• 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.


    • Austin

      Since medicare pays without respective review fraudulent providers KNOW they can submit fraudulent claims with little retribution save for the occasional high profile case. That being said private insurers red flag certain procedures and providers as suspected fraud. The reason medicare must pay without respective review? Its required quick processing time. The reason it is required to pay so quickly? Its low reimbursement rate. You must accept the bad when true with the good. The idea that some have that “government can do it better” is not borne out by any facts whatsoever.

      • The other side of the equation is provider costs. It costs me much more to process private insurer claims. For years, insurers rejected clean claims just to earn money on the float. We now have a law against that, but they still do it occasionally. Beyond that, it takes more time and the money comes in much later with much more time by my staff. A Health Affairs article places these costs at about, IIRC, $7 billion a year, but ignores the costs of errors when physicians erroneously bill when they miss rule changes.


        • Steve

          BULL. Do you realize that most employers self insure so that means that its not the insurers money but the employers? Also is it not possible and likely that providers COULD make billing errors on their side or are they perfect? Could some not be clerical errors on both insurers or providers parts? Your flawed arguments are like Swiss cheese

    • If Medicare cost per enrollee — seniors — is roughly x times the cost of an average commercial enrollee, and if Medicare’s admin costs on a per capita basis are 1/x that of the commercial plans, is that really different? The $ per enrollee admin costs are about equal?

      I have heard that argued and been silenced by it.

      • The key factor in that argument is that Medicare is a program for seniors and disabled people. Costs are naturally much higher per enrollee than the costs of private insurers in dealing with younger, employed enrollees.

        If you want to compare costs other than overhead, the correct comparison is cost per service — what Medicare pays for a CT of the head compared with what private insurers pay. By that standard, Medicare is cheaper to much cheaper because of their ability to dictate rates to providers and hospitals as opposed to having rates dictated to them by powerful providers and hospitals.

        Private insurers have admitted, in the context of Medicare Advantage, that they cannot provide care to all comers in Medicare as cheaply as Medicare can. Lower overhead is much less important than ability to obtain low prices for services.

        • “Private insurers have admitted, in the context of Medicare Advantage, that they cannot provide care to all comers in Medicare as cheaply as Medicare can.”

          Where and how have they admitted this? I ask because it is a highly contested claim. If you have some evidence to point me to, I’d appreciate it because it suggests I missed something.

          • When the transition from Medicare + Choice to Medicare Advantage occurred in 2003, the change, and its associated increase in payments for MA compared with conventional Medicare, was made because of lobbying by private insurers based on the notion that they required more money to make the program work. This was preceded by a series of failures and closures of Medicare + Choice programs due to the inability of insurers to continue to offer the programs while being paid premiums much closer to the cost of FFS Medicare.

            In response to the changes in MA payments proposed under the ACA, there has been another aggressive lobbying effort by insurers pleading that they cannot forego the bonus payments they now receive and still run Medicare Advantage programs, an effort that has been rewarded by a huge relaxation of efforts to cut MA payments that has been well documented in this blog.

    • The Levin post and thread is interesting.

      Those arguing FFS administrative costs are low–a la Krugman–due to usual suspects–economies of scale, etc, also fail to account for many factors, including DWL from taxation. The thread got a bit above me in that regard, but followed enough to glean the meat.

      The counterfactural–MA world without FFS, would engender collection and processing costs like you mention in #6. Renders whole discussion somewhat moot.

      However, using today’s commercial plans and TPAs, is there evidence to extrapolate as a comparison, mainly, their collection costs and similar activities of doing business. Discussion would be easier if we could model how a FFS-less world would impact MA plans–and allow for a pure right/conservative, apple to apple comparison (sorta) construct.

      The debate gets silly knowing costs might be the same, and only difference is who collects and transfers the money.

    • 1. Canadian Medicare and the French Medicare both pay millions of claims very rapidly and with minimal auditing.

      In France some claims are paid “on the spotr” by swiping a government debit card.

      Do they have less fraud than we do? If so, why? My

    • continued………..

      Is our fraud centered on certain parts of the country? Is our fraud centered on certain kinds of MD’s or medical supplies?

      I also have the impression that overtreatment for heart care uses up more dollars than false invoices for scooters, even though extra heart surgery and catheterizations are not considered fraud.

      2. For Medicare as well as Medicaid, some form of capitation is inevitable. Just the unavoidable demographic growth of Medicare will push its costs toward $1 trillion a year in 2022 in virtually all scenarios.
      In 2010 the entire tax revenue of the federal government was $2.3 trillion and it is not growing much at all. (see David Cay Johnston;s writings.)

      We should be airing out ten different types of capitation, Paul Ryan’s being one of them and maybe not the worst.

      Medicare cannot forever remain as an open-ended, self-reporting, claims-based plan with an easily-manipulated and hospital-indulgent fee schedule.

      Once again we must look at any other countries that have achieved any success with capitation.

    • One cost of medicare, that IMO can be and should be removed is the cost to businesses of figuring and paying a separate medicare tax. It and SS tax should be rolled into the income tax or better yet a replace the payroll and income taxes with a simple and progressive consumption tax.

      BTW medicare must take its share of the cost of collecting the taxes else it is all free.

    • I do not think that the real issue to right wing economists is the physcial cost of tax collection.

      Their real beilief is that the nation would be better off with lower taxes, no matter how easy the taxes are to collect….(the ‘dead weight’ hypothesis).

      If Medicare was cancelled, each American worker would see a rise in their income, at least 1.5% and maybe 3% if their employer gave them a raise due to payroll tax relief. In addition, income taxes on all Americans who pay income taxes would go down about 3-4% if there were no subsidies for Medicare Plan B.

      That is the good news. Sales of riding lawn mowers and flat screen TV’s would go up. Many of these products are made abroad, and more things are sold on-line, so this increase in consumer sales might not create all that many jobs.

      Now for the bad news. The one sector of the economy that has been creating middle class jobs for the past twenty years — health care — would begin to hemmorage jobs. Many younger Americans would have to help pay the medical bills for their grandparents (as happened often before 1965.)

      A true devotee of Mises and Milton Friedman would say that over time, the prosperity created by lower taxes will make it easy for young people to pay those medical bills. That same prosperity will help young people build up huge balances in HSA’s, so that they will not need Msdicare when they grow old.

      If you are Dick Armey, with a government pension and millions each year in lobbying income, this all seems plausible. Stephen Moore and Peter Ferrara are less wealthy, I suspect, but make a good living as cheerleaders for the cause.

      I am not trained in economics. I tend to follow James Galbraith and Peter Lindert, in the idea that social insurance makes a nation more prosperous in most cases.

      If there is any economist who has mastered this issue, please give me their name.