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Is Government Provision the Answer? (Part I)



A small but vocal group on the left believes that single-payer national health insurance is the answer to the problem of escalating healthcare costs. As I wrote in my recent book, Priceless: Curing the Healthcare Crisis, some would like to copy Canada’s healthcare system. Others would like to enroll everyone in Medicare. The Physicians for a National Health Program, for example, claims that Medicare has lower administrative costs than private insurance and is able to use its monopsony (single-buyer) power to suppress provider fees. The group favors “Medicare for all” and endorses a bill to do just that by Representative John Conyers.

Columnist Paul Krugman, writing in The New York Times, also argues this way. Krugman, along with others, touts the slower growth rate in the Canadian healthcare system (also called Medicare). In separate editorials, both Krugman1 and former Secretary of Labor Robert Reich2 have joined the call for Medicare for everyone. What’s wrong with this idea?

Is Medicare Really Public Insurance?

Let’s begin with a fundamental point that almost everyone tends to ignore. Medicare is not actually managed by the federal government. In most places, Medicare is managed by private contractors, including such entities as Cigna and BlueCross. Further, there is nothing particularly special about the way Medicare pays providers. Private insurers tend to use the same billing codes, and their payment rates are often pegged as a percentage of Medicare rates.

Does Medicare Have Lower Administrative Costs?

What about the claim that Medicare’s administrative costs are only 2 percent, compared to 10 percent to 15 percent for private insurers? The problem with this comparison is that it includes the cost of marketing and selling insurance as well as the cost of collecting premiums on the private side but ignores the cost of collecting taxes on the public side. It also ignores the substantial administrative cost that Medicare shifts to the providers of care.

Studies by Milliman3 and others4 show that when all costs are included, Medicare costs more, not less, to administer. Further, raw numbers show that, using Medicare’s own accounting, its administrative expenses per enrollee are higher than private insurance. They are lower only when expressed as a percentage—but that may be because the average medical expense for a senior is so much higher than the expense for nonseniors. Also, an unpublished, ongoing study by Milliman finds that seniors on Medicare use twice the health resources as seniors who are still on private insurance, everything equal. Ironically, many observers think Medicare spends too little on administration, which is one reason why one out of every ten dollars of Medicare spending is lost to fraud. Private insurers devote more resources to fraud prevention and find it profitable to do so.

Are Medicare Costs Growing More Slowly?

What about the claim that Medicare’s cost per enrollee is growing more slowly? The Congressional Budget Office has calculated spending in excess of GDP growth for the public and private enrollee populations. As the figure shows, Medicare has been growing faster than the private sector. For that matter, Medicaid has also been growing faster.

As the CBO acknowledges, its comparison is far from perfect. The “other” category includes the uninsured as well as out-of-pocket spending by Medicare enrollees. Still, there is no reason to believe that overall spending would have been lower if the entire country had been in Medicare for the past 35 years.

Looking forward, the CBO believes that Medicare will grow more slowly than the private sector. It will grow a lot more slowly if the provisions of the Affordable Care Act are implemented without any changes. Under the act, Medicare will suppress provider fees so much that real per capita Medicare spending will grow no faster than real per capita GDP. Yet, the rest of the healthcare system will be growing at twice that rate. As the Office of the Actuary has explained, this means greatly reduced access to care for the elderly and the disabled. A two-tiered system will likely emerge before this decade is out. Because of the political ramifications of all this, most Washington insiders believe the Medicare spending cuts will never materialize.

Notes:

1. Paul Krugman, “Messing with Medicare,” New York Times, July 24, 2011. 

2. Robert Reich, “Why Medicare Is the Solution—Not the Problem,”The Healthcare­ Blog, July 22, 2011.

3. Merrill Matthews, “Medicare’s Hidden Administrative Costs: A Comparison of Medicare and the Private Sector,” (Based in part on a technical paper by Mark Litow of Milliman, Inc.), Council for Affordable Health Insurance, January 10, 2006.

4. Benjamin Zycher, “Comparing Public and Private Health Insurance: Would a Single- Payer System Save Enough to Cover the Uninsured?”Manhattan Institute for Policy Research, Medical Progress Report No. 5, October 2007.

[Cross-posted at Psychology Today]

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