Medicare for All: Administrative Costs Are Much Higher than You Think

Gary Galles, with me doing the counting:


But having less than half the health care costs per beneficiary more than doubles private insurance’s administrative cost as a percentage of total costs, than if the more accurate measure — administrative cost per beneficiary — was used. In fact, Medicare’s reported administrative cost per beneficiary has consistently exceeded that for private health insurance.


Adding to the mismeasurement is that many of the administrative costs of Medicare are not counted in comparisons because they show up in other agencies’ budgets. Social Security administers the collection of Medicare premiums. The IRS collects the taxes. Health and Human Services pays for building and marketing costs, as well as accounting and related concerns. Attributing those costs correctly would roughly double Medicare’s administrative costs.


Private insurance administrative costs are normally defined as premiums received minus claims paid, categorizing everything but claims paid as administrative. However, states commonly impose a premium tax (averaging roughly 2 percent) on health insurers, but not on Medicare. Though not administrative costs, that is how they are counted. Many private insurers (including mine) also offer disease-management and on-call nurse consultation services, which, even though they are medical, are counted as administrative because they do not generate claims.


Fraud, a very large and persistent problem for Medicare, also biases comparisons. If Medicare spends less to reduce fraud, it saves on measured administrative costs, and the unnecessary costs fraud causes are counted as medical costs. It looks more efficient. But because studies have found fifteen-to-one payoffs for fraud prevention investments, when private insurers do more to combat fraud, their administrative costs go up and their efficiency looks worse, even when they produce remarkable cost savings.


We should also remember that current taxpayers fund most of Medicare, imposing another large differential but unrecorded cost which economists call “excess burden.” Tax wedges between what buyers pay and what sellers receive eliminate substantial gains from trade as well as directly taking resources for government. One study concluded that even the “lowest plausible assumption about the excess burden engendered by the tax system raises the true costs of delivering Medicare benefits to about 20–25 percent of its Medicare outlays,” far higher than any estimate of private insurance administrative costs. Expanding into Medicare for all would balloon those costs as well as the direct cost of financing it.