Friday, July 3, 2009

More on the Administrative Savings Myth

The AAPS debunks the widely-repeated myth that, "A public plan could save enough on administrative costs to provide coverage to all".

Some excerpts:
...The basis for the assertion is the claim that Medicare spends only 2% to 3% of its outlays on administration, compared with private plans’ alleged costs of 20% to 25%.

In fact, data from the Congressional Budget Office (CBO) shows that insurance companies spend at least 50% less on administration that government does on its health programs. (The Congressional Budget Office Reports: Comparing health care admin cost: who's less costly?)
Furthermore, there are various accounting differences that one must remember when comparing relative administrative costs of Medicare vs. private insurance plans that make Medicare seem artificially cheaper than it really is:
* Private insurance plans must pay government taxes and assessments up to 5% of premiums. When these are factored out, the real net cost of private administration is less than 10%.
* CMS excludes the cost of its own employees who enroll recipients, perform outreach and education, handle customer service, and do auditing and other functions. Private plans include these in overhead.
* Private plans have on average a higher number of claims to process for a given amount of expenditure.
* Insurance companies have to collect premiums. The IRS does that for Medicare.
* Private companies do underwriting; their premiums have to cover their costs. Medicare deficits have to be covered by taxpayers.
* The cost of servicing the public debt is not included in Medicare costs—and Part B is 75% subsidized by general revenues, not beneficiary premiums.
Journalists and politicians need to be aware of these hidden costs, rather then repeating myths promoted by those with a specific policy agenda.