Does Medicare really have exceptionally low administrative costs … ah, not so much

We have all heard the claim the Medicare is more efficient than private insurers with administrative costs running around 3%. This is then used to make the case that government-run health care is more efficient as well. Not so fast on this one.

First, the 3% number is a percentage of claims. We all know that seniors have higher claim costs and a great majority of that is hospital bills. So let’s do the math. If it costs $600 a year in total administrative expenses and your claims are $5,000 you have admin costs equal to 12%. However, if your claim costs are $50,000 your admin costs are just 1.2%. In other words because of high claim costs for the average beneficiary, Medicare looks more efficient. On the other hand, some studies have found that on a per person basis, Medicare is actually more expensive to operate.

But there is more. Medicare does not include the expense incurred by other government agencies related to Medicare.

For example, the Internal Revenue Service collects the taxes that fund the program; the Social Security Administration helps collect some of the premiums paid by beneficiaries; the Department of Health and Human Services helps with accounting, auditing, and fraud issues and pays for marketing costs, building costs, and more. In addition, private insurers pay state premium taxes which are part of their overhead costs.

And then we have my favorite reality check; fraud and abuse. Medicare pays just about every claim submitted with a covered service code with no or very little review for medical necessity, or appropriateness of the service. Ask your doctor which coverage pays with the least hassle. But all that hassle free claim paying leads to fraud and abuse on the part of both patients and providers, higher than may be justified claims, higher premiums for Part B of Medicare and, of course, the appearance of low administrative costs as a percentage of claims.

Medicare is so huge it should have low administrative costs, but at least we should compare apples to apples.

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