Traditional Medicares Administrative Cost 1%;
Private Company Medicare Advantage 6%
Setting the record straight on Medicare's overhead
costs: New study finds surprising results
Feb. 20, 2013 - The traditional Medicare program
allocates only 1 percent of total spending to overhead compared with 6
percent when the privatized portion of Medicare, known as Medicare
Advantage, is included, according to a study in the June 2013 issue of
the Journal of Health Politics, Policy and Law.
The 1 percent figure includes all types of
non-medical spending by the Centers for Medicare and Medicaid Services,
plus other federal agencies, such as the IRS, that support the Medicare
program, and is based on data contained in the latest report of the
Medicare trustees. The 6 percent figure, on the other hand, is based on
data contained in the latest National Health Expenditure Accounts (NHEA)
The journal article, written by Minneapolis-based
researcher Kip Sullivan, finds that the gap between the two measures has
been growing over the last two decades as enrollment in private Medicare
plans has risen.
"The high administrative costs of the privatized
portion of Medicare are no surprise," says Sullivan. "What's surprising
is that the high administrative costs of the Medicare private insurance
companies haven't provoked a debate about whether spending more money on
insurance industry overhead is a good use of scarce tax revenues."
According to Sullivan, the low attention given to
this issue is caused in part by confusion about Medicare's overhead
"The confusion is due partly to the existence of
two government reports," says Sullivan, "and partly to claims by critics
of Medicare that the government fails to report all of Medicare's
overhead costs." The paper addresses both sources of confusion.
The article explains the difference between the
yardstick used by the trustees and the one used by the NHEA and
concludes both are accurate. The trustees' measure counts as overhead
only those administrative expenditures that support the traditional
fee-for-service Medicare program, in which approximately three-fourths
of all Medicare beneficiaries are enrolled.
The NHEA measure takes the
trustees' measure and adds to it the overhead of insurance companies
that participate in Medicare Advantage and that sell stand-alone Part D
"The issue isn't whether one yardstick is more
accurate than the other," Sullivan explains. "The issue is when it's
appropriate to use one measure instead of the other."
The 1 percent figure is the one that should be used
to analyze several hotly debated health reform issues, including whether
to expand traditional Medicare to all Americans and whether to turn
Medicare over to the insurance industry, either by expanding the
Medicare Advantage program of by converting Medicare to a voucher
program as Rep. Paul Ryan has proposed.
"Total spending for any type of insurer, public or
private, consists of medical and administrative expenditures," explains
Sullivan. "If you want to know whether Medicare would cost more or less
if it were turned over to insurance companies, you first have to
determine what Medicare spends on medical care and administration and
you have to do the same for the health insurance industry."
The proper yardstick to use to measure Medicare's
overhead in analyses of issues such as these would be the trustees'
measure 1 percent. The average overhead of the health insurance
industry is approximately 20 percent, he said.
The large difference between traditional Medicare's
overhead and that of the insurance industry has caused some conservative
critics of Medicare to assert that the federal government is ignoring
numerous administrative expenditures incurred by various federal
agencies that should be attributed to Medicare.
Sullivan's paper, "How to think clearly about
Medicare administrative costs: Data sources and measurement," describes
this criticism as the second major source of confusion about Medicare's
overhead. Sullivan's study reports that the 1 percent figure includes
all appropriate administrative expenses incurred on Medicare's behalf,
including those by the IRS, the Social Security Administration, and the
FBI, as well as the cost of numerous pilot projects that Congress orders
CMS to conduct.
Sullivan's notes that many liberals are also
confused about what Medicare's overhead costs are. "With so much
confusion on both sides of the political spectrum, it's fair to say a
useful debate about whether to expand or contract the traditional
Medicare program has yet to take place in this country," he said.
Sullivan is a lawyer and member of the Minnesota
chapter of Physicians for a National Health Program, which had no role
in funding the study.
"How to think clearly about Medicare administrative
costs: Data sources and measurement," Kip Sullivan, J.D., Journal of
Health Politics, Policy and Law, Vol. 38, No. 3, June 2013. Advance
version published online Feb. 15, 2013. DOI 10.1215/03616878-2079523
Physicians for a
National Health Program is a research and education
organization of more than 18,000 doctors who advocate for single-payer
national health insurance. PNHP had no role in funding the study
mentioned above. To speak with a physician/spokesperson in your area,
www.pnhp.org/stateactions or call (312) 622-0996.
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