Monday, June 25, 2007

The Cost to Administer Medicare Versus the Cost to Administer Private Health Plans--The Difference Isn't Anything Close to 25%

Those that favor a single-payer government-run health care system have been reenergized by the Michael Moore movie, "Sicko."

One of their contentions I keep hearing is that we could save 25% by getting rid of private health insurance plans and creating one big government-run plan. They point to Medicare's expense factor of 2.9% as evidence.

The private health insurance plans have much higher expense factors.

But, like so many things in health care, it isn't so simple--or simplistic as I keep saying about this movie.

There are a number of other considerations:
  • Medicare's capital costs - Medicare benefits are paid from payroll taxes and general revenues. Medicare has done its share to run-up the federal debt in its 40 years. In 2004, Medicare costs comprised about 12% of federal non-interest spending. Using that factor to represent Medicare's portion of government operations, Medicare's share of government debt service costs would have been $19 billion in 2004. Adding this cost would have boosted Medicare's administrative costs to just under 10%.
  • Medicare pays health care claims for seniors which tend to cost a lot more than the average claim cost for a younger person thereby distorting any comparison between under-age-65 costs and those over age-65. For example, Humana reported its first quarter 2007 medical cost ratio to be 89.3% for its senior business. That is a lot closer to the Medicare expense ratio than I would expect most favoring a single-payer system would think.
  • Medicare generally uses payment strategies to control costs (it just cuts payments). While it is starting to do things like disease management, that is a very small part of what it does to control costs. If Medicare had the whole system, it wouldn't benefit from the spill-over impact of private sector programs to control waste and would have to build and operate its own on a much broader scale. That would run its cost ratio up considerably.
Now, let's look at private sector health insurance plan costs.

The first quarter 2007 earning's reports from the HMOs included the following:
  • United Health reported a medical cost ratio of 82.7%--which means 17.3% was spent on expenses, taxes, and profit for all of its businesses including commercial, Medicare, and Medicaid.
  • Wellpoint's medical cost ratio was 83.1% in the first quarter of 2007 for all of its health care businesses--commercial and government. That leaves 16.9% for expenses, taxes, and profit.
But wait, what is the one thing health plans pay that Medicare doesn't pay? Taxes!

Wellpoint and United each paid taxes equal to about 3% of their revenue in the first quarter of 2007 (that's 3% of revenue not profit).

So, Medicare's real expense ratio is a lot closer to 10% than 3%.

The big HMOs have expense, tax, and profit ratios of about 17%. But, take 3 points from that because it was income taxes paid to the government--meaning their net cost is around 14%. Apples to apples, Humana paid out 89.3% of its senior revenue on benefits leaving 10.7% of expenses, taxes, and profits. Give them credit for taxes and who's out front now?

But what about that poor doctor's office today having to administer so many plans adding lots of expenses. True, one government plan would be a lot easier. But how much easier? You might have only one plan if the government took over but you would still have the same number of patients all with their unique needs and problems. And, would Medicare just be able to write checks if it were the only payer? Not likely. Medicare would be in the managed care business with all its bureaucracy before too long.

Maybe the private sector does cost more but could we please knock off this, "It costs 25% more" junk science.

The single-payer folks would do well to read more than the headline in an HMO earnings report.

A public/private system like ours will cost more than a single government-run system. But the difference in expenses is not so great that it should preclude our consideration for the advantages of private options.
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