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Medicare Is More Efficient Than Private Insurance

September 20th, 2011

Editor’s note: Robert B. Wohl, B.A., Wesleyan 2011, assisted Diane Archer in the preparation of this response to an earlier Health Affairs Blog “Contributing Voices” post by John Goodman and Thomas Saving. See also Austin Frakt’s post at the Incidental Economist and John Geyman’s post at the Physicians for a National Health Program blog for additional responses to the Goodman-Saving post.

Contrary to claims made by John Goodman and Thomas Saving in an earlier Health Affairs Blog post, non-partisan data from the Congressional Budget Office (CBO) and the Center for Medicare and Medicaid Services (CMS) demonstrate definitively that private insurance is increasingly less efficient than Medicare. The data show that Congress should examine and address the role that private insurance is playing in driving up overall health care costs.

Medicare Has Controlled Costs Better Than Private Insurance

Medicare Has Lower Administrative Costs Than Private Plans.

So-called “competition” in the private health care market has driven costs up.

  • In most local markets, providers have monopoly power. Consequently, private insurers lack the bargaining power to contain prices.
  • In most areas, two or three dominant insurers dominate the regional market, limit competition and make it extremely difficult if not impossible for new insurers to enter the marketplace and stimulate price competition.
  • Medicare Advantage, which enrolls seniors in private health plans, has failed to deliver care more efficiently than traditional fee-for-service Medicare. Both the CBO and the Medicare Payment Advisory Commission (MedPAC), the commission which advises congress on Medicare’s finances, have calculated that Medicare Advantage plans covering the same care as traditional Medicare cost 12 percent more.
  • Karen Ignagni, who heads America’s Health Insurance Plans (AHIP), the insurance industry’s trade association, has admitted that private plans cannot bargain down provider costs and has asked Washington to intervene.

Medicare Is Publicly Accountable, Private Plans Are Not

When it comes to how much it costs private plans to deliver care, or individual insurer innovations that deliver value, the publicly available data are scarce. Goodman and Saving present only one study on the ways that insurers try to control costs, and this was published by AHIP. Because Medicare is publicly accountable, it allows us to study what works so that we can improve the health care system.

  • The authors cite a number of innovations that could lower the cost of care, but all of them have been introduced by doctors and clinics, not insurers. Because insurance companies treat their claims data as trade secrets, we do not know if they have adopted such innovations.
  • Even government-funded Medicare Advantage plans don’t release payment and coverage data.

A closer look at the data shows that, contrary to Goodman and Saving’s claims, Medicare delivers health care more efficiently than private insurers. Medicare’s public accountability and bargaining power give it the ability to drive system change and control skyrocketing health care costs, while profit-driven private insurers have offered no solution.

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5 Responses to “Medicare Is More Efficient Than Private Insurance”

  1. Wilson Donaldson Says:

    If not for congressional restrictions, Medicare will even have much lower cost that private insurance setup. The government must become smarter with our tax dollars. Why should we be paying higher drug prices as compared to other countries with government-run healthcare programs?

  2. Scott Cochran Says:

    It is a flawed argument to assert that Medicare is more efficient because they have a lower percentage of total cost that goes to administrative costs. That percentage is the result of a numerator (admin cost) divided into a denominator (total revenue). The percentage is affected by both numbers and it is clear that Medicare, due to the advanced age of its enrollees, spends more per enrollee on benefits, which lowers the MLR or administrative cost percentage. I also agree that the assertion that Medicare pays for collection of taxes, fraud and abuse protections and building costs is contrary to other sources, and the link provided did not elucidate that assertion. A truer measure of efficiency in administration of Medicare would be the actual cost per enrollee for similar administrative tasks since Medicare does not have all of the required administrative duties that a private company would (marketing, pre-certification, negotiations with providers, claim review, sufficient customer service, sales, etc). Some sources assert that Medicare pays MORE per enrollee for admin, even though they perform fewer administrative tasks.

  3. Chris Fleming Says:

    As originally posted, the first bullet point under the first subhead — “Medicare Has Controlled Costs Better Than Private Insurance” — contained errors. These have now been corrected. The corrected text above specifies that the comparison between Medicare and private insurance refers to common benefits, it refers readers to Table 13 of the CMS source rather than Table 14, and it corrects the percentages, which were slightly erroneous. We apologize for the mistakes.

  4. Devon Herrick Says:

    In her claim that Medicare is more efficient than private coverage, Diane Archer is comparing apples to oranges to make an erroneous conclusion. Archer cites CMS data showing that per-capita Medicare spending grew two percentage points slower than private insurance premiums from 1997 through 2009. Comparing insurance premium costs to Medicare spending completely ignores the percentage of medical care paid for out-of-pocket by the privately insured.

    Increasingly, private insurance is a form of pre-paid medical care. While health costs have increased dramatically, insurance pays a larger percentage of Americans’ medical bills than ever before. In 1960, Americans paid about half of their medical bills out-of-pocket, but the OOP percentage fell to one-quarter by 1980. Today, Americans pay an average of only 11 percent of their medical bills out-of-pocket.

    Some of the increased premium costs during the past two decades represents the decrease in out-of-pocket spending. (See CBO graph.)

    Another reason for the increase in insurance premiums is the proliferation of state health insurance mandates. The CBO report also shows Medicare’s real per capita cost growth since 1975 was higher than that of private insurance.

    Archer repeats an often-used argument that the administrative costs for Medicare are lower than private insurers. They’re not. How can you say Medicare is more efficient than private insurance when it’s private insurers who administrate Medicare? Most Medicare claims are adjudicated by private firms, such as BlueCross BlueShield.

    Medicare proponents ignore many of Medicare’s administrative costs when comparing costs to private insurance. For example, Archer says Medicare’s administrative costs are only two percent of operating expenditures, and adds “Medicare administrative cost figures include the collection of Medicare taxes, fraud and abuse controls, and building costs.” This is inconsistent with reports that fraud rate alone in Medicare is estimated as high as ten percent. When all costs and benefits are considered, private insurance is more efficient than Medicare.

  5. Richard Walker Says:

    And yet, all of Ms. Archer’s analysis to the contrary, where providers compete on price and quality, efficiency improves, and Medicare is a prime example. See, for example, the post by Michael Cannon of the Cato Institute at John Goodman’s health care blog:

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