During Wednesday night’s presidential debate, the discussion about Medicare was heated, and extended. At one point President Obama made a strong claim, saying:
“If I can just respond very quickly, first of all, every study has shown that Medicare has lower administrative cost than private insurance does, which is why seniors are generally pretty happy with it. And private insurers have to make a profit. Nothing wrong with that; that's what they do. And so you've got higher administrative costs, plus profit on top of that, and if you are going to save any money through what Governor Romney's proposing, what has to happen is that the money has to come from somewhere.”
The claim the President is referring to was repeated back during the “Obamacare” debate: the percentage of Medicare’s expenses devoted to “administrative costs” is just 3% of the program’s total expenses - (This number seems to originate from a study by Woolhandler, Campbell, and Himmelstein putting the costs at 3.6 percent).
“Other government agencies help administer the Medicare program. The Internal Revenue Service collects the taxes that fund the program; the Social Security Administration helps collect some of the premiums paid by beneficiaries (which are deducted from Social Security checks); the Department of Health and Human Services helps to manage accounting, auditing, and fraud issues and pays for marketing costs, building costs, and more. Private insurers obviously don’t have this kind of outside or off-budget help.”
Roy also points out how the percentage measurement is weak, since administrative costs will be relatively static, and thus sicker patients that increase the benefit expenditures of Medicare will shrink the percentage of the program’s budget devoted to administration.
A study by the Urban Institute that actually defends a public insurance option, also points out deficiencies in the 3.6 percent estimate, “Estimates of Medicare administrative costs are often understated because they often exclude the costs of CMS administrative staff, office space, and collecting Medicare premiums and payroll taxes.” They also reference a study by Merrill Matthews of the Council for Affordable Health Insurance stating Medicare administrative costs are about 5 percent.
Clearly, there is disagreement over what Medicare’s administrative costs are, but there is also disagreement over what the measurement is even worth.
The Manhattan Institute’s Benjamin Zycher argues higher administrative costs in the private sector are not clearly “inefficient”:
“This does not mean that the higher reported administrative costs of private health insurance are “wasteful.” Instead, they serve the interests of consumers by reducing the extent to which insurance creates cross-subsidies among consumer classes; such cross-subsidies reduce the economic benefits of risk-pooling. Private administrative functions also impose discipline on the consumption of health-care resources, thus reducing upward pressure on insurance premiums.”
Zycher’s study also points out the difficulty of measuring the ‘economic costs’ imposed by the burdensome tax system required to fund Medicare.
In the ultimate stacked deck move, taxes contribute to the administrative costs calculated for private insurance companies.
In the end, as Avik Roy contended, debating this number is a rigged game. Whether “every study” agrees with the President’s statement is difficult to measure, because of the different parameters, and Medicare’s administrative costs being hidden by virtue of being spread across multiple government agencies. Taxpayers are still paying for those costs.
Taxpayers will also be paying for the disastrous collapse of Medicare should it continue hurtling down its current path.
Will the misleadingly low “administrative costs” of the program matter then?
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Editor's Note: Douglas Kellogg is Communications Manager for the 362,000-member National Taxpayers Union.