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

		The total for administrative costs and health care costs shown in each bar graph below equals 100%
1. American Medical Association		Administrative Costs	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)

---

		The total for administrative costs and health care costs shown in each bar graph below equals 100%
2. California Medical Association		Administrative Costs	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” , www.cmanet.org (accessed Nov. 2, 2010)

---

		The total for administrative costs and health care costs shown in each bar graph below equals 100%
3. Council for Affordable Health Insurance		Administrative Costs	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” , www.cahi.org, Jan. 10, 2006

---

		The total for administrative costs and health care costs shown in each bar graph below equals 100%
4. Heritage Foundation		Administrative Costs	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” , www.heritage.org, June 25, 2009

---

		The total for administrative costs and health care costs shown in each bar graph below equals 100%
5. New England Journal of Medicine		Administrative Costs	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

Robert A. Book, PhD, “Medicare Administrative Costs Are Higher, Not Lower, Than for Private Insurance” , www.heritage.org, June 25, 2009

IV. International Comparison of Health Insurance Administrative (Overhead) Costs

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” , cbo.gov, Dec. 2008