POLICY: Medicare and admin costs, again.

In today’s post I risk upsetting The Veteran even more, by featuring a new comment from Joe Crea, a doc who’s run off to academia and so doesn’t need to care what anyone thinks of him! Joe is peeved at my comment in Friday’s post that:

Hence I’m told again and again that government healthcare would be inefficient (as I heard from a Democrat I met tonight), despite the fact that Medicare’s admin costs are 3% while private insurance’s costs are 8-15%. You’d think that the onus would be on the defenders of the staus quo to show why a change would be worse.

I later went on to say:

But it is a long way from being a government dictated-system like that of Canada or the UK. Given the record of American private health care, that may be a bad thing…

Joe thinks that there is a flaw in my logic:

One of my pet peeves is the presenting of “the fact that Medicare’s admin costs are 3%” without appropriate qualification or explanation. I have attached such a succinct qualification here, courtesy of Healthleaders.

“Medicare overhead has the appearance of a gold standard: 2.1 percent overhead compared to a commercial average of 13 percent and a “best practices” company commercial average in the range of 5-8 percent. Medicare clearly has economies of scale, but its overhead figure is a bit misleading. The average per-member-per-month premium for commercial HMOs in now in the $200-$250 range, while the typical PMPM for Medicare is in the $600 range. If the Medicare PMPM were $200 rather than $600, then it would have an administrative overhead of 6.3 percent rather than 2.1 percent-still very good, but not out of the range of the very lowest-cost private insurers.

“For that relatively low overhead, Medicare offers only a single product (little choice except in urban areas where Medicare+Choice is available), provides limited medical management (and that seemingly by lawsuit), conducts provider contracting by fiat (negotiations take place in Congress), and has almost no marketing costs (no competitors).”

The other two things that are not mentioned are the hiding of the debt service to other areas of the government, and the shifting of administrative costs to providers by way of mandates and voluminous paperwork.

Now the article Joe references does take a look at the “best practice” plans with the lowest medical loss ratios. They tend to be big monopoly Blues in rural states, or staff/group model HMOs which practice shoulder to shoulder restraint (or push medical management doen to the physician level). But with the exception of Kaiser they are not the core private health insurers that dominate the national market. Those guys not only have very high admin costs (or in the jargon “low medical loss ratios”) but are making them higher. Following United Health Group raising its profit forecasts CBS Marketwatch reports that Health insurers (are) getting bigger cut of medical dollars:

From 2000 to 2003, medical loss ratios for the 17 companies dropped from an average of 84.8 percent four years ago to 81.5 percent last year. So while medical expenses have increased, the proportion of dollars devoted to them has dropped.

So for the bigger players getting bigger, more money is sticking with them, so adminstrative costs are going up not down. And, duh, that’s the way the system is designed. Everyone at Anthem, Pacificare, Wellpoint, Aetna, etc, etc is incented to try to reduce their medical loss ratio.

Now that might not be such a bad thing if they were truly managing care, auditing for quality, and increasing the amount they’re spending on administrative functions in order to reduce the amount being spent on medical care. But if you think that’s what they’ve been doing for the last 5 years, you really haven’t been paying attention. I talked to a VP of HR at a very, very big telecoms company last week, and she disputed my notion that the health plan’s clients (like her) haven’t been holding their feet to the fire. She claimed that they’d done huge amounts to try reduce their costs. I said, “Tell me another industry that supplies you from which you’ve accepted 15% annual increases in costs for no perceived additional benefits for the last 5 years in a row?” The HR VP went very quiet.

Now maybe Joe is right and we should be calculating Medicare’s admin charge on its higher cost per case. But even at 6% it looks pretty good compared to all but monopoly Blues plans. In other words Medicare and those plans all share a bunch of characteristics leading to their low overhead (from the same Healthleaders article):

  • Economies of scale in a single state (Blue Cross Blue Shield of Alabama and Blue Cross Blue Shield of Tennessee)
  • A narrow geographic focus (Capital Group, Fallon, Kaiser)
  • Off-loading medical management expenses to capitated medical groups or IPAs (Kaiser, Fallon, Capital Group)
  • Market leader position (Fallon, Capital Group, Blues of Alabama and Blues of Tennessee), lowering marketing costs
  • Comparatively narrow product offering (Fallon, Capital Group, Kaiser, BCBS of Alabama)

I’d actually dispute Joe’s point about Medicare off-loading admin work to providers. Given the lack of UR in the Medicare system I think it off-loads less admin onto providers than private insurers–certainly it doesn’t create more. And because it’s so big and only needs things done one way, it’s a lot less work for providers than dealing with 5-10 plans of the same cumulative size who all want things done just their way (the thing that HIPAA simplification was supposed to do). But even if he’s right, Medicare’s adminstrative cost is as low as it is because of all the things he finds so terrible such as being able to set its own provider rates, only offering a limited “product” line up, limited medical management, etc. The problem is that private health plans are “charging” through the nose to deliver all those things and yet it just costs more and more with no apparent gains. And those “charges” are increasing (or the MLRs are going down).

So let me ask one more time. Why is the onus on the government program to prove that it is more administratively efficient than private plans when it already is, and they are getting less efficient?

Coda: I don’t want you to think that I’m a huge fan of the way Medicare works. I think it needs drastic changes, including upping its oversight of the system and changing the way it pays providers to a performance-based reimbursement system. And I said as much in the very first post of THCB. But given its huge clout and the government’s ability to change the law, I think a reformed Medicare could do that in a way that will improve the care delivered at a lower cost, bloody battle though that’ll be. The private plans’ record of the the last 5 years shows no sign that they could.

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