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The Costs (Administrative and Otherwise) of Medicare for All

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The Costs (Administrative and Otherwise) of Medicare for All

October 12, 2017

Last month the Washington Post’s Fact Checker Glenn Kessler tackled a favorite talking point of “Medicare for All” (M4A) advocates: that M4A would save Americans money by replacing the high administrative costs of private health insurance with the low administrative costs of Medicare.  Kessler’s treatment was even-handed, but a fuller understanding of the issue requires more details than can be fit into a newspaper column. This piece attempts to fill some of the information gaps evident in the ongoing, surrounding debate.  Spoiler alert: Medicare’s administrative cost percentages are indeed low, but the total costs of M4A would nevertheless be quite high.

Sorting out this controversy requires disentangling four questions:

1)      Whether Medicare administrative costs when described as percentages of total expenditures are substantially lower than those in the private sector.

2)      Whether Medicare’s reported administrative cost percentages understate the full costs of administering Medicare.

3)      Whether describing Medicare’s administrative costs in dollars per person tells a different, more meaningful story than administrative cost percentages.

4)      Whether lower administrative costs for health insurance would translate into lower health care costs overall.

I will gloss over issue #1 for the simple reason that I am not an expert on private sector insurance administration.  However, it’s fair to say that both supporters and opponents of M4A generally agree that Medicare’s administrative cost percentages, taken at face value, are lower than those in the private sector.  Most of the disputes pertain to the extent to which the respective percentages can be meaningfully compared when they reflect different activities.  The differences between the private sector and public sector circumstances are too numerous to list here, but include such factors as the public sector’s power to shift revenue collection burdens to others, as well as the private sector’s greater obligation to police fraud effectively and to otherwise maintain solvency.  (Final ruling on point #1: no decision).

Issue #2 – whether Medicare’s reported administrative costs understate its true costs – is hotly debated.  Many M4A supporters assert that Medicare’s administrative cost percentages are much lower than the private sector’s.  Many M4A opponents reply that Medicare’s reported administrative costs omit many of its substantial costs.  Although I am a skeptic of M4A on policy grounds, I award this point to the supporters’ side of the argument.  Medicare’s administrative cost percentages are in the same general ballpark as the low numbers commonly reported, whereas some analyses may have overstepped in attributing substantial additional unreported costs to Medicare.

Various analyses of Medicare’s unreported costs have referred to its share of justice and other general government administration, salaries for federal managerial personnel, and costs to other government departments.  But such expenses are actually included among Medicare’s total reported administrative costs of $9.2 billion in 2016.

Table III.B1 in the Medicare trustees’ report details the $4.9 billion in administrative costs reported for Medicare Hospital Insurance.  These include more than $2 billion for salaries and expenses at the Centers for Medicare and Medicaid Services (CMS), as well as nearly $1 billion for salaries and expenses of the Social Security Administration (SSA).  They also include substantial expenses for fraud and abuse control undertaken, respectively, by the Department of Health and Human Services (HHS), CMS, the FBI, and the Justice Department.  Administrative expenses of the Treasury Department are also included in the total.  Similar details are provided in the report’s Table III.C1 for the Medicare Part B account, including a transfer of nearly $800 million to Medicaid, which is categorized as an administrative expense. 

These reimbursements of other government departments for administrative expenses are required by law.  Section 2011(g)(1) of the Social Security Act stipulates that the Medicare trust funds provide reimbursements for expenditures made by the departments of Treasury, HHS and SSA in the course of administering the Medicare program.  Section 1817 of the Social Security Act requires that the Justice Department be similarly reimbursed for its expenditures combating Medicare fraud.  The total amounts reported for these various expenditures may or may not be perfectly complete. But they do show that the categories of expenditures sometimes described as unreported are actually included in Medicare’s publicly tabulated administrative costs.  (Final ruling on point #2: point for M4A advocates).

Issue #3 is whether it even makes sense to compare administrative cost percentages, given that Medicare’s per-person expenditures are much higher than those in private insurance. Answer: no, it doesn’t make sense.  As Robert Book points out, total Medicare expenditures per beneficiary are nearly two and a half times the health spending per person in private insurance plans.  Thus, even if Medicare administrative costs per person were identical to private insurers’, Medicare’s administrative cost percentages would still appear two and a half times smaller.  A rhetorical focus on percentages therefore provides an extremely distorted comparison.

It’s important to understand that insurer administrative costs don’t rise and fall proportionally with total health claim costs.  This, combined with the information in the previous paragraph, means that the administrative cost percentages of bringing younger enrollees into M4A wouldn’t be the low ones now reported for Medicare’s coverage of seniors, but substantially higher.

Thus, on the one hand, M4A opponents are correct when they note that administrative cost percentage comparisons are misleading.   But on the other hand, it’s still possible that Medicare administrative costs per person are lower than they are in private sector insurance.  There are some estimates that Medicare’s are actually higher, but they appear to be based on previous research that may overstate Medicare’s unreported administrative costs.  Supporters of M4A might have a stronger, more valid talking point if they focused on the right thing: administrative costs per person rather than administrative cost percentages, which create a distorted picture in this context.  In sum, M4A opponents are right on the methodology, but M4A supporters might still be right on which way the numbers cut.  (Final ruling on point #3: split decision).

Issue #4 is perhaps the most important factor of all.  Too many advocates are leaping from the premise that M4A would reduce administrative costs to the conclusion that this would result in lower health costs for consumers overall.  This leap is questionable at best, at worst simply incorrect.

To the extent that M4A achieves its intended goal of universal health coverage, this would increase total national health expenditures.  The primary effect of insurance is to reduce out-of-pocket costs facing consumers of health services. This increases health service demand and puts upward pressure on costs and prices.  Any credible model for forecasting national health expenditure growth will treat wider insurance coverage as a cost driver rather than a cost reducer.  The Medicare trustees’ projection model, for example, anticipates more rapid health expenditure growth to the extent individuals carry comprehensive insurance.

This is not merely a theoretical proposition, especially with specific respect to Medicare itself.  The academic literature is clear that the enactment of Medicare in 1965 was a prime driver of subsequent increases in national per capita health spending, notwithstanding Medicare’s relatively low administrative costs.  Thus, even if the administrative costs of M4A were impressively low it would still be expected, other things being equal, to add significantly to national health care cost growth.  Furthermore, there is no particular reason to believe that single-payer would add significantly to the quality of health care spending – that is, the health value Americans receive per dollar spent.  The most M4A is likely to accomplish from a cost perspective to shift costs to providers via legislated Medicare fee schedules, constraining the supply and quality of health services.  The bottom line is that lower administrative costs do not necessarily imply a less expensive system.  (Final ruling on point #4: point for M4A opponents). 

In sum, supporters of M4A are on fairly solid ground when they credit Medicare with having commendably low administrative costs.  But in the aggregate, Medicare for All should be expected to drive total costs up, not down.

Charles Blahous, a contributor to E21, holds the J. Fish and Lillian F. Smith Chair at the Mercatus Center and is a visiting fellow at the Hoover Institution. He recently served as a public trustee for Social Security and Medicare.

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