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POLICY: Why Medicare is More Efficient Than Private Insurers By Maggie Mahar

I found Eric’s Novack’s June 13 post, “The Three Percent Myth,” provocative, though I’m afraid I can’t agree. Medicare is, in fact, more efficient than private insurers.

In his comment on the post, Rick underlines a key difference: In contrast to private insurers Medicare doesn’t have to spend millions on marketing, advertising, and Washington lobbyists. 
On top of that, private insurers must generate profits for their shareholders. In 2003, the HMO industry as a whole reported total earnings of $5.5 billion—up 83 percent from $3 million in 2002 , according to Weiss Ratings, a firm that assesses the financial strength of banks and insurance companies.

In 2004 the industry’s profits jumped another 10.7 percent to $11.4 billion,  and in the summer of 2005 industry leader WellPoint told investors that it expected its profits to continue to levitate by an average of 15 percent a year for the next five years. That same week Wellpoint announced its plans to boost average premiums by 16.6 percent in 2006.

In my 2006 book, Money-Driven Medicine: The Real Reason Health Care Costs So Much, I quote Weiss vice-president Melissa Gannon, who is remarkably candid about
the impact the insurance industry’s fat profit margins have on society:

“While this bodes well for the industry’s overall health, rising premiums have forced many consumers to select more restrictive health plans or opt not to purchase insurance entirely.”

But it’s not just the cost of marketing, advertising, lobbying and providing profits for investors  that makes a private insurer’s overhead so much higher. Insurers also have higher administrative costs because they are constantly enrolling and disenrolling customers as people change plans. (The average turnover in an employer-sponsored insurance plan is 20% to 25% a year. By contrast, Medicare patients stay put. Even if they could switch, most prefer Medicare’s coverage to the coverage they had under a private insurer.)

In Money-Driven Medicine, I quote former Medicare chief Bruce Vladeck who points out that:

“. . . even very efficient insurers must spend roughly 5 percent of their premiums just to enroll and disenroll customers  . . . . This is why, when I was in Washington, some of us talked about giving people age 55 to 65 the opportunity to voluntarily enroll in Medicare –letting them pay premiums to the government in exchange for full Medicare coverage . . Donna Shalala, who was Secretary of Health and Human Services at the time, said to me, ‘You really want to compete with the insurance companies, don’t you?’

And I said, ‘You bet,” Simply because our costs were so much lower, I knew I could beat them.’”

In his post, Eric also argues that Medicare is less efficient because its oversight is lax, and thus millions are lost to fraud. But if you look at cases where healthcare providers like National Medical Enterprises cheat insurers, you’ll find that they are just as likely to bilk private insurers.

If anything, private insurers may be more laid-back because they can “pass the costs associated with fraud on along their customers in the form of higher premiums,” notes The Wall Street Journal, quoting Louis Parisi, director of  the New Jersey Insurance department fraud division. (Medicare has a harder time finding funds to cover fraud.)

In the same story, the Journal quotes the medical director of an NME hospital saying that when he tried to inform the Prudential Insurance Company of possible fraud, company executives merely laughed, saying that for them, large bills meant large premiums and big bonuses.

Eric goes on to suggest that Medicare’s voluminous rules create “hidden overhead” for healthcare providers who must spend hours deciphering the coding. But Jonathan is right in pointing out that private insurers also create “hidden overhead”: for doctors who must deal with the 12 different sets of forms form 12 different insurers—all designed to make it difficult for the doctor to be reimbursed.

While interviewing doctors for my book, I found that the vast majority found Medicare’s paper-work far simpler. They also liked the fact that Medicare does not try to micro-manage their practice by forcing them to call and ask permission to keep a patient in the hospital an extra two days, or to perform a certain procedure. Medicare simply publishes a list of what it will and won’t cover—and that’s that. When dealing with private insurers, by contrast, physicians spend hours on the phone.

What’s interesting is that, in the course of interviewing doctors for Money-Driven Medicine, I found that the majority preferred Medicare—even when it paid less—because it was so much less hassle. As The New York Times recently pointed out, private insurers make a game out of delaying reimbursement,  and designing the forms so that the doctor leaves out one detail, he or she won’t be paid.

