Healthcare Myths V: The Efficiency Factor

The Myth: Medicare is much more efficient than private sector insurance, spending only a fraction of what private companies do on administration.

Bad Policy Based on the Myth: A large justification for a single-payer system comes from this myth. Proponents argue that an efficient government system would squeeze the fat out of the system.

The Truth: This one should fail the smell test spectacularly. No one who is even vaguely familiar with the functioning of government would argue that it’s efficient. A priori assumptions are never a good basis for policy of course. But if your conclusions are so at variance with common sense and experience, you might want to double-check.

And indeed, we find that this is untrue.

First, Medicare does not administer Medicare. That job is outsourced to private insurance companies. This saves Medicare money directly — they get to use non-union private employees instead of unionized government employees. But it also saves them money indirectly — they do not have to invest money in infrastructure. They don’t have to build and maintain a vast sprawling organization all on their own.

Medicare also gets help from other agencies within the federal government. Including this would double the estimate of Medicare’s administrative costs (see link below).

Second, Medicare saves money because they have, arguably, too little administration. Decisions about what to pay for are handed down from the bureaucrats. I know — I’ve worked for years to get a hearing with an Administrative Law Judge on whether or not Medicare was going to pay for something. But if the Medicare rulers have decreed that something will or will not be paid for, there is usually no argument. And Medicare often cuts checks with little regard to whether those checks are going to actual services that have actually been rendered. If you’re an honest doctor, you get screwed by low Medicare fees. If you’re a crooked doctor, you can do fine.

But don’t believe me. I wouldn’t. Believe the CBO (PDF), which noted that Medicare has very few cost controls. Believe Obama, who has claimed Medicare is subject to $60 billion a year in fraud (a number I find unbelievable, frankly). Believe recent testimony that Medicare needs to increase the money spent on claims review by a factor of 10-20 to cut fraud.

Finally, Medicare has a very different task from private insurance companies. And that distorts the numbers.

Medicare patients are by definition elderly, disabled, or patients with end-stage renal disease, and as such have higher average patient care costs, so expressing administrative costs as a percentage of total costs gives a misleading picture of relative efficiency. Administrative costs are incurred primarily on a fixed or per-beneficiary basis; this approach spreads Medicare’s costs over a larger base of patient care cost.

Even if Medicare and private insurance had identical levels of administrative efficiency, Medicare would appear to be more efficient merely because of an artifact of the arithmetic of percentages–Medicare’s identical administrative costs per person would be divided by a larger number for patient 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.

In summary, Medicare is a program that does little more than cut big checks (although not big enough — if you’re an honest provider). Of course they can keep administrative costs down. I could keep costs down too if I didn’t care how much money I spent and had expensive customers.

But that’s not a model we can apply to the rest of the nation. It’s not even a model that’s being applied well to the elderly and infirm.

I’m no fan of insurance companies. But what we see in Medicare is even worse. We see a lumbering behemoth that has greater per patient administrative costs and more fraud and waste than the private sector. We see an agency that hides its administrative costs by piggy-backing on other agencies and private insurers. And, unlike private insurers, it doesn’t compete for customers, it doesn’t turn profits for investors and it doesn’t innovate to save money.

Why would you want more of that? For the simple reason that the supporters of government healthcare have already decided what they want. They don’t care about data — they care about socialized medicine. And whatever laughable distortions they have to create to make Medicare appear “efficient” are justified.

After all, it’s for the greater good, right?

You can argue for single-payer healthcare because you think people have a “right” to healthcare. I disagree — you can not have a right to someone else’s labor — but at least it’s an argument. You can argue for single-payer healthcare because you want greater equality — if we can’t all get heart transplants, no one should. I disagree — innovation has to start somewhere — but at least it’s an argument.

But you can not argue that socialized medicine is going to make healthcare more efficient. Because that’s just at variance with the facts.

One last note — there’s an undercurrent to the debate that distorts the nomenclature. Even if the private sector spends less money on administration than the public sector, I don’t think this would meet most single-payer supporters’ definition of “efficient”. Because what they mean by “efficient” is orderly. What they mean is controlled.

The free market is chaotic. Costs and benefits vary wildly from company to company. People get medical procedures without even checking with the politicians if it’s OK. Under a single-payer system, that all vanishes. We all have the same benefits, the same costs, the same size shoe. We are all told what to do and when and here. Great masses of humanity can move together at a single stroke of an executive pen. That vision of a uniform healthcare system is the basis for creating a health board that would review the effectiveness of healthcare treatments — to make sure no one is getting healthcare they don’t deserve.

So in that sense, perhaps Medicare is more efficient. But it’s not an efficiency I particularly care for.

Update: Paul Krugman attacked the study I reference above because it’s from the Heritage Foundation. The author responds and, in the process, humiliates the usually less hysterical Krugman.

3 thoughts on “Healthcare Myths V: The Efficiency Factor”

  1. Well, we don’t all get *quite* the same size shoe, do we? My understanding is that single-payer reform or not, Congress will be keeping its gold-plated health plan. I’ve said it before, and I’ll say it again, I’ll sign on for healthcare reform when the law proposing includes a cost that makes it illegal (punishable with jail time) for any elected federal official or member of their immediate family to seek care outside the proposed system. If it’s not good enough for the lawmakers passing the bill, then it’s not good enough for the rest of us.

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