Medicare administrative costs

A health policy factoid is that the administrative costs of Medicare are lower than are those for private insurance. Austin Frakt and Tyler Cowen were discussing a Yuval Levin piece that argued that was partly due to Medicare “free riding” on other government infrastructures by not paying for them, and that the real administrative costs were therefore higher. This claim appears to be incorrect, because Medicare does explicitly pay other agencies (Treasury, SSA, CMS, HHS, etc.) for administrative work related to Medicare.

One of Austin’s readers flagged table III.B1 on p. 51 of the Medicare trustees report that shows these payments. Here is the relevant portion of the table (the entire table at the link).

Update: Via email with Austin and Paul Van de Water, Paul points out Part B admin expenses are also paid as discussed on pages 93-94.

Part D admin expenses are discussed on pages 118-19.

Paul Van de Water addresses the issue of relative administrative costs of health insurance in this National Association of Social Insurance (NASI) report (see pp. 45-47) and provides the following estimated delta on administrative costs using national health care accounts: Medicare 5.0%; Medicaid 7.7%; private insurance 12.2% (with great variation by employer size). I will do a bit more reading on this…it seems as though the administrative expenses across types of insurance should be knowable in a fairly non controversial manner. If we are thinking of issues that will need to be gotten straight to move toward a competitive bidding approach in Medicare with level competition, this is one issue. Another are the exit rights from private options back to traditional Medicare, and the hospice issue that exists with current Medicare Advantage plans.

About Don Taylor
Professor of Public Policy (with appointments in Business, Nursing, Community and Family Medicine, and the Duke Clinical Research Institute), and Chair of the Academic Council at Duke University . I am one of the founding faculty of the Margolis Center for Health Policy. My research focuses on improving care for persons who are dying, and I am co-PI of a CMMI award in Community Based Palliative Care. I teach both undergrads and grad students at Duke. On twitter @donaldhtaylorjr

3 Responses to Medicare administrative costs

  1. Brad F says:

    Trust fund administrative fee is 3% (in the report). While its difficult to discern same rate on the commercial side–opaqueness and MLR generalities–is it possible that even with this assessment, feds are underpaying relative to service they are receiving?

    This is a difft question than paying at all–we now know thats not the issue–but rather is their parity?


    • Don Taylor says:

      of course, but efficiencies of piggy backing onto existing systems is part of the point of having a govt insurance program. If we are moving toward someday having a “fair competition” between private Medicare and FFS, this is one area that will be a focus. Another will be what are the “exit rights” going forward in private Medicare. Can people bail to FFS Medicare when they get sick as they do now (not talking about the hospice issue, but more generally).

      • Brad F says:

        I did not make the obvious point of built in economies of scale–an advantage–but the delta is still important to ascertain if the systems are to run in parallel. Given margins of MA profitability <5%, teasing out what FFS and MA deliver and at what price, eg, combating fraud and abuse, will make these facts more important when the "exit rights" question must be answered.

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