For the sake of argument let us assume that Medicare’s administrative costs are lower than those of the typical health insurance company. Does this imply that Medicare is more efficient than the private company? I’ve been skeptical of this view point since one thing I’ve learned in economics is that firms want to maximize profits. You don’t do this by wasting money. In fact, at the profit maximizing level of output the firm is minimizing its costs. So, does it make sense that a health insurance firm is going to spend money it doesn’t have to on administrative costs?
One commenter put forward the idea that a CEO of a $10 billion dollar health insurance company is probably going to get paid more than the CEO of a $5 billion dollar health insurance company. Probably so, however, I’d also argue that the first CEO wont be CEO for long if he gets to the $10 billion mark by incurring losses of $5 billion. So I think we can rule this one out, or at the very least it needs quite a bit more to explain it than mere assertion.
So I’m still left thinking, “Really, the government is our model for efficiency?” This is the same government that has lost billions in the Pentagon and can’t find and probably never will. But when it comes to Medicare, which is an even bigger portion of the Federal government, nope they are so efficient we should implement the same standards globally. Even Paul Krugman indicates that this is true.
But the root source of Krugman’s beliefs disputes his views.
The higher administrative costs of private plans do not imply that those plans are less efficient than the traditional FFS program. Some of the plans’ administrative expenses are for functions, such as utilization management and quality improvement, that are designed to increase the efficiency of care delivery.—page 12
And via Greg Mankiw we now have this portion of testimony by Malcolm K. Sparrow, Professor of the Practice of Public Management at Harvard’s Kennedy School of Government,
The units of measure for losses due to health care fraud and abuse in this country are hundreds of billions of dollars per year. We just don’t know the first digit. It might be as low as one hundred billion. More likely two or three. Possibly four or five. But whatever that first digit is, it has eleven zeroes after it. These are staggering sums of money to waste, and the task of controlling and reducing these losses warrants a great deal of serious attention….
By taking the fraud and abuse problem seriously this administration might be able to save 10% or even 20% from Medicare and Medicaid budgets. But to do that, one would have to spend 1% or maybe 2% (as opposed to the prevailing 0.1%) in order to check that the other 98% or 99% of the funds were well spent. But please realize what a massive departure that would be from the status quo. This would mean increasing the budgets for control operations by a factor of 10 or 20. Not by 10% or 20%, but by a factor of 10 or 20.
Now at this juncture I want to say, “Why?” Why are Medicare’s Administrative costs so much lower, if they are indeed lower, than private industry? There has to be a reason and nobody that I know of has offered one. It is simply spouted as if it is true, always has been true, that private health insurance companies are dolts, always will be true, and if we just emulated Medicare we could save lots and lots of money that we could use to insure some of the uninsured you vile evil jerks!
In other words, Medicare’s really low administrative costs might come at a cost of hundreds of billions of dollars. If we emulate them in private health insurance then we will not be saving any money but losing money. Not only that, but we will likely accelerate the rate of increase of health care costs. After all we are going to having more wasteful spending on procedures that are not needed and any legislation on the issue will likely make access to health care easier for those who don’t already have access.
Now let us take a look at a graph that Dave Schuler dug up and posted today. Notice that for the 0-64 age range the U.S. is quite competitive with other countries, including the vaunted France. In fact, in eye-balling the chart the U.S. does better in terms of spending.
Note that the problem for U.S. health care spending is due to those 65 and older. Without them the U.S. spending on health care would be very low, even compared to places like France. If part of the reason why the spending on those 65+ is due to low administrative costs of Medicare and we force private health insurance to become more like Medicare then we could end up making the portion of the graph that is 64 and younger larger. We could exacerbate the problem, not make it better.
So answering this question of why are Medicare’s administrative costs lower is somewhat important. If there is research that answers this, I’d like to see it. But the distinct lack of such evidence leads me to believe it doesn’t exist. That nobody has asked the question let alone answered it.
