First the facts.

According to the latest annual report of the Medicare board of trustees (these reports are required by law), Medicare spent $431.5 billion dollars in 2007. Of this amount, $6.3 billion was administrative expenditures (or overhead). If we do the math, we determine that Medicare’s overhead was 1.5 percent of its expenditures. Other data presented in the trustees report indicate Medicare’s overhead was about 2 percent throughout this decade, about 2 percent during the 1990s, and about 3 percent in the 1980s.

During the last three or four decades, the comparable figure for health insurance companies has been 20 percent while the comparable figure for self-insured firms has been about 10 percent. I think it is safe to say all reasonable people would agree that 2 percent is “lower” than 20 percent and 10 percent.

Even if you didn’t know these figures, your common sense tells you Medicare’s overhead costs have to be lower than the insurance industry’s. Medicare spends little or nothing on a variety of administrative activities that insurance companies spend substantial sums of money on, including:

* marketing;
* underwriting (which means doing the research necessary to determine applicants’ health histories and whether to insure them and if so at what price);
* making routine use of “utilization review” (aka telling doctors how to practice medicine);
* restricting patients’ choice of provider (it costs money to assemble “networks” of providers that include some providers and exclude others);
* lobbying;
* financing costly salaries and perks for executives; and
* financing profits.

(I consider profit to be a subset of administrative costs, others don’t. Insurance companies typically allocate 3 to 5 percent of their revenues or expenditures to profit.)

Among experts who publish in peer-reviewed journals, the 2-percent figure for Medicare is widely (probably universally) accepted. I offer two examples of expert opinion from the conservative side of the health care reform debate: the Lewin Group, and a coalition of organizations and individuals that signed an open letter to Congress in 1999.

The Lewin Group is a consulting firm which is on record criticizing single-payer proponents. It often makes unjustifiably favorable assumptions about the cost-cutting abilities of health insurance companies. It was purchased by United Health Group last year. It uses the 2-percent figure to estimate Medicare’s overhead costs and the overhead costs of Medicare-like systems (cf the Lewin Group’s reports for the states of California and Colorado).

In 1999, a coalition of conservative and middle-of-the road groups and individuals signed an open letter to Congress begging Congress to raise Medicare’s administrative spending level to the level “found in the private sector” so that Medicare would be better equipped to function like a managed care insurance company. The coalition included the Heritage Foundation, the former Health Insurance Association of America (the trade group that represented the non-HMO wing of the health insurance industry), the American Enterprise Institute, the Concord Coalition, and Wellpoint Health Networks.

This coalition stated that Medicare’s overhead was less than 2 percent. Here is how they put it: “The latest report of the Medicare trustees points out that HCFA’s administrative expenses represented only 1 percent of the outlays of the Hospital Insurance trust fund [which finances Part A] and less than 2 percent of the Supplementary Medical Insurance trust fund [which at that time financed Part B]” (Heritage Foundation et al., “Open letter to Congress and the executive: Crisis facing HCFA and millions of Americans,” Health Affairs 1999;18(1):8-10, 8). Obviously, the average of these two trust funds comes to less than 2 percent.

Now that the basic facts are in front of us, let’s examine Simpson’s strange logic. It is strange in two ways.

First, Simpson assumes undetected fraud is a problem only for Medicare. It is in fact a serious problem for all health insurers, public and private. The US GAO has estimated that fraud eats up 10 percent of all US spending on health care. A national coalition against fraud, which includes US health insurance companies, puts the total at closer to 3 percent. Whatever the accurate number, fraud is occurring at epidemic levels, and it is afflicting private-sector insurers as well as public insurers. If we’re going to charge Medicare with higher-than-reported overhead costs because Medicare is not immune to fraud, then we must do the same for private insurers. If we do that, Medicare’s low overhead costs remain low vis a vis the insurance industry’s overhead costs.

But Simpson’s proposal that we raise our estimate of an insurer’s overhead by the amount by which the insurer is defrauded is irrational, arguably delusional. We may all fervently wish that public and private insurers spent enough money to eliminate fraud. (I am as upset as Simpson is by the Bush administration’s devil-may-care attitude about private-sector corporations ripping off the taxpayer, be it wheelchair manufacturers defrauding Medicare or Halliburton defrauding the Pentagon.) But our wishes can’t change reality – our wishes can’t change what Medicare or any other insurer actually spent on fraud detection in 2007 or any other year.

But just to humor Simpson, let’s follow his odd logic to its conclusion. Let’s raise Medicare’s overhead costs and total spending by the $2.8 billion in fraud that Simpson says Medicare failed to detect and see what happens to Medicare’s overhead ratio, and let’s for kicks just totally ignore fraud committed against the private sector. Total spending for Medicare in 2007 would rise to $431.5 + $2.8 = $434.3. Administrative spending would rise to $6.3 + $2.8 = $9.1 billion. Medicare’s new Simpson-style overhead ratio is no longer 1.5 percent but is instead 2.1 percent, still far lower than the comparable figure for health insurance companies or even self-insured firms.

I won’t return Simpson the favor of calling him “incredibly dishonest” because he got his facts so wrong. I will say I think he wrote a very sloppy post.

Quote:

But according to a confidential draft of a federal inspector general’s report, those claims of success, which earned Medicare wide praise from lawmakers, were misleading.

In calculating the agency’s rate of improper payments, Medicare officials told outside auditors to ignore government policies that would have accurately measured fraud, according to the report. For example, auditors were told not to compare invoices from salespeople against doctors’ records, as required by law, to make sure that medical equipment went to actual patients.

As a result, Medicare did not detect that more than one-third of spending for wheelchairs, oxygen supplies and other medical equipment in its 2006 fiscal year was improper, according to the report. Based on data in other Medicare reports, that would be about $2.8 billion in improper spending

End quote

$2.8 billion dollars in improper spending blows that 3% administrative costs sky high. That much widespread abuse of a system doesn’t exactly instill confidence in Medicare as a prescription for all.