Medicare vs. Non-Government (Private) Health Insurance
Comparison of Administrative Costs


To help determine whether or not the federal government’s Medicare program is more cost efficient than non-government (private) health insurance, we’ve compared the administrative costs for both according to five different studies.  The results are presented in summary chart form (I. below) and graph form (II. below) with links to the full studies themselves.

Some organizations, including the Heritage Foundation, argue that calculating administrative costs as a % of total expenses misleads people into thinking that Medicare is more efficient than non-government (private) health insurance. They believe that comparing the administrative costs per beneficiary (III. below) more accurately reflects the greater efficiency of private health insurance. Others point out that Medicare treats the elderly exclusively, and since they typically have more health problems than the general population, comparing costs per beneficiary is misleading and therefore percentage comparisons are more reliable.

An international comparison of the US and five other industrialized countries (IV. below) shows that the US spends at least twice as much administrating its health care system as countries with universal health coverage such as Germany and Canada.

Administrative costs, according to the Congressional Budget Office (V. below), "refer to any expenses insurers incur that are not payments for health care services, including the profits retained by private insurers and the taxes paid on those profits."

I. Summary Chart of Administrative Costs: Medicare vs. Non-Government (Private) Health Insurance

Administrative costs as % of total expenses
Source of Information (in alphabetical order)
by Year Studied
Medicare Non-Government Health Insurance
1. American Medical Association, 2005   3.1% 14.1%
2. California Medical Association, 2003-2004
a. Blue Cross of California (for-profit) 20.1%
b. PacifiCare of California (for-profit) 16.2%
c. Aetna Health Care of California (for-profit) 19.1%
d. Blue Shield of California (non-profit) 18.5%
e. Kaiser Foundation Health Plan (non-profit) 7.2%
3. Council for Affordable Health Insurance, 2006 5.2% 16.7%
4. Heritage Foundation, 2000 6.0% 11.4%
Heritage Foundation, 2005 5.8% 13.2%
5. New England Journal of Medicine, 2003 3.6% 11.7%
 Total Average 4.7% 14.8%


II. Graphs of Administrative Costs vs. Health Care Costs for Medicare & Private Health Insurance
1. American Medical Association
Administrative Costs
The total for administrative costs and health care costs shown in each bar graph below equals 100%
Health Care Costs
2005 Medicare
3.1% 96.9%
Private Health Insurance
14.1% 85.9%
American Medical Association, "Administrative Costs of Health Care Coverage," www.ama-assn.org (Nov. 1, 2010)

2. California Medical Association
Administrative Costs
The total for administrative costs and health care costs shown in each bar graph below equals 100%
Health Care Costs
2003-2004 Blue Cross of California (For-Profit)
20.1% 79.9%
PacifiCare of California (For-Profit)
16.2% 83.8%
Aetna Health Care of California (For-Profit)
19.1% 80.9%
Blue Shield of California (Non-Profit)
18.5% 81.5%
Kaiser Foundation Health Plan (Non-Profit)
7.2% 92.8%
California Medical Association, "Knox-Kleene Health Plan Expenditures Summary: FY 2003-2004" (291 KB) , www.cmanet.org (accessed Nov. 2, 2010)

3. Council for Affordable Health Insurance
Administrative Costs
The total for administrative costs and health care costs shown in each bar graph below equals 100%
Health Care Costs
2006 Medicare
5.2% 94.8%
Private Health Insurance
16.7% 83.3%
Merril Matthews, PhD, "Medicare's Hidden Administrative Costs: A Comparison of Medicare and the Private Sector" (91 KB) , www.cahi.org, Jan. 10, 2006

4. Heritage Foundation
Administrative Costs
The total for administrative costs and health care costs shown in each bar graph below equals 100%
Health Care Costs
2000 Medicare
6% 98%
Private Health Insurance
11.4% 88.6%
2005 Medicare
5.8% 94.2%
Private Health Insurance
13.2% 86.8%
[Editors Note: Calculations at the bottom of this page show administrative spending per benificiary. They were included because they were an integral part of the conclusion of the Heritage Foundation report. The other entries on this page did not make such comparisons between total percentages and spending per person.]
Robert A. Book, PhD, "Medicare Administrative Costs Are Higher, Not Lower, Than for Private Insurance" (238 KB) , www.heritage.org, June 25, 2009

5. New England Journal of Medicine
Administrative Costs
The total for administrative costs and health care costs shown in each bar graph below equals 100%
Health Care Costs
2003 Medicare
3.6% 96.4%
Private Health Insurance
11.7% 88.3%
Steffie Woolhandler, MD, MPH, et al., "Costs of Health Care Administration in the United States and Canada," New England Journal of Medicine," Aug. 21, 2003

III. Health Insurance Administrative Spending per Beneficiary
Medicare Private Health Insurance Percent by
which Medicare
is higher
Primary beneficiaries ($millions) Administrative spending ($billions) Administrative spending per beneficiary Total beneficiaries ($millions) Administrative spending
($billions)
Administrative spending per beneficiary
2000 37.06 $14.10 $380 202.8 $52.0 $256 48.4%
2005 39.21 $19.94 $509 201.2 $91.1 $453 12.3%
Robert A. Book, PhD, "Medicare Administrative Costs Are Higher, Not Lower, Than for Private Insurance" (238 KB) , www.heritage.org, June 25, 2009


IV. International Comparison of Health Insurance Administrative (Overhead) Costs
"In a single-payer national health insurance system, as demonstrated by Canada, Denmark, Norway, and Sweden, health insurance is publicly administered and most physicians are in private practice.

Great Britain and Spain are among the OECD countries with national health services, in which salaried physicians predominate and hospitals are publicly owned and operated.

Highly regulated, universal, multi-payer health insurance systems are illustrated by countries like Germany and France, which have universal health insurance via sickness funds. The sickness funds pay physicians and hospitals uniform rates that are negotiated annually (also known as an "all-payer” system)."

Physicians for a National Health Plan (PNHP), "International Health Systems," www.pnhp.org (accessed Nov. 3, 2010)

This chart used the term "overhead" to describe administrative costs.
Source: Physicians for a National Health Plan (PNHP), "PNHP Slide Show: Health Insurance Overhead Per Person," www.masscare.org (accessed Oct. 29, 2010)


V. Definition of Health Insurance Administrative Spending by the Congressional Budget Office
The Congressional Budget Office (CBO) stated the following in a Dec. 2008 report titled, "Key Issues in Analyzing Major Health Insurance Proposals," available at www.cbo.gov:
"[A]dminis­trative costs refer to any expenses insurers incur that are not payments for health care services, including the profits retained by private insurers and the taxes paid on those profits...

Administrative costs can be divided into three categories:

- Marketing costs include expenses for advertising, sales, enrollment processing, customer service, billing, and actuarial and underwriting activities. (Underwrit­ing involves an assessment of an applicant’s health and expected use of health care in order to determine what premium to charge.)

- Costs associated with medical activities include expenses for claims review and processing, medical management (such as utilization review, case manage­ment, quality assurance, and regulatory compliance), and provider and network management (contracting with doctors and hospitals and maintaining relations with providers).

- General administrative costs are difficult to allocate to a specific function; they include expenses for infor­mation technology, general management overhead, profits, and taxes."

Congressional Budget Office (CBO), "Key Issues in Analyzing Major Health Insurance Proposals" (2.2 MB) , www.cbo.gov, Dec. 2008