The following originally appeared on The Upshot (copyright 2018, The New York Times Company) and on page B6 of the print edition on October 16, 2018.
Calls for a Medicare for All system are growing louder. Many Democrats have embraced it, while President Trump said last week that it would raise health care costs drastically.
Democrats say that giving people the option to partake in Medicare — no matter their age — will actually cut costs.
American administrative costs for health care are the highest in the world, and they argue that one advantage of Medicare for All is that it would save money because Medicare’s administrative costs are below those of private insurers.
Does that argument hold up?
Don’t forget about Medicare’s private plans
Medicare’s administrative costs were $8.1 billion last year, or 1.1 percent of total spending, close to the proportion it has been in recent years.
But some have argued that the actual cost is higher because of services performed for Medicare by other parts of the government that aren’t accounted for: The Social Security Administration collects premiums, the Internal Revenue Service collects taxes for the program, the F.B.I. provides fraud prevention services, and at least seven other federal agencies and departments also do work that benefits Medicare.
The claim that these administrative costs are overlooked is false. As annual reporting of Medicare’s finances plainly states, they are accounted for.
But there is something missing from the $8.1 billion Medicare administrative cost figure, as Kip Sullivan explains in a 2013 paperpublished in the Journal of Health Politics, Policy and Law. Although it accurately accounts for the federal government’s administrative costs, it does not include those borne by private plans that also offer Medicare benefits.
In addition to the traditional (public) Medicare plan, Medicare is also available from private plans through the Medicare Advantage program. Today, one-third of people using Medicare are in such plans, up from about one-fifth a decade ago. Moreover, all Medicare drug benefits are administered through private plans.
National Health Expenditure data shows both the government’s administrative costs for Medicare and those of Medicare’s private plans. Putting them together for the most recent year available (2016), they reach $47 billion, or 7 percent of total Medicare spending — well above the administrative costs borne directly by the Medicare program.
Medicare’s private drug benefit plans incur administrative costs that are about 11 percent of their spending. All of this additional, private administrative cost is paid for by taxpayers and, through their premiums, people who use Medicare.
Medicare’s direct administrative costs are not only low, but they also have been falling over the years, as a percent of total program spending. Yet the program’s total administrative costs — including those of the private plans — have been rising.
“This reflects a shift toward more enrollment in private plans,” Mr. Sullivan said. “The growth of those plans has raised, not lowered, overall Medicare administrative costs.”
The high costs of private insurer plans
Making an accurate estimate of the administrative costs of Medicare for All would depend, in part, on whether it would be more like an expansion of traditional Medicare (with its 1.1 percent administrative cost rate) or of all of Medicare, including its private plans (with a combined 7 percent administrative cost rate).
Yet both figures are well below private insurers’ administrative costs, which run about 13 percent of spending (this also includes profit), according to America’s Health Insurance Plans, an advocacy organization for the industry.
Some critics have argued that Medicare’s administrative cost rate appears artificially low because Medicare enrollees’ health spending is so high. Average Medicare spending per beneficiary is just over $12,000 per year; for an average worker in a private plan, it’s about $6,000. If you simply divide administrative costs by total spending, you will get a lower number for Medicare for this reason alone.
This is true, but the government’s administrative costs for Medicare are still below those of private plans. The government’s administrative costs are about $132 per person compared with over $700 for private plans. One reason Medicare’s are so much lower is that it reaps economies of scale. It also benefits from not needing to do much marketing, and it doesn’t earn profits.