Finally, I agree with John when he points out in his comment that even if we switched to Medicare-for-All ( a bill now in Congress that would let people 55-65 and those under 20, voluntarily switch to Medicare, paying Medicare rather than a private insurer for coverage) —and even if Bruce Vladeck is right that because Medicare’s administrative, marketing, advertising and lobbying costs are so much lower, and because it doesn’t have to generate profits, Medicare could provide more coverage for less—this still doesn’t solve the larger problem of health care inflation of 8% a year. After a couple of years, inflation would exceed the lower administrative costs—then what?

Ideally, if more people were on Medicare, Medicare would begin to exercise its clout as the nation’s largest payer—the way other governments do—negotiating with drugmakers and device-makers for lower prices. (The high cost of drugs and devices is a major reason why our hospital bills are so high—drugs and devices account for 15% of the $2 trillion-plus  that we spend on healthcare each year. Private insurers are less likely to bargain because they can always pass the cost along to their customers—and they do just that.. In just the last five years the cost of an average insurance premium has risen 75%.)

Of course drugmakers and device-makers argue that Americans need to pay twice what patients in other countries pay for their products in order to cover the high  cost of research.

This is simply not true. Analysis by Families USA, a non-profit consumer group, shows that drugmakers spend roughly twice as much on advertising, marketing and administration as they spend on research.

Moreover, from 1995 to 2002, drugmakers took top prize as the nation’s most profitable industry, showing profit margins of 13 percent to 18.6 percent of sales each and every year. (In 2004, they fell to third place, but still posted profits equaling 16 percent of sales.) Meanwhile, in recent years, device makers have boasting profits margins as high as 20%.

There is no reason for drug makers and device-maker to make so much more money than other industries—especially when those industries are going broke trying to cover the high cost of healthcare for their employees.  Investors needed to be rewarded for taking a risk, but there’s just not that much risk when you invest in Pfizer or Johnson and Johnson.

Even on Wall Street, health care analysts say, that that if you cut  profit margins in these industries—and cut back on excessive  marketing, advertising and lobbying— and  drug-makers and device-makers could roll back prices without making a dent in their research budgets.

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Pam Burns
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Pam Burns

Maggie – I work in the executive offices at the Inova Health System in Northern Virginia. Dr. Cleve Francis, President of our Medical Affairs Council, requested that I contact you to see if you were available for speaking engagements. I can be reached at the e-mail above or at 703-289-2023. This is probably not the right venue to reach you – just could not find another way.

Tom Leith
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Tom Leith

> It would be surprising if the most ardent supporter > of evidence based medicine would ever advocate a > randomized trial for an intervention in which an > observational study showed remarkable efficacy in > preventing a near death situation. He wouldn’t say “stop doing that because it hasn’t been scientifically proved” or “do whatever the hell you want to because no treatment for that has been scientifically proved” or “don’t do anything for that patient because no treatment for that has been scientifically proved”. But he might nevertheless advocate a randomized trial. Sometimes the obvious beneficial effects are… Read more »

Gregory D. Pawelski
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In regards to evidence-based medicine, it is a trial and error process to see what might appear to be correct or improved. It is the mindset of rewarding academic achievement and publication over all else. There is this aurora that organizations, government agencies, scientists, researcher and even practitioners work together, sharing information for the benefit of patients. Each group has its own priorities and its own agenda. Moreover, the image of cooperation between these different groups only gives the illusion that reform isn’t needed. The present system exists to serve academic achievement and publication, but not to serve the best… Read more »

Maggie Mahar
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Maggie Mahar

Brian– Thanks for your comment.I agree with much of what you say about the need for evidence-based medicne, the need for healthcare IT, and a move away from fee-for service medicine in order to control costs. But there is no reason why this could not happen under Medicare. To call the idea of universal Medicare “laughable” from the point of view of anyone with “real world experience” is to ignore the “real world” experience” of people like Bruce Vladeck (former head of Medicare in the 1990s), Dr. George Lundberg (former JAMA edtior-in-chief and now editor-in-chief of Medscape, Lundberg believes that… Read more »

