Many people believe the admin cost for original Medicare (Part A and
Part B) is lower
than private insurance admin cost, because Medicare's cost is "only
3%". These people also believe that
private insurance admin costs are much higher, up to 20% or 30%. So
Medicare, they believe, is obviously more efficient. Well, let's look
at it.
Based on CBO projections of Medicare benefit costs for 2013, a 3% admin cost for original Medicare
is equivalent to about $31-$32 per month, per enrolled person.
Here are my calculations:
1. CBO Part A and Part B benefit costs $528 bn
2. Less M'Care Advantage benefit costs $145 bn
3. Net Part A and Part B benefit costs $383 bn
4. Allowance for admin @3% (divide by:) 0.97
5. Cost of benefits + admin $395 bn
6. Base administration cost ($395-$383) $ 12 bn
7. Plus CBO mandatory admin add-ons $ 2 bn
(ACA mandated e.g. quality, fraud, others)
8. Total admin cost $ 14 bn
9. CBO Medicare enrollment 51 mn
10. Less M'Care Advtge enrollment 14 mn
11. Net Medicare enrollment 37 mn
The monthly per person admin cost is therefore $31-$32
$14 bn / (37 mn x 12)
Private large-group
admin costs
Current admin costs for large groups generally run in the
range of $20 to $25 per person per month.
I’ve seen lower and I’ve seen higher, but most fall within that
range. (By “large” group
plans, I mean plans covering more than 20,000 persons; large, but nowhere near
as large as Medicare.)
Conclusions
Comparing these results suggests the typical per-person
admin cost for large private group plans is distinctly less than original
Medicare, using the assumption that original
Medicare admin is "only 3%" of its total cost.
Even if one excludes the ACA-mandated add-ons from the analysis, the
Medicare admin cost per person, per month works out to $27 which still
leaves large private groups with an admin cost advantage.
This result makes sense for several
reasons. Most important, seniors have higher medical costs than the
working-age population, mainly because of chronic conditions related to
age. That's why Medicare premiums are so much higher than for working
age people. But higher claims don't mean higher admin expenses; it does
not cost 100X's as much to adjudicate a $10,000 claim vs a $100 claim. A
(%) of premiums uses the much higher Medicare premiums in the
denominator. Using this higher denominator produces a lower answer,
which says nothing about the actual relationship between admin costs.
So comparing Medicare admin expenses to other insurance as a percentage
of premiums is faulty. Comparing admin expenses to enrollment is
analytically superior. Keep in mind that private insurance companies administer original Medicare under
contract with HHS; there is no reason their admin charges should differ
greatly between their large private groups and their Medicare contracts. Nor is Medicare otherwise regarded as an efficient federal bureaucracy. (If there is one.)
So yes, “3%” may be arithmetically
correct – but it's misleading nevertheless. It leads to the mistaken
notion that Medicare is more efficient than private insurers when in
fact the reverse is most likely true.
Whenever you hear someone claim that Medicare admin is "only 3%" the smart follow-up questions are
"3% of what?" and “compared to what?” The preceding analysis suggests an answer for both of these follow-up
questions.
I've relied on CBO Medicare projections for 2013. The private plan information is from
my own experience working in three major insurance
companies, a national consulting firm, and head of benefits for a large employer.
The analysis is approximate, but I believe basically sound.
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