Ilovebenefits’s Blog

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Are Medicare Administrative Costs Really Lower?

Editor’s note: Read this article to learn about the topic of administrative costs of Medicare versus private insurance.


Right now, the Medicare average is 3% and private insurance averages 12%. But Tom Bevan points out, some of that difference is an apples and oranges comparison:

But here’s the catch: because Medicare is devoted to serving a population that is elderly, and therefore in need of greater levels of medical care, it generates significantly higher expenditures than private insurance plans, thus making administrative costs smaller as a percentage of total costs. This creates the appearance that Medicare is a model of administrative efficiency. What Jon Alter sees as a “miracle” is really just a statistical sleight of hand.

Furthermore, Book notes that private insurers have a number of additional expenditures which fall into the category of “administrative costs” (like state health insurance premium taxes of 2-4%, marketing costs, etc) that Medicare does not have, further inflating the apparent differences in cost.

However, when you make an apples to apples comparison, Medicare comes out much worse than private insurance:

But, as you might expect, when you compare administrative costs on a per-person basis, Medicare is dramatically less efficient than private insurance plans. As you can see here, between 2001-2005, Medicare’s administrative costs on a per-person basis were 24.8% higher, on average, than private insurers.

So, contrary to claims of Alter, Krugman, and President Obama, moving tens of millions of Americans into a government run health care option won’t generate any costs savings through lower administrative costs. Just the opposite.


August 11, 2009 - Posted by | Federal Government, healthcare | , , ,


  1. “You ask how a private company can compete against the government? . . . I think private insurance should be able to compete. If you think about it, UPS and Fedex are doing just fine, it’s the Post Office that’s always having problems.” So, we assure that its bloated administrative costs continue by preventing companies from providing within city mail delivery. That’s the public option. The political class assures that competition does not drive the Post Office out of business.

    Comment by Douglas Foss | August 11, 2009 | Reply

  2. I overlooked something quite important before commenting. After looking at the data, it occurred to me that Heritage’s comparison is itself misleading. True, older beneficiaries require more procedures and therefore consume proportionately more of the health care dollar. However, administrative costs might have more to do with processing claims on a per procedure basis, as opposed to a per beneficiary basis. Perhaps there are better indicia of relative efficiency; for example, we could compare administrative costs per procedure or per doctor visit.

    To this end, I would be interested in a comparison of Medicaid administrative costs to private insurance costs. The population of Medicaid beneficiaries might be more similar to private insurance beneficiaries than Medicare beneficiaries are to private insurance beneficiaries. There often is an overtone of advocacy in these presentations of data, and a more thorough discussion (in plain terms) of strengths and weaknesses of statistical comparisons would be quite useful and would tend to reduce rhetoric and simplify decision making.

    Comment by Douglas Foss | August 12, 2009 | Reply

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