Health Care Administative Costs

An article in the NY Times recently said that Medicare has lower administrative costs than the private sector. Below are things I have posted before

https://www.bloomberg.com/view/articles/2016-08-19/obamacare-s-public-option-is-no-longer-defensible?

While Medicare does have lower administrative costs than insurers, a lot of that benefit lies either in outsourcing normal administrative costs to other parts of the government (where they are still costly, but not on Medicare’s books) or in not doing things that insurers have to do, like all the boring customer service and billing that comes with selling to the public, rather than enrolling every citizen over the age of 65.

And then there are provider prices. Medicare pays providers less than private insurers. The idea is that the public option could pay more than Medicare, but less than private insurers (say, Medicare rates plus 5 to 10 percent), and thereby offer a cheaper product than private insurance.

https://www.bloomberg.com/view/articles/2016-07-12/the-public-option-it-s-baaaaaaaack

To summarize for those who have forgotten the last exciting round of health-care quarrels, a “public option” would be a public insurer that would sell policies on the insurance marketplace alongside for-profit companies. It would be expected to be budget-neutral, which is to say that it would have to cover all its costs -- including administrative overhead -- through premiums. Nonetheless, its supporters think that it would provide cheaper policies than the for-profits, and while people have long expressed worries that this would crowd other insurers out of the market, if you favor single payer, that’s a feature, not a bug.

However, the hopes for a public option revolution were always a bit overblown. The less wonky supporters of the public option -- and that’s most of them -- were generally under the impression that private insurers had bloated administrative costs and obscene profits, so that a public insurer which could streamline overhead would easily be able to offer better prices. But while Medicare’s overhead costs are lower than those of private insurers, that doesn’t mean that the public option policies would be cheap. For one thing, one of the reasons that Medicare’s overhead is low is that it doesn’t do annoying things such as sell policies to consumers, who require a lot of expensive hand-holding and bill-collecting. As one of many players in the marketplace, the public option would need to have all those service staff, just like the insurance companies do.

For another thing, there’s a credible case that Medicare lowers its overhead by inadequately policing fraud, which is not necessarily a net savings to the whole system, but does lower the amount captured in that one budget line. Medicare’s overhead—which is expressed as a percentage of total expenses -- also looks artificially low because the population it covers is so sick. Expressed as a hard number rather than a ratio, its administrative expenses per enrollee are arguably higher than the private sector's.

 http://econlog.econlib.org/archives/2011/08/administrative_1.html

Finally, there’s the matter of efficiency. Medicare has lower overhead because it has a huge number of consumers spread out across 50 states. Normal health insurance policies, unfortunately, are regulated at the state level, which means that the public option would have to write an individual policy for each market, have individual networks of doctors and hospitals, and deal with individual insurance regulators.