• Kaiser’s Medicare Primer

    A reader pointed me to the Kaiser Family Foundation’s 2011 Medicare Primer:

    This primer provides an overview of Medicare spending trends, how the program is financed, and factors contributing to the growth in Medicare spending.  Medicare now covers 47 million seniors and younger people with disabilities, with total expenditures of $524 billion in fiscal year 2010, representing 15 percent of federal outlays.

    It also describes the expected effects of provisions in the 2010 health reform law on future Medicare spending.  The primer reviews the financial obligations and out-of-pocket spending for people covered by Medicare, outlines several ways to assess Medicare’s long-term fiscal outlook, and discusses future financing challenges facing the program.

    I found a few points worth highlighting. The first involves the section discussing what accounts for the rising cost of Medicare. One complaint I always hear is how the inefficiencies and waste of government are responsible. Not so (emphasis mine):

    The costs of administering the Medicare program have remained low over the years – less than 2 percent of program expenditures. As such, program administration is not a contributing factor to Medicare’s expenditure growth.  Administrative costs include all expenses by government agencies in administering the program (HHS, Treasury, the Social Security Administration, and the Medicare Payment Advisory Commission).  Also included are the cost of claims contractors and other costs incurred in the payment of benefits, collection of Medicare taxes, fraud and abuse control activities, various demonstration projects, and building costs associated with program administration.

    Compare this to Austin’s post on the administrative costs of private insurance.

    There’s also a nice chart on the PPACA’s expected effect on Medicare spending over the next decade, compared to other legislation:

    With the exception of the Balanced Budget Act, the PPACA is most comprehensive Medicare cost control passed in the last few decades. Much of that comes from reduced payments to providers and Medicare Advantage Plans, the Medicare Independent Advisory Board, increases in beneficiary premiums, delivery system reforms, and new taxes. They aren’t all popular, but they were all enacted to make Medicare more affordable to the government.

    I’ve seen a lot of people hammering the President over the weak deficit controls of his recent budget, especially with respect to entitlement programs. It’s worth remembering that he did sign a law less than a year ago to reduce spending on Medicare by over $400 billion over the next decade.*

    The whole thing is worth a read.

    *Yes, they will use that money to pay for the rest of PPACA. I’m not double counting it. I’m one of those crazy people that thinks it’s OK for good things to cost money, so I’ve never had a problem saying that the PPACA will cost $938 billion over a decade. Here, I’m pointing out that Medicare is not the untouchable program many claim it to be. And yes, these projections require Congress not to change them. All laws do. That’s how the system works.

    • Aaron,
      This is a good post, and that chart is really interesting. (Although I wish I could remember what all those acronyms stand for.) But how do you square this with the fact that the PPACA cuts in Medicare have already been partially unraveled? A series of patches were passed that covered 2010, and 2011 had a “doc fix” bill passed that costs $30B+, and Obama’s budget calls for another doc fix of $60B that kicks the can down the road until 2013. On top of that, the $60B is “paid for” through elimination of “waste, fraud, and abuse,” which, according to your post above, is minimal. Don’t we have to debit these items against PPACA? And how do we regard those lawmakers (and the president) who vote for the cuts on one hand, and then add the spending back in later?

    • Comparing the administrative costs of Medicare to those of private insurance is not even remotely apples to apples. First, the Medicare administrative costs are expressed as a percent of total claims, when the average claim cost of a Medicare beneficiary is over 50% higher than that of a privately insured person. Second, one thing insurers spend a great deal of administrative money on is ensuring that any payments they make are appropriate and not fraudulent. In 2010 alone, the GAO found $48B in improper payments, 10% of total Medicare spending. It’s easy to keep admin low when you just cut a check, but the cost in additional improper claims ought to then be factored into your estimate of admin costs.

      I don’t dispute that Medicare has lower administrative costs than private insurance, but it is nowhere near the gap implied by citing that 2% number.

    • pipster,

      The doc fix is not part of PPACA. The doc fix is not part of PPACA. The doc fix is not part of PPACA.

      I can’t say that enough.

