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The Incalculable Costs of Medicare Michael Arnold Glueck, M.D., and Robert J. Cihak, M.D., The Medicine Men Now that Mrs. Bill Clinton is trying to resuscitate her health-care proposals that died a decade ago, it's time to remember some of the socialistic fallacies proposed and exposed at that time and to report some recent research.
One such falsehood is that Medicare is a good deal because its administrative costs are only 2percent of claims.
The context for presenting this factoid is usually an attempt to make private health insurance and managed care look bad by comparison.
Trying to compare the costs and results of government with private ventures is more difficult than comparing apples with oranges; it's more like comparing house cats with elephants. Where do you start? And what difference does the comparison make?
Why is this comparison so difficult? One huge problem is that governments at all levels often excuse themselves from disclosing actual costs and other information about their activities.
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Another problem is that governments require private ventures to spend a lot of resources that the government doesn't require of its own functions; these are often called "unfunded mandates" because the government requires somebody else to do something but doesn't pay for it. For one small example, the government requires doctors to tell it about every charge a doctor makes to every Medicare recipient, even if the service isn't covered by Medicare or the patient doesn't want Medicare to be billed. Patients and taxpayers pay these costs but the government doesn't want us to consider them costs of the government. Furthermore, the government certainly doesn't reimburse doctors for this superfluous paperwork expense. Multiply the cost per report times the hundreds of millions of reports required and we're talking about a lot of wasted resources.
Despite these profound differences, Mark Litow, a consulting actuary with Milliman, a firm of consultants and actuaries, calculated overall administrative costs of Medicare and Medicaid, including hidden costs and some of its unfunded mandates in a 1994 study. He found these administrative costs of these government programs to be 27 percent of total claims costs, compared with 16 percent for private insurance.
Earlier this month, the Council for Affordable Health Insurance (CAHI) released a paper written by Merrill Matthews, Ph.D., "Medicare's Hidden Administrative Costs" based on a new technical report provided by Litow. This paper only looked at Medicaid and Medicare administrative costs and did not include the unfunded liabilities burden. Adding in these costs resulted in a 5 percent estimate, one and a half times as much as the 2 percent estimate. Allowing for the large size of claims in Medicare resulted in estimated costs of 6 percent to 8 percent, about the same as the private sector costs of 9 percent.
Costs not included in the widely-quoted two percent estimate include spending by Congress and staff; management costs such as office building costs and professional staff salaries at the Center for Medicare and Medicaid Services (formerly the Health Care Financing Administration or HCFA); borrowing expenses; tax collection expenses; promotion and marketing costs; costs for the Inspector General's office (part of over $1 billion in spending mandated by Congress for stamping out Medicare fraud and abuse); and unfunded mandