News Release

Study: Privatizing Medicare Spikes Overhead Costs

KIP SULLIVAN, [email]
MARK ALMBERG, [email]
Sullivan wrote the new piece “How to Think Clearly about Medicare Administrative Costs: Data Sources and Measurement” in the Journal of Health Politics, Policy and Law [PDF].

Sullivan is a member of the Minnesota chapter of Physicians for a National Health Program; Almberg is PNHP’s communications director. The group released a statement today: “The traditional Medicare program allocates only 1 percent of total spending to overhead compared with 6 percent when the privatized portion of Medicare, known as Medicare Advantage, is included, according to a study in the June 2013 issue of the Journal of Health Politics, Policy and Law.

“The 1 percent figure includes all types of non-medical spending by the Centers for Medicare and Medicaid Services plus other federal agencies, such as the IRS, that support the Medicare program, and is based on data contained in the latest report of the Medicare trustees. The 6 percent figure, on the other hand, is based on data contained in the latest National Health Expenditure Accounts report.

Sullivan said today: “The high administrative costs of the privatized portion of Medicare are no surprise. What’s surprising is that the high administrative costs of the Medicare private insurance companies haven’t provoked a debate about whether spending more money on insurance industry overhead is a good use of scarce tax revenues. … The confusion is due partly to the existence of two government reports and partly to claims by critics of Medicare that the government fails to report all of Medicare’s overhead costs.”

PNHP added: “The article explains the difference between the yardstick used by the trustees and the one used by the NHEA and concludes both are accurate. The trustees’ measure counts as overhead only those administrative expenditures that support the traditional fee-for-service Medicare program, in which approximately three-fourths of all Medicare beneficiaries are enrolled. The NHEA measure takes the trustees’ measure and adds to it the overhead of insurance companies that participate in Medicare Advantage and that sell stand-alone Part D drug coverage.

“The 1 percent figure is the one that should be used to analyze several hotly debated health reform issues, including whether to expand traditional Medicare to all Americans and whether to turn Medicare over to the insurance industry, either by expanding the Medicare Advantage program or by converting Medicare to a voucher program as Rep. Paul Ryan has proposed. … The average overhead of the health insurance industry is approximately 20 percent.”