Last year we, and many others, drew attention to the chaotic and costly roll out of the Affordable Care Act’s (ACA) exchanges. The chaos is mostly over (unless King prevails over Burwell), but the costs will linger on. The roughly $6 billion in exchange start-up costs pale in comparison to the ongoing insurance overhead that the ACA has added to our health care system — more than a quarter of a trillion dollars through 2022.

Bloated Administrative Costs

We calculated these new overhead costs from the official National Health Expenditure Projections for 2012-2022 released by the Centers for Medicare and Medicaid Services (CMS)’ Office of the Actuary in July 2014. The projections included separate tables projecting costs with, and without, the effects of the ACA, allowing calculation of the incremental insurance overhead costs directly attributable to the reform.

We use the July 2014 release of projected figures because the projections released subsequently no longer included any “without ACA” figures. Although the latest projections forecast slightly lower health care cost growth in the coming decade—5.7 percent annually vs. 5.8 percent in the earlier release—this change would only minimally affect our estimates.

The table below shows the CMS actuaries’ estimates for private insurance overhead and government program administration with and without the ACA. It also shows our estimates of the administrative cost increases attributable to the ACA, and the administrative cost per newly-insured person and as percent of federal government expenditures under the ACA (calculated using the CBO’s estimates of coverage and cost).

Between 2014 and 2022, CMS projects $2.757 trillion in spending for private insurance overhead and administering government health programs (mostly Medicare and Medicaid), including $273.6 billion in new administrative costs attributable to the ACA. Nearly two-thirds of this new overhead—$172.2 billion—will go for increased private insurance overhead (data not shown in table).

Most of this soaring private insurance overhead is attributable to rising enrollment in private plans which carry high costs for administration and profits. The rest reflects the costs of running the exchanges, which serve as brokers for the new private coverage and will be funded (after initial startup costs) by surcharges on exchange plans’ premiums.

Government programs—primarily Medicaid—account for the remaining $101.4 billion increase in overhead. But even the added dollars to administer Medicaid will flow mostly to private Medicaid HMOs, which will account for 59 percent of total Medicaid administrative costs in 2022. (The subcontracting of Medicaid coverage to private HMOs has nearly doubled Medicaid’s administrative overhead, which has risen from 5.1 percent of total Medicaid expenditures in 1980 to 9.2 percent this year).

The $273.6 billion in added insurance overhead under the ACA averages out to $1,375 per newly insured person per year, or 22.5 percent of the total federal government expenditures for the program.

Better Options

Insuring 25 million additional Americans, as the CBO projects the ACA will do, is surely worthwhile. But the administrative cost of doing so seems awfully steep, particularly when much cheaper alternatives are available.

Traditional Medicare runs for 2 percent overhead, somewhat higher than insurance overhead in universal single payer systems like Taiwan’s or Canada’s. Yet traditional Medicare is a bargain compared to the ACA strategy of filtering most of the new dollars through private insurers and private HMOs that subcontract for much of the new Medicaid coverage. Indeed, dropping the overhead figure from 22.5 percent to traditional Medicare’s 2 percent would save $249.3 billion by 2022.

The ACA isn’t the first time we’ve seen bloated administrative costs from a federal program that subcontracts for coverage through private insurers. Medicare Advantage plans’ overhead averaged 13.7 percent in 2011, about $1,355 per enrollee. But rather than learn from that mistake, both Democrats and Republicans seem intent on tossing more federal dollars to private insurers. Indeed, the House Republican’s initial budget proposal would have voucherized Medicare, eventually diverting almost the entire Medicare budget to private insurers (the measure passed by the House on April 30 dropped the “premium support” voucher scheme).

In contrast, a universal single payer system would pare down both insurers’ and providers’ overhead, yielding huge administrative savings — $375 billion in 2012 according to one recent estimate.

In health care, public insurance gives much more bang for each buck.

Table 1

ACA-Admin-Cost-Table

a. Source: National Health Expenditure Projections 2012-2022 Tables 2A and 2B (version archived on July 23, 2014)
b. Authors calculation from previous 2 columns
c. Calculation of costs per newly insured person and new overhead as percent of new federal costs are based on estimates of coverage and costs under the ACA from: Congressional Budget Office. Insurance coverage provisions of the Affordable Care Act – CBOs March, 2015 baseline. Data for 2014 are from the CBO’s April, 2014 Baseline.