Brian Klepper
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Brian Klepper

Maggie, While I admire your enthusiasm, I doubt anybody who has actually worked with Medicare and commercial health plans actually believes that Medicare is more efficient. This is true, even now, when few health plans do any actual management of care processes. For a real world view, I’d suggest you first visit the DC lobbying arms of major health care vendors, like Medtronic, Pfizer or GE, where armies of their representatives are allowed to both obtain patents and then set the price of their products through Medicare. Clinicians in the field, knowing that they can bill Medicare for a very… Read more »

Barry Carol
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Barry Carol

Rick, While I appreciate the high cost of treating chronic disease, the roughly 50% of healthcare that is financed by taxpayers (federal and state) is spent overwhelmingly on the elderly. Certainly virtually all of Medicare dollars (except for some dialysis patients perhaps) is spent on people over 65 while more than 70% of Medicaid is spent on the elderly and disabled with nursing home costs accounting for a large portion of that. For Medicare, the sickest 5% of the population accounts for about 50% of the cost, and, until this year, very little of that was for drugs which account… Read more »

Rick
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Rick

Barry, the thing you’re missing is that age has nothing to do with what you cost the system. It’s how sick you are. You, as I once did, believed that as you get older, the cost of treating you goes up in a steady slope. In fact, the sickest and most costly folks to treat are not in their 80s and 90s (though some of them are). The sickest and most costly folks are those people in their 50s and 60s with chronic conditions like diabetes, CHF, COPD and whatnot. Most of these folks die, however, before they reach their… Read more »

Maggie Mahar
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Maggie Mahar

Eric– First, I agree wholeheartedly that if “Medicare for All” legislation were passed and made it possible for 55-64 year olds to voluntarily sign up for Medicare, we would then have a real basis for a solid comparison of Medicare to private-sector healthcare. Secondly, with regard to the number of veterans who need healthcare, what you’re “missing” is Vietnam and Korea– 2.7 million Vietnam veterans and 3.9 million veterans from the Korean War. Those two groups replace the WWII veterans that have died. Moreover, they’re aging, which means they need more and more medical care. in 1986, the average Vietnam… Read more »

Barry Carol
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Barry Carol

Maggie, I have two questions. First, with respect to VA Healthcare, my understanding is that World War II vets are dying off at the rate of 1,000 per day or thereabouts. Not that many years ago, there were 13 million World War II vets, and now we are down below 4 million, I believe. Even with casualties in Iraq and Afghanistan, it seems that it should have enough capacity to treat its remaining eligible population without drastically increased funding. What am I missing? Second, regarding the enormous administrative savings we could reap from a single payer Medicare for all system,… Read more »

Maggie Mahar
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Maggie Mahar

Eric– You assert that the private sector always does a better job than govt, and “that government interference in healthcare over the past 40 years” is responsible for our healthcare crisis. But you don’t offer any evidence I’m afraid you’re letting your ideology get in the way of the facts. The fact is that the government-run U.S. Veterans healthcare system is now considered signficantly more efficient than private-sector healthcare according to The New England Journal of Medicine (“Effect of the Transformation of the Veterans Affaris Health Care System on the Quality of Care, May 29, 2003)The Annals of Internal Medicine… Read more »

James
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James

Competition for health care plan yeilds lower costs. A great example is a healthia.com where you can get different companies offering different health savings account plans to fit your needs.

james weber
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james weber

Competition lower costs assumes that you have a free market, with some degree of transparancy. The unpleasant reality is that we have neither today. If you are injured in an accident, will the paramedics take you to any hospital? Do you get to price shop for the services? (In fact some time actually try to find out what ANYTHING actually costs in a hospital before you get the bill). Even without the same Hospital Group, at two hospital only 6 miles apart, the difference between the charges for exactly the same service can vary by as much as a factor… Read more »

Eric Novack
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Maggie- while giving a long explanation as to why you believe medicare is much more efficient than the private sector, you fail to comment on the central theme of my post: saying that medicare’s overhead is 3% when compared to private insurers is, in fact, a myth. Also in my post, I say that in spite of all the inaccuracies inherent in the ‘3% myth’, medicare might have lower overhead than private insurers. Where you and I differ is that you believe that the government can better plan, manage, anticipate, and adapt than I can. The role of government ought… Read more »