A few remarks on Medicare’s administrative cost

I’ve been asked by several readers to respond to Tyler Cowen’s extract of Yuval Levin’s post.

…many of Medicare’s most significant administrative costs are just covered by other federal agencies, and so don’t appear on Medicare’s particular budget, but are still huge costs of the program. The IRS collects the taxes that fund the program; Social Security collects many of the premiums paid by beneficiaries; HHS pays for a great deal of what you would think of as basic overhead, but doesn’t put it on the Medicare program’s budget. Obviously private insurers have to pay for such things themselves. Medicare’s administration is also exempt from taxes, while insurers pay an excise tax on premiums (which is counted as overhead). And private insurers also spend a great deal of money fighting fraud, while Medicare doesn’t. That might reduce the program’s administrative costs, but it greatly increases its overall costs. Some administrative costs save money, after all: The GAO has estimated that a $1 investment in pre-payment review of claims, for instance, would save $21 in improper Medicare payments.

To this, Cowen adds,

I also would add the deadweight cost of taxation. Arguably that does not count as a cost of “overhead,” but very often it runs 20% or more and still it is a cost.

A few points:

1. It seems plausible to me that the marginal cost of Medicare’s piggybacking on IRS tax collections and Social Security’s operations is close to zero. That the program can leverage existing federal infrastructure, which would exist in essentially the same form even if Medicare didn’t, is a feature not a bug. It’s what you’d expect from an efficient government, not an inefficient one.

2. For ASPE, Stephen Parente and colleagues wrote an insightful report on Medicare fraud, “Assessment of Predictive Modeling for Identifying Fraud within the Medicare Program” (unfortunately, not now available online). The authors note that a prior estimate (or maybe “guestimate,” is a better term) of the annual cost to Medicare of fraud put the value at $60 billion. Another that included public and private payers ranged from $75 billion to $250 billion per year, suggesting that fraud is a substantial problem system-wide, not just for public programs.

However, the authors write that, “Prior estimates of fraud or abuse were based on assumptions, not detailed claims analysis coupled with objective examination and validation of patient data and provider practices.” This does not inspire confidence.

But, Parente et al. perform a far more convincing analysis.

Using Medicare claims representing 20% of all beneficiaries and 100% of beneficiaries for a 3% sample of all providers in the nation, we estimate $18.1 billion of [annual] financial benefit for Medicare in the Part B physician program alone that could be potentially saved by implementing fraud and abuse payment prevention technologies without the need to access detailed medical records. When the Part A inpatient services are included, the estimated fraud and abuse prevention impact is nearly $20.7 billion [per year]. A separate [one-time] retrospective recovery financial benefit is estimated at $17.5 billion. Implementation of this system, and the associated technology, can begin immediately in order to begin realizing these savings.

To the extent it is cost-effective to do so, recovery of these billions for taxpayers should move forward. However, it should be noted, that these are not especially large sums relative to the the roughly half-trillion dollar per-year cost of the program. Recovering them would not be curve-bending.

I have not seen anything like an equivalent analysis of fraud for commercial market insurers. Appeal to profit maximization and competitive market theory would suggest it is as low as is cost-effective. But that’s far different from an empirical estimate. Really, who knows?

3. The several comments to Cowen’s post that I read are good, some making similar points to what I’ve stated above. If you have the time, go and read.

4. As for the deadweight loss of taxpayer-funded health benefits, nobody, from left to right,  is talking about not subsidizing Medicare. It will always be a transfer program, even with more private plan participation and enrollment. To the extent that politically realistic premium support concepts and the Obamacare vision result in roughly the same program costs (and no current version of either makes it clear that it wouldn’t), the deadweight loss is a cost that hits both sides. We could make the tax system more efficient (ending certain deductions and lower marginal rates and/or, perhaps, swapping income taxation out for a progressive consumption tax, at least in part). But that’s a different discussion.

5. I have no other comments on the Levin excerpt at the top of this post. However, I read Levin’s full post and there are some things that are consistent with evidence and some that are not. I will not go through it point by point, but I have to note that his appeal to cost shifting gives the wrong impression. He and anyone who believes cost shifting is inevitable and large should read the FAQs. It isn’t.

6. Many of the administrative costs that some argue should be allocated to Medicare — premium and tax collection, provider and plan oversight, for example — would continue to hit it even if it ran solely through private plans (i.e., no FFS arm). But, in that case, the private insurer administrative costs would also apply, so we’d have both. It’s not clear that’s a good idea insofar as reducing administrative costs are concerned. Nobody has proposed abolishing Medicare entire.

See also, my few prior posts on health care fraud here and here.

UPDATE: There is a follow-up to this post.

@afrakt

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