Several excellent articles have hit the news this past month analyzing the claim that Medicare, and therefore Medicare-for-All (M4A) will save money due to lower administrative costs. This is not a new or uncontested claim—and individuals on both sides have made good points, as well as factual errors. I’ve listed a few resources at the bottom of this post if you want to delve into this issue deeper. But first, a summary of some key points.
- Let’s use the right measurement for comparison.
Proponents of single-payer like to compare the percent of costs Medicare and private insurance spend on administrative activities. This statistic is relatively easy to come by: divide total administrative costs by total spending. The problem with this figure is that Medicare patients are sicker, and per beneficiary expenditures are almost two and a half times greater than privately insured patients. (In 2014: ~$11,000 per person in Medicare vs. ~$4,600 per person in private insurance.) In other words, right out of the starting gate, the denominator (total spending) for Medicare is much larger. That’s how you end up with the calculation that Medicare only spends 2.2% on administrative activities while private insurance spends 12.4%, thus “proving” that 10% of private insurance is “waste” (i.e. inefficient). However, when you compare per beneficiary administrative cost, Medicare’s “efficiency” drops drastically—and in some analyses, Medicare is worse.
Because the bulk of administrative cost per individual does not change with the size of the claim or total medical spending, comparing percentages is a distorted analysis. When single-payer proponents continue to emphasize percentages and ignore per beneficiary cost comparisons—I have to wonder at the integrity of their intent.
The goal of discussions and debates should be to help each other arrive at the most accurate understanding of the issues so we can make the best possible decisions. Repeatedly emphasizing a misleading statistic because it appears to make a particular case distracts us from getting to the truth—and from dealing with more fundamental areas of disagreement.
- Are administrative expenses all “waste” (inefficient)?
First, what activities get counted as “administrative?”
B. Marketing. Single-payer supporters do not think the market can or should provide medical care. (If they did, they wouldn’t be for single-payer.) Marketing plays an essential role in informing customers of available services. It also provides a way for companies to communicate their niche of excellence. (Government programs “market” as well—just think about the outreach efforts for the ACA exchanges.)
In general, marketing enhances choice and competition by providing information. Truthful information increases opportunity for better decisions (more value for the cost, i.e. more efficient use of resources). Giving the government monopoly control hampers choice and competition and reduces efficiency. Of course, if you don’t think people should be allowed to make their own spending decisions because some other subset of people know what’s best for them, then you won’t agree with this conclusion.
It’s always possible to spend too much or too little on marketing. In a free market, feedback from profit and loss provides the signals needed to discover what is and isn’t an efficient allocation of resources for marketing. But what provides feedback on the efficiency of government marketing?
- Customer service. Wasteful? Need I say more? But for the skeptics, I will. This category includes nurse hotlines, and the educational and disease management services the insurance company provides. It also includes commissions for insurance brokers—those advisors who help customers choose the best plan for their individual circumstances. Of course, if you take away customer choice….
- Claims adjusting. This is the work which determines whether claims for medical expenses are legitimate (or fraudulent) and reasonable (or exorbitant). Getting that answer right is clearly important to efficiency. Medicare also has this expense—and has enormous losses due to inappropriate and fraudulent payments. If you are going to calculate wasteful spending, it only makes sense to include money lost due to waste and fraud.
- Profit. Of all the claims of inefficiency within the private system, equating profit with waste is the most revealing as to the underlying philosophy of M4A proponents.
Second, what is efficiency and how is it determined?
Efficiency can be defined as the best possible use of scarce resources. Put another way, it’s getting the best value for the resources consumed.
One way to achieve this is to appoint a powerful group of experts to analyze the data, and based on criteria and values they determine, decide for the rest of us the best use of our resources. Another way is to crowdsource decision-making through voluntary exchange, letting prices reflect supply (of resources) and demand (by consumers). Since Medicare’s advent in 1965, the U.S. increasingly has been using the former method. This has significantly contributed to rising demand in the face of shrinking supply (another big force for rising prices). Are you concerned about the shortage of primary care providers? Today’s imbalance between primary and specialty care is a direct result of Medicare administrative price-setting through the RUC (acronym for the ‘Specialty Society Relative Value Scale Update Committee’) and RBRVS (Resource Based Relative Value Scale).
