           6.19% 2.86%
Investment              
  Research           3.68% 1.89%
  Structures and Equipment           2.26% 4.49%

 

If one assumed from Table 2 that Medicare administrative cost is just 5.01%, compared to 12.21% for private insurance, it might seem that Medicare is administered at a significantly lower rate. However, comparing the percentage of cost for activities not directly related to patient care paints a far different and truer picture: Private insurers’ non-patient care costs are 12.21% compared to 11.68% public healthcare. Yet, this still leaves out vital data.

Table 3 shows the cost of care in dollars per capita and leads to the truth. Considering “Government Administration and Net Cost of Private Health Insurance” in isolation, the net cost of administering Medicare is 11% greater than that of private insurers on a per capita basis. Including all non-patient care cost indicates that public healthcare administration is 281% greater than that of private insurance administration. This assessment still does not include the cost of collecting taxes, nor does it include the providers’ cost of complying with insurance billing and collection requirements.

Table 3

Per capita in absolute dollars   Private Insurance Medicare Medicaid   Government Grand Total
Number of enrollees   201,991 41,375 39,554   91,884 299,106
Total cost in millions   775 431 329   1,036 2,241
  Cost per Capita   3,837 10,422 8,328   11,272 7,493
Patient care costs   3,368 9,900 7,683   9,257 6,280
Non Patient Care costs   468 522 642   1,317 999
                 
  Government Administration and Net   -          
  Cost of Private Health Insurance   468 522 642   648 521
  Government Public Health Activities   - - -   698 214
Investment   - - -   - -
  Research   - - -   415 142
  Structures and Equipment   - - -   255 337

 

Americans have always been mistrustful of the concept of “government efficiencies” (the ultimate oxymoron). The idea that government can manage health care more effectively and more efficiently is counter-intuitive, and for good reason: The facts show it is not true.

Let the facts stand, and in so doing, let us quit considering the nonsense of a government-run health system. Instead, let us move toward the kind of reforms that will unlock the power of American consumers, and watch effectiveness and efficiencies fall into place.

About the authors

Ralph Weber is a Canadian expatriate, now a Tennessee-based health insurance design consultant, and CEO of Route Three Benefits, Inc. Also the founder and CEO of MediBid Inc., A free market online medical shopping portal for transparency in pricing.

Dave Racer is a speaker, writer, publisher and co-author of Your Health Matters: What you need to know about US health care (Alethos Press LLC, 2006), FACTS: Not Fiction – What really ails US health care (Alethos Press LLC, 2007), and Why health care costs so much: The solution – Consumers (Alethos Press, 2009).  See Alethos Press.

—-

Notes:

CMS expenditure data taken from Table 4, and table 6, National Health Expenditures, by source of funds and type of expenditure: Calendar year 2007. Last accesses January 18, 2009

Enrollment data taken from CPS Annual Demographic Survey Table HI01. Health Insurance Coverage Status and Type of Coverage by Selected Characteristics: 2007. Last Accessed January 18, 2009

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