The latest talking points, delivered by top Democrats and echoed in a town hall question to Republican Senator John McCain, is that government-run health care would be good because Medicare is more efficient than private insurance.
Not so fast, says Fox News analyst James Farrell:
There are three general points to keep in mind:
(1) The Democrats are comparing apples and oranges because Medicare is not subject to many of the costs that private plans are;
(2) If you compare similar services on a per patient basis, private health care companies are more efficientthan the government; and
(3) Medicare is administered largely by private insurance companies – the federal medical programs which are primarily internally administered are even less efficient than private insurance plans (even including all the costs which private companies bear and which the government is exempt from).
Why you cannot compare Medicare with private insurance
First, private insurance plans must pay government taxes and assessments up to 5% of premiums. These add to the "overhead" costs. Medicare is exempt from these costs.
Second , in determining the overhead costs for Medicare, the government excludes the cost of its own employees who enroll recipients, perform outreach and education, handle customer service, and do auditing and other functions. Private plans include these in overhead.
Third , insurance companies have to collect premiums. The IRS does that for Medicare.
Fourth , private companies do underwriting; their premiums have to cover their costs. Medicare deficits have to be covered by taxpayers.
Fifth , the cost of servicing the public debt is not included in Medicare costs—and Part B is 75% subsidized by general revenues, not beneficiary premiums. If a private insurance company borrows money, the interest paid goes to its overhead.
Comparing on a per patient basis
Even including all the advantages that Medicare has over private plans, if you compare administrative costs on a per patientbasis, private plans are far more efficient that Medicare.
For example, the Heritage Foundation found that in the years from 2000 to 2005, Medicare's administrative costs per beneficiary were consistently higher than that for private insurance, ranging from 5 to 48 percent higher, depending on the year.
Year Medicare admin costs per patient Private insurance Govt higher by
2000 $380 $256 48.4%
2001 $386 $281 37.5%
2002 $420 $411 22.7%
2003 $433 $425 5.3%
2004 $521 $425 22.7%
2005 $509 $453 12.3%
Similarly, a study by the Sherlock Company for the Blue Cross and Blue Shield Association in 2009 found that "[i]n comparing only those administrative functions that Medicare performs, private administrative costs are actually lower — $12.51 per member per month, compared to a $13.19 per member per month in traditional Medicare.
So how can Democrats claim that Medicare is more efficient than private insurance? They look at statistics comparing administrative costs as a percentage of total claims paid out (and not on a per beneficiary basis).
Medicare beneficiaries are by definition elderly, disabled, or patients with end-stage renal disease. Private insurance beneficiaries may include a small percentage of people in those categories, but they consist primarily of people are who under age 65 and not disabled.
Naturally, Medicare beneficiaries need, on average, more health care services than those who are privately insured. Yet the bulk of administrative costs are incurred on a fixed program-level or a per-beneficiary basis.
Expressing administrative costs as a percentage of total costs makes Medicare's administrative costs appear lower not because Medicare is necessarily more efficient but merely because its administrative costs are spread over a larger base of actual health care costs.
Comparing to government plans which are not privately administered
The alleged "efficiency" of government-run health care over private industry is similarly debunked when you compare the administrative costs of the health care plans that the government internally administers versus private insurance.
According to a March 2009 analysis done for the Association of Health Insurance Advisors, if you exclude Medicare, the administrative costs as a percentage of total claims for the other government-run health care programs which are internally administered (Medicaid, VA, etc) is 26%. This is more than twice as high as the 12.7% figure for privately paid health care (even without adjustments for taxes and assessments).