Alternatively, by tracking profits (and losses) we can learn which activities create more (or less) value than it took to produce them. It’s a mathematical equation: Cost of resources – value produced = excess value (profit), or loss. The drive for profit is the drive for efficiency.
Honestly earned profits are not the problem. It’s people who lie, cheat and steal; and, those activities occur just as much in politics as in markets. We won’t escape them by substituting economic transactions for political ones.
- Is administrative cost even what we should be focusing on?
Short answer: No.
Part of the reason is that splitting costs into “valuable medical spending” and “wasteful administrative spending” is an artificial construct. Where do you put the dividing line on “medical” spending? Should disease management and educational activities count as a medical expenditure, or as the cost of running a quality business (i.e. administrative)?
Another problem is that administrative costs are NOT what drive overall costs. In fact, investing in more administrative activity such as fraud detection and patient education may help to reduce medical spending.
What does drive rising costs? As much as some advocate for free access to medical care, evidence shows lack of cost sharing (i.e. deductibles, co-pays, and co-insurance) is one of the biggest drivers of demand, which then leads to higher prices. Evidence also shows that very few preventive measures actually reduce cost. They improve health, but they also increase spending and cost.
Then, there is the deadweight cost of taxes. Economist Chris Conover calculates this to be 44 cents for every federal tax dollar. The Urban Institute estimates M4A would add $32 trillion to federal spending in the first 10 years (and these type of estimates are always way too low). According to Conover, “Sanders’ Medicare-for-All plan would have a hidden cost of $1.1 trillion in deadweight losses in 2017 alone.”
Finally—there is a cost which I haven’t read in any of the analyses listed below. Where do you factor in resources spent on lobbying? When you move economic exchanges from the market to the political process, you essentially require lobbying for a business to survive, let alone thrive. Instead of spending those dollars competing for customers on quality (new or improved goods and services) and price (lower cost by streamlining efficiency), they are spent buying special favors through the political process. In 2017 thus far, $413,776,411 has been spent on lobbying.
I sincerely doubt that number will decrease if we increase political control over healthcare.
Healthcare economics is a complex subject, made even more complicated because it rapidly gets mixed up with passionately held beliefs about the proper roles of individuals and government in society. “Facts” abound, most of which by themselves are only a small part of the problem. Just like it would be gross negligence if a doctor focused on a single symptom in constructing a patient’s complete treatment plan, administrative costs are just one small piece to solving the puzzle of affordable, quality medical care for all. Let’s work together not to lose sight of the big picture: overall human flourishing. And even inside that goal, medical care itself is just one important consideration among many.
For further reading:
Blahous, Charles, “The Costs (Administrative and Otherwise) of Medicare for All” e21, 2017-10-12
Book, Robert “Medicare-For-All Would Increase, Not Save, Administrative Costs” Forbes, 2017-09-20
Conover, Chris “The #1 Reason Bernie Sanders’ Medicare-for-All Single-Payer Plan Is A Singularly Bad Idea” Forbes, 2017-09-28 (also check out reasons #2-5)
Kessler, Glenn “Medicare, private insurance and administrative costs: a Democratic talking point” Washington Post, 2017-09-19
Moffitt, Robert, “Government Monopoly: Senator Sanders’ ‘Single-Payer’ Health Care Prescription” Heritage Backgrounder, 2017-10-31
Sullivan, Kip, “How to Think Clearly about Medicare Administrative costs: Data Sources and Measurement” J Health Politics Policy Law, 2013; 38(3)479-504
Woolhandler, S. & Himmelstein, D., “Single-Payer Reform: The Only Way to Fulfill the President’s Pledge of More Coverage, Better Benefits, and Lower Costs” Ann Int Med, 2017; 166(8):587-588.