One of the themes you will hear as Democrats increasingly push for a government-run, single-payer health care system is it will cut billions of dollars in wasted administrative costs.
For example, a recent Harvard Business Review article by Harvard Business School lecturer Mark R. Kramer and consultant John Pontillo says, “Other studies have suggested that billing and insurance-related administrative costs would fall by 70% or more. After all, private insurance overhead averages 12.1%, compared to 2.1% for single-payer Medicare.”
While there is waste in private insurance, the authors’ numbers are misleading.
The 2 percent administrative cost for Medicare is only what it costs to process the reimbursement checks, ignoring virtually all of the standard inputs such as employee and management costs, rent, utilities, capital equipment, etc.
The private sector must account for all of its inputs; it’s not apples to apples.
In 2006 the Council for Affordable Health Insurance (which I ran at the time) published “Medicare’s Hidden Administrative Costs: A Comparison of Medicare and the Private Sector,” by Mark Litow, a now-retired principal and health actuary for Milliman, Inc.
Litow went through the federal budget and calculated administrative costs for Medicare if it were to include all of the hidden costs. He concluded it was about 5.2 percent, not 2 percent.
The paper found average private sector administrative costs were 8.9 percent, excluding premium taxes (which the government doesn’t pay), commissions and profit.
But that’s still higher than Medicare, right? Not so fast. That figure covered all health insurance markets. Large companies that were able to achieve economies of scale were lower than the average.
When all elements were factored in, Litow estimated the private sector administrative costs were in the 6-8 percent range.
But even that isn’t the whole story. Part of private insurers’ administrative cost is monitoring for fraud. Until recently, Medicare had what’s known as a “pay and chase” model. It simply paid nearly all claims and only went after fraud when it was so egregious it couldn’t be overlooked.
The Centers for Medicare and Medicaid Services estimates its “improper payment” rate for 2017 was 9.51 percent, or $36.21 billion. It was 11 percent in 2016. While not all of that is fraud, a good portion of it is.
Fraud in the private insurance market is estimated to be a fraction of that figure, in part because it spends more administrative money on preventing it. Arguably, it’s better to pay the processors than to pay the crooks.
There is waste in the private insurance system, and there are a number of reforms that could reduce it. But the private sector tends to produce much higher quality goods and services for lower prices than the government.
Be very skeptical of people who tout the quality and efficiency of huge government bureaucracies.