One of President Obama’s claims during his ABC News health care reform TV special last week was that a public health insurance option would have lower administrative costs than competing private plans. This, he claimed, would allow the public plan to offer lower premiums.
The only way that is going to happen is if the government significantly undercounts the costs it actually incurs in operating its health insurance GSE (government sponsored enterprise). Such book cooking is something that, despite the President’s pledge of a “level playing field,” is a virtual certainty.
To understand this, look no further than Medicare. It signals a dire warning that any government-run GSE’s actual administrative costs will be billions of dollars higher than will ever be reported or factored into its premiums. Despite Medicare’s published reports that it spends only about three percent on administration, that figure leaves out the costs of even more costly and necessary support services provided by other government agencies, such as the GSA and IRS. An apples-to-apples comparison shows Medicare’s administrative costs are actually about 8%, with private insurers running 16.7% (including profits). That’s still a sizable difference, but a highly deceiving one.
Convert those numbers to a cost-per-person basis and you’ll discover that Medicare actually spends substantially more than private insurers for similar management efforts. The average Medicare beneficiary incurs more than twice the medical costs of the average non-Medicare person, so even a low administrative cost percentage translates into a high dollar amount. Thus, according to Heritage Foundation’s Robert Book, Medicare’s administrative costs for 2005 were $509 per beneficiary versus $453 for private insurers.
But even this comparison understates how much a new government public health plan will have to spend, because it will have additional requirements not relevant to Medicare, such as sales costs and the need to earn operating surpluses to build reserves and to provide a financial cushion against unforeseen financial events (unless President Obama’s pledge of no government subsidies and a level playing field is only political rhetoric). That could easily add another 10-12% to premiums. All told, the insurance GSE’s administrative costs will almost certainly be much higher than private insurers’ on both a percentage and cost-per-member basis.
But wait! There’s more. It turns out that Medicare’s administrative costs are actually too low. Medicare’s vaunted “efficiency” has left it paying a raft of fraudulent, inappropriate, erroneous, unnecessary, and excessive claims —something private insurers have long had the financial controls to prevent. GAO has cited Medicare for “virtually nonexistent” financial controls and has listed it “at high risk for fraud, waste, abuse, and mismanagement” every year since 1990. The GAO has estimate Medicare’s overpayments at 10%, while the Insurance Information Institute says it’s14%.
The idea that a government-run health insurance plan will be more efficient than private insurers is as nonsensical as it sounds, not that the government will ever actually report the numbers to confirm it. America’s private insurance is hardly a paragon of cost-control effectiveness, but that can be remedied by other means (see my free Situation Analysis).
President Obama, you really need to improve the quality of factoids you’re getting from your advisors.