One of the issues discussed in the health care debate today is the allegedly wasteful administrative and overhead costs of private health insurance, compared to — again allegedly — efficient government processes. The Wichita Eagle today printed a letter from a citizen that made this claim.
The article Comparing Public and Private Health Insurance: Would A Single-Payer System Save Enough to Cover the Uninsured? makes some useful points.
First, “Administrative costs for private health insurance, defined broadly, are in the range of 11-14 percent of total premiums.” For Medicare, the figure usually cited is 3%. But when “combined with a proportional allocation of the costs of other federal government administrative functions” the number is actually 6%. So Medicare’s administrative costs are, in fact, higher than the usual claim.
Then: “The lower reported administrative costs for Medicare are unsurprising, in that Medicare spends substantially less on such functions as marketing, risk evaluation, claims scrutiny, and compliance with the regulatory requirements of the individual states. This does not mean that the higher reported administrative costs of private health insurance are ‘wasteful.’ Instead, they serve the interests of consumers by reducing the extent to which insurance creates cross-subsidies among consumer classes; such cross-subsidies reduce the economic benefits of risk-pooling. Private administrative functions also impose discipline on the consumption of health-care resources, thus reducing upward pressure on insurance premiums. ”
An example of what administrative costs can do is to combat fraud, which is a severe problem in Medicare. Low administrative expenses are achieved in part because Medicare pretty much pays any bill it receives without regard to potential criminality. As reported in the Washington Post last year on Medical Fraud a Growing Problem: Medicare Pays Most Claims Without Review: “A critical aspect of the problem is that Medicare, the health program for the elderly and the disabled, automatically pays the vast majority of the bills it receives from companies that possess federally issued supplier numbers. Computer and audit systems now in place to detect problems generally focus on overbilling and unorthodox medical treatment rather than fraud, scholars say.”
A scholar cited in this article is Malcolm K. Sparrow, Professor of the Practice of Public Management, John F. Kennedy School of Government at Harvard University. In testimony before the Senate Committee on the Judiciary, Subcommittee on Crime and Drugs in May, Sparrow said that the amount of fraud is like $200 billion to $300 billion, and perhaps as much as $500 billion. His conclusion, after years of studying fraud, is this: “The rule for criminals is simple: if you want to steal from Medicare, or Medicaid, or any other health care insurance program, learn to bill your lies correctly. Then, for the most part, your claims will be paid in full and on time, without a hiccup, by a computer, and with no human involvement at all.”
Another source of administrative costs for private insurers is “compliance with the regulatory requirements of the individual states.” Whether these regulatory costs are wasteful is one matter, but the fact is that Medicare does not pay these administrative costs that private insurers must bear.