As we all know, Bernie Sanders recently announced his campaign for the Democratic Party’s presidential nomination. This is despite the fact that he no longer stands out in a crowd of Democrats for his ideas. Based on what several candidates have said, his ideas seem to be mainstream, particularly Medicare-for-All. Proponents of this idea, including Mr. Sanders, often point to high administrative costs in private insurance as an example of the benefits of a single-payer system. They specifically argue that the higher ratio of Administrative costs to total costs of private insurers, in comparison to Medicare, points to a lack of administrative efficiency in the private market.
However, as Charles Silver and David Hyman point out in their book Overcharged: Why Americans Pay Too Much for Healthcare, this form of measurement is inherently flawed. To demonstrate this, take an example of two insurers-Insurer A and Insurer B. Insurer A spends $1 billion in total, and $30 million of that covers administrative costs. Insurer B spends $700 million total, with $60 million of that covering administrative expenses. When you do the math, you find that Insurer A spends about 3% of total spending on administrative expenses, while Insurer B spends about 9%. By this measurement, Insurer B would be seen as less efficient in the eyes of Mr. Sanders. Hopefully, you see the absurdity of this measurement of efficiency. Insurer A spent way more overall than Insurer B-$300 million. Just because administrative costs account for a smaller relative portion of total cost does not mean that the insurer is operating more efficiently-especially if spending more on administrative expenses by Medicare might actually curtail the massive fraud that Medicare and Medicaid permit.
What happens instead if we look at other ways to measure administrative efficiency in health insurance? Robert Book used a different mechanism to measure efficiency back in 2009. He looked at administrative costs per beneficiary, and found that, in 2005, Medicare spent around $509 per beneficiary on administrative costs, compared to $453 per enrollee by private insurers. Thats around a 10% difference. And before you say that his research only covered one year, it should be noted that Book found the situation to be the same for every year from 2000-2005. By this measurement, Medicare does not seem to be more efficient.
In fact, Medicare also has certain benefits as a government program, benefits that result in lower administrative costs, that private insurers do not have, as Avik Roy points out. For one, other government agencies help Medicare operate. Take the IRS, for example, which collects Medicare’s tax revenues. The Department of HHS also helps Medicare with administrative operations. On top of this, Medicare does not have to pay certain state excise taxes that fall under administrative costs for private insurers. In short, the difference between administrative costs per beneficiary in Medicare and administrative costs per enrollee in private insurance is actually higher than the 10% difference when other extra-Medicare administrative expenses are taken into account.
Proponents of Medicare-for-All should do us all a big favor and stop lying about the efficiency of Medicare, and Medicare-for-All.