Medicare: Not a Cost Control Example
The Foundry has an interesting article on the “Cost Control Myth” often cited for Medicare:
Ah, yes. It seems the proponents of a government takeover of health care . . . the Orwellian-named “public option” . . . don’t want to bother us with the details of their comparison of government and private health care insurance. The article points out how Medicare benefits are not directly comparable to private health care benefits, so you do have to dig a little deeper than the “top level stats”. The other stat often cited is that Medicare spends only 2 – 3% in administrative costs, while private insurance spends 14 – 22%. The devil is again in the details, this time in how the percentages are calculated. First, we have to remember that government agencies do not adhere to the GAAP (Generally Accepted Accounting Principles) or other standards that businesses must use. What is counted as overhead and administrative expense is likely far different in government agencies. Second, the stat appears to be a simple calculation by taking the total payout and dividing by the administrative expense. Heritage fellow Robert Book explains:. . . a 2007 CBO report by Perter Orszag found that between 1975 and 2005, the real per capita cost growth in Medicare was 4.6%, compared to 4.1% for all other health care spending.
Imagine, for a moment, that Fred and Jane each have a credit card from a different bank. Fred charges $5,000 a month, and Jane charges $1,000 a month. Suppose it costs each bank $5 to produce and send a plastic credit card when the account is opened. That $5 “administrative cost” is a much lower percentage of Fred’s monthly charges than it is of Jane’s, but that does not mean Fred’s bank is more efficient. It is purely a mathematical artifact of Fred’s charging pattern, and it would be silly to compare the efficiency of bank operations on that basis. Yet that is how many analysts compare Medicare with private insurance.
Finally, it would be good to remember that Medicare has done a lousy job of eliminating waste, fraud and abuse. There is a Medicare fraud task force, started in 2008, that is seeing dramatic arrests. But there is still staggering waste: authorities in Miami have prosecuted individuals for an estimated 2 billion dollars in fraud in that one city, since 2005. And that one city is one-third of all prosecutions, showing just how light enforcement is nationwide. Perhaps if Medicare spent more on “administrative costs”, they might actually do more than just throw tax payer’s money out the window.
