Glenn Kessler, the Washington Post's Fact Checker, is trying to be even-handed in assessing the claim by advocates of single-payer health insurance of large potential administrative savings from switching to a universal Medicare-type system. Unfortunately, he gives too much credence to an insurance industry funded report (identified as such in the piece), which whittles away at the difference.

The basic story is that Medicare's administrative costs, as shown in the Medicare Trustees Report come to less than 2.0 percent of annual benefits. (Table II.B1 puts administrative costs for 2016 at $9.2 billion, with total payments at $669.5 billion.) The Centers for Medicare and Medicaid Services puts the administrative costs for private insurance at $216.3 billion for 2016 (Table 2), with total spending of $1,135.4 billion (Table 3) for a ratio administrative expenses as a percent of related outlays of 23.5 percent. (The administrative expenses are deducted from total spending to get health related outlays.)

While there is some room for fudging both of these numbers, it is pretty hard to make the difference go away. The industry funded study ups the Medicare costs to 5.2 percent by allocating a large amount of non-Medicare spending to Medicare administration. For example, it notes that the Treasury Department collects taxes for Medicare and the Justice Department pursues fraud cases in the system. As the report explains to get to this number:

"Medicare unreported costs include parts of salaries for legislators, staff and others working on Medicare, building costs, marketing costs, collection of premiums and taxes, and accounting, including auditing and fraud issues, etc."

While these costs are not detailed carefully, Table 4 in the appendix shows that the study allocated 14.5 percent of the salaries of members of Congress and staff, as well executive branch salaries, to the administrative costs of Medicare. It also allocated 14.5 percent of non-correctional judicial costs.


This may seem a bit high. (Do your senators and staff spend 14.5 percent of their time on Medicare?) For a point of reference, the I.R.S. budget for last year was $11.7 billion. If 10 percent involved collecting Medicare taxes (a very generous figure since the I.R.S. oversees the individual and corporate income tax, the estate tax, and Social Security tax, in addition to the Medicare tax), its inclusion would add less than 0.2 percent to the share of administrative costs of Medicare. In short, its pretty hard to get from the reported number of less than 2.0 percent to the 5.2 percent figure in the industry study.

One legitimate point made in this study is that some costs are going to be roughly proportional to the number of people. Since Medicare patients have claims that are roughly twice as high as the younger population of privately insured people, the costs for a Medicare equivalent system for the larger population might be higher the 2 percent of spending for the Medicare population. (I also noted this point in a recent article.)

On the other side, the study lowers the costs of private insurers by pointing out that state taxes are equal to 1–3 percent of premiums. The problem with pulling this money out is that this is the cost incurred by states to oversee the industry. They are not using this money to fund parks and schools. It also pulls out the money for commissions and returns to capital. That's fine — private companies need to pay commissions to sales agents and get a return to capital — but we get to save this money if we have a universal Medicare system.

A useful independent point of reference on this is the requirement in the Affordable Care Act that insurers have a minimum 80% Medical Loss Ratio (MLR).  This means that at least 80% of collected premiums go towards paying for direct patient care and that no more than 20% of premium dollars go towards administrative costs.  States have been granted waivers for insurance companies to increase their administrative costs beyond 20% if they can show:

"that requiring insurers in its individual market to meet the 80% MLR has a likelihood of destabilizing the individual market and result in fewer choices for consumers."

In other words, we have good reason to believe that the administrative costs for private insurers are near 20 percent and the costs for Medicare are near the 2.0 percent advertised in the Trustees report. The people pointing out this huge gap are not in error, the industry funded report is.

One other point worth noting is that the various forms and rules applied by competing insurers impose a burden on hospitals, doctors' offices, and other providers, as they have to hire additional personal to deal with this paperwork. This burden would also be reduced with a universal Medicare system.

 

Note; This was amended slightly from an earlier version, thanks to Robert Salzberg for providing the background on the waiver to the 80 percent rule.