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07/06/2009

A bit more on administrative costs

After rereading my earlier post, it occurred to me that it might be useful to lay out the logic of the argument. What we observe is that private insurers spend a much larger fraction of their receipts on administration than Medicare does. Heritage asserts that this is because administration costs are proportional to the number of beneficiaries, not spending, so Medicare has low percentage costs because its elderly beneficiaries are so much more expensive than average.

So how would you test this assertion? I can think of two obvious approaches: (1) Compare the administrative costs of different systems serving similar populations (2) Compare the administrative costs of similar systems serving different populations.

And we can do both of these things.

Medicare Advantage plans are private insurance serving the elderly population. So this is a case of different systems serving similar populations. (Medicare Advantage clients are probably somewhat healthier than the average senior, but the average cost of their health care is still very high.) If costs depended mainly on number of people, these plans should have low administrative costs as a percentage of spending. They don’t — their numbers look like those of private insurance in general.

Meanwhile, other countries have Medicare-like systems that cover low-cost as well as high-cost individuals. Canada’s system is actually called Medicare. So this is a similar system covering a different, lower-cost population. If costs depended on the number of people, Canada should have high administrative costs; in fact, its numbers look like those of American Medicare (actually even better.)

This seems like fairly overwhelming evidence that single-payer systems do, in fact, have low administrative costs compared with private insurers. To argue that this doesn’t clinch the case, you have to resort to pretty desperate expedients; for example, one of my commenters says that the CBO study of administrative costs can’t be trusted, because Democrats control Congress. (The CBO bends over backwards to be nonpartisan — and anyway, the study was done in 2006, when Republicans were still in control.)

I know that some people find that answer unacceptable: they know that the private sector is always more efficient than the government, and no amount of evidence will shake their faith. But that’s what the evidence shows.


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