Thursday, October 04, 2012

Medicare's Administrative Costs Are Higher Not Lower Than Private Insurance

The Heritage Foundation has already dissected the long time chestnut that administrative costs are higher in private insurance than Medicare.  The answer you get as to higher or lower depends on how you calculate it.  One way is to look at the per patient cost.  Measured that way, administrative costs for Medicare are far higher than private insurance.  Another way is to measure administrative costs as a percentage of total expenditures.  By that measure Medicare administrative costs are lower.

As the Heritage author notes, when you use the latter measure you are comparing apples and oranges and this is the reason why.

Medicare only insures people who are elderly or have been determined to be long term disabled.  Thus, these are people who are significantly likely to be more sick and have more serious illnesses than the public at large.

So let me give you an example of how this impacts measuring administrative costs.  I used to work for CIGNA, a company that processes a lot of medical claims.  They pay claims reps to process these claims and the claims rep is expected to process X amount of claims per hour.  Here is the thing.  It costs the company exactly the same amount of money to process a claim for $100.00 as to process a claim for $1000.00  Very complex medical claims may take extra time.

There is almost no insurance available for persons over 65 that is not a Medicare supplement.  That is, you have to be a Medicare participant to get the insurance.  Thus it is simply impossible to make an apples to apples comparison of Medicare administrative costs vs. Private insurance.  On a per patient basis Medicare administrative costs are higher than Private Insurance, but that is also not a fair comparison.

No comments: