Medicare Compliance & Reimbursement

Medicare cost reports don't tell the whole story, study reveals.

Health care policy analysts have for years stood by the axiom that Medicare administrative costs are significantly less than private insurers' administrative costs--but a new study shows a much narrower margin.

"There are more costs in running the Medicare program than just paying claims--costs that are regularly included, and are more transparent, in any private sector assessment of administrative costs," notes the Council for Affordable Health Insurance in a Jan. 10 study. Such costs include policy setting, management, raising capital, premiums and commissions, claims processing, fraud, and premium taxes.

Hidden Medicare Costs Paint A More Accurate Picture

The study's results challenge assertions--specifically a 1991 Government Accountability Office statement--that a single-payer, government-financed healthcare system would create enough administrative expense savings to offset the rollout costs for universal coverage. The study's cost analyses reveal a much narrower margin.

For years, the health care industry has maintained that administrative costs for private insurance plans range between 20 and 25 percent of claims costs, whereas Medicare administrative costs are only about 2 percent. "It is very difficult to do a real apples-to-apples comparison of Medicare's true costs with those of the insurance industry," says CAHI. "The primary problem is that private sector insurers must track and divulge their administrative costs, while most of Medicare's administrative costs are hidden or completely ignored by the complex and bureaucratic reporting and tracking systems used by the government."

The disparity between Medicare and private insurance administrative costs is less extreme than the health care industry has been led to believe, the study shows. Medicare administrative costs are actually 5.2 percent, according to the new study--more than double the amount that policy analysts typically cite. Private sector administrative costs are misreported as well, the study finds. These costs actually measure in at 8.9 percent of claims--less than half the amount the industry widely believes.

When the study applies commission, premium tax and profit to private insurers' administrative costs, the level increases only to 16.7 percent--still less than the 20- to 25-percent maxim. In addition, larger companies that are able to obtain "economies of scale" similar to those available to Medicare rank even closer to Medicare's cost rates, CAHI points out.

Medicare's higher cost per beneficiary--$6,600 per bene in 2003 versus $2,700 for privately insured benes--gives it an "inherent advantage" in cost reporting by creating the illusion that Medicare administrative costs are lower than they actually are, upholds CAHI. Factoring out this advantage bumps Medicare administrative costs up to the 6 to 8 percent range--right in line with the private sector.

The new administrative cost figures in CAHI's study stem from a closer analysis of actual, hard costs that don't include unfunded liabilities--in Medicare's case, the costs to fund claims payments. When CAHI included unfunded liabilities in its 1994 administrative cost analysis, Medicare's administrative costs were significantly higher (26.9 percent) than the private sector.

Close Comparison Challenges Single-Payer System Reform

Evidence that there's a much narrower cost margin between Medicare and private insurance takes some of the wind out of claims that private insurance is more costly and less efficient than a single-payer health care system like Medicare. "Even though the private sector's administrative costs are higher than Medicare's, that isn't 'wasted money' that could go to insuring the uninsured," argues CAHI. "In fact, consumers receive significant value for those additional dollars."

The study also challenges the notion that high administrative costs are inherently "bad"--only "inefficient" administrative costs are bad, asserts CAHI. Efficient administrative oversight alters behavior, resulting in lower premiums that recover the cost. "Insurers regularly scrutinize claims forms and check with health care providers if they find an error, discrepancy or what they believe to be an unnecessary treatment. That raises administrative costs, but it also lowers claims costs. That is a benefit for those insured because it helps keep premiums lower," CAHI maintains.

Reform Group Cites Bias

One reform group didn't hold back in reaction to the study's implications. Private insurers are responsible for much more administrative waste than is our Medicare program, says Physicians for a National Health Program. The CAHI study makes biased assumptions based on its platform for affordable private health insurance, the association accuses. "The administrative costs of claims processing is related much more to the volume of claims and much less to the number of beneficiaries," argues PNHP.

The association objects strongly to the study's assertion that private insurers' greater administrative costs stem from value-added services. "Most of us have difficulty recognizing the value of marketing costs, medical underwriting, brokers' fees, excessive executive compensation packages, insurer profits and other such administrative excesses," says PHNP. "This claim alone, that these excesses add value, should destroy the credibility of this report."

For related news on Medicare costs, see the companion article "Private Plans To Blame For Part D's High Costs" later in this issue.