Healthcare Administrative Costs: Medicare vs. private insurance under Obamacare

A major piece of Obamacare, President Obama’s signature achievement of his first term, was a new requirement that private insurers spend at least 80% of their premium dollars on care, leaving the remaining 20% to cover administrative costs and profit. This requirement was a response to a common criticism of the private health insurance industry: Too many premium dollars going to administrative costs and profit, and not enough going to actual healthcare. Indeed, much has been made recently of the rebate checks that Obamacare forced some private insurance companies to issue to their customers in order to comply with the new requirement. There is, however, one familiar health insurance system that is reported to have extremely low administrative costs: Medicare. This article will compare administrative cost levels among private health insurers and Medicare.



According to the Board of Trustees that oversees Medicare, $7 billion was spent in 2011 on administrative expenses, about 1.3% of the total $522.8 billion. This percentage is comparable to the figure of 2% commonly heard in the media debate over the issue. Either of these two percentages are far lower than the 20% limit required under Obamacare. However, according to Washington Post columnist Ezra Klein, Medicare’s administrative costs have been “significantly undersold in the public debate”. It seems that Medicare’s reported “direct” administrative costs are only half of the story; many administrative costs associated with Medicare are in fact borne by other government agencies. One example of these “off-budget” expenses is premium collection. Private insurers incur costs in collecting premiums from customers, but since Medicare premiums are paid through federal taxes, the IRS is tasked with collecting them. The IRS incurs costs in its collection activities that do not get passed on to Medicare, and thus are not reported on Medicare’s budget. A further example is billing activities (doctors billing insurers for care provided). Private insurance companies operate or outsource their own billing system, treating the costs as administrative expenses. However, Medicare accounts for its own billing costs in a separate category called “vendor services” (ironically, this is because Medicare outsources its billing system to some of the same private insurers that count their own billing as an administrative cost). After attempting to control for these hidden administrative costs, a study by the Manhattan Institute for Policy Research determined that Medicare’s true administrative expenses hover somewhere around 6%.

On the other hand, according to Klein, there is great variation in the levels of administrative costs among both private health insurance companies and among their individual plans. Klein cites a CBO report (his link to the report is currently down) finding that the largest private health plans, covering businesses with over 1000 employees, were also the most efficient, with an average of 7% of premiums spent on administrative costs. Plans and insurers covering smaller employers spent an average of 26% of premiums on administrative costs, while plans on the individual market (not employer sponsored) averaged 30%.

All other things held equal, it seems that Medicare's administrative costs are comparable to those of the largest employer-sponsored health plans, and are vastly cheaper than smaller employer-sponsored plans and individual coverage. This raises several questions:  Whether Obamacare's requirement limiting administrative costs goes far enough to significantly control costs, and whether the country would be better off switching to some form of a "Medicare-for-All" national health insurance system.

-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

References

“Barbara Boxer says Medicare overhead is far lower than private insurers' overhead.” Politifact. Tampa Bay Times, Inc. 30 May 2011. Web. 06 Oct. 2012.

“Comparing Public and Private Health Insurance: Would A Single-Payer System Save Enough to Cover the Uninsured?” Medical Progress Report. Manhattan Institute for Policy Research. Oct. 2007. Web. 06 Oct. 2012.

Goodnough, Abby. "Insurance Rebates Seen as Selling Point for Health Law." New York Times 30 July 2012. Web. 06 Oct. 2012.

Klein, Ezra. “Administrative Costs in Healthcare: A Primer.” Washington Post 07 July 2009. Web. 06 Oct. 2012.

"Patient Protection and Affordable Care Act." Wikipedia. Wikimedia Foundation, Inc. n.d. Web. 06 Oct. 2012.

The Boards of Trustees, Federal Hospital Insurance and Federal Supplementary Health Insurance Trust Funds.  2011 Annual Report.  Washington.  Web.  06 Oct. 2012.

"United States National Health Care Act." Wikipedia. Wikimedia Foundation, Inc. n.d. Web. 06 Oct. 2012.