      I already addressed your later point. If you don’t believe that Congress will ever do what it says, then there’s no point in doing anything at all. It’s nihilist thinking, and I don’t believe it’s true. Congress has managed to follow it’s laws in the past.


      I’ve been over this before. I don’t think it’s apples to apples, but Medicare to Medicare Advantage IS apples to apples. And there, Medicare Advantage loses, too.

    • Of course MA loses, private insurers pay premium taxes, keep a portion of premiums as profits, and pay executives more than we pay the people administering Medicare. Like I said, Medicare obviously has lower costs than private insurance. But it’s pretty misleading to cite the 2% number and then immediately say “compare it to the administrative costs of private insurance”.

      Administrative costs are the least of our worries when it comes to slowing the growth in health care costs. Medicare would be better served spending MORE on admin to avoid spending 10% of the money on fraudulent claims.

      • Just jumping in to mention that Walton Francis’s book (which I summarize here) goes deep into waste, fraud, and abuse, as well as many comparisons of MA, FFS, FEHBP, Medigap, and so on in many dimensions, citing a load of studies. It’s worth consulting on such comparisons. I learned a lot.

    • Aaron,

      For somebody who likes to say that he is concerned with data, evidence, and the like, your cherry picking of data should concern you. I’ll turn things around here:

      In 2005, President Bush signed a tax bill (TIPRA) that increased taxes on foreign earned income, passive income of minors, and certain partnerships and S-Corps. Clearly, Bush should be recognized as a president that raised taxes, especially on the rich. The earlier Bush tax cuts are not TIPRA. The earlier Bush tax cuts are not TIPRA. The earlier Bush tax cuts are not TIPRA.

      Bulletproof argument, right?

    • pipster,

      I promise you,t he first time I make such claims, you can call me on it. But I don’t think I’ve been writing a lot of posts claiming that President Bush did or did not do any such things. And none of that still changes the truth that the doc fix was not part of PPACA. Not because I keep repeating it; because it’s true. What data am I cherry picking?


      Sorry, but I disagree. I don’t think there’s anything misleading about it at all. I didn’t say it accounted for the vast majority of spending. In fact, I am on record talking about administrative spending in terms of overall health care costs in my series.

      You have a habit of taking what I write, and extrapolating it to others’ arguments even when there are many, many posts that show I am not saying what you say I am. Since I am not continually warping your words, I’d ask you to extend me the same courtesy.

    • I don’t see how I’m warping any words. You cite a report saying that Medicare has 2% admin expenses, and in the very next sentence say that people ought to compare that to Austin’s post on the admin costs of private insurance. You’ve since acknowledged that the comparison is not apples to apples. How is that not misleading? Should we compare them or shouldn’t we? The original post says we should, your comment suggests we shouldn’t.

      Also, secondary to this issue but more to the point you were making in the post, is it true to say that “inefficiencies and waste” are not significantly contributing to cost growth when 10% of the spending is improper? And is the 2% admin expense ratio the measure one should use to decide if “inefficiencies and waste” are a factor? Rather than refuting the existence of waste and inefficiency, in this case the low percentage of admin costs is contributing to the waste and inefficiency.

      Would eliminating those improper/fraudulent payments save Medicare? Of course not. But that doesn’t mean we should be so dismissive of them either. There are real savings to be had.

    • The flip side to Medicare having fraud is the decreased costs of billing for providers. I still have many clean claims denied by private insurers, even though they are not supposed to do so. Most of my billing costs are driven by complying with the demands of private insurance. If you want to compare apples to apples, not sure it is possible, you need to include fraud from the private sector (data not available), and the added costs incurred by providers. I would bet they come close to evening out, if we could gather the data. Until we can do that, the best we can do is to compare direct administrative costs. We can also look at other countries which have government run healthcare, and in those we als see lower administrative costs.


    • Aaron,
      You maintain that Obama is undeserving of certain criticism. To support your argument, you cite the one bill (PPACA) that supports your hypothesis, but you ignore the other bills (multiple “doc fixes”) that refute your hypothesis. That’s cherry picking.