Are they lower? This article by the Heritage Foundation makes an interesting point.
Medicare beneficiaries are by definition elderly, disabled, or patients with end-stage renal disease. Private insurance beneficiaries may include a small percentage of people in those categories, but they consist primarily of people are who under age 65 and not disabled. Naturally, Medicare beneficiaries need, on average, more health care services than those who are privately insured. Yet the bulk of administrative costs are incurred on a fixed program-level or a per-beneficiary basis. Expressing administrative costs as a percentage of total costs makes Medicare’s administrative costs appear lower not because Medicare is necessarily more efficient but merely because its administrative costs are spread over a larger base of actual health care costs.
When administrative costs are compared on a per-person basis, the picture changes. In 2005, Medicare’s administrative costs were $509 per primary beneficiary, compared to private-sector administrative costs of $453. In the years from 2000 to 2005, Medicare’s administrative costs per beneficiary were consistently higher than that for private insurance, ranging from 5 to 48 percent higher, depending on the year (see Table 1). This is despite the fact that private-sector “administrative” costs include state health insurance premium taxes of up to 4 percent (averaging around 2 percent, depending on the state)–an expense from which Medicare is exempt–as well as the cost of non-claim health care expenses, such as disease management and on-call nurse consultation services.
If you are measuring administrative costs as the ratio of total costs then I can see this being true given the two different populations that are being covered. Further, when we look at this post by Bryan Caplan that argues that there isn’t so much adverse selection as many argue but in reality advantageous selection then it makes even more sense.
Caplan argues that contrary to what the theoretical models predict what we see in market with regulations that mandate insurance is that it isn’t to bring the low risk individuals back into the market, but to make sure that the high risk individuals are buying insurance and often at a subsidized rate. I know that is how the insurance regulations work here in California. The insurance requirements aren’t so much that a low risk driver will buy insurance, but that the high risk one’s will.
Since mandates requiring health insurance are far less prevalent then it is possible that the dominant type of individual that has private health insurance is the healthy and under 65. These people are going to require less health care and by similar reason less health care costs. As such, the ratio of administrative costs to total costs is going to favor Medicare. I would think that at the very least we’d want to know what the per-capita administrative costs. After all, suppose the above is true, that the reason why administrative costs for Medicare are “low” is that people are looking at the ratio of administrative costs to total costs. If everyone were to move onto Medicare than you’d have quite a few healthy people move on and incur exactly the same costs as the unhealthy currently in the program. But total costs would not go up by the same proportion since we are talking about bringing in healthier people. Since the numerator is going up faster than the denominator administrative costs must rise. And if private insurers really are doing it cheaper on a per-capita basis, then such a move would actually cost billions not save us billions.
Via Greg Mankiw.
Image by Flickr user Brooks Elliot, used under the Creative Commons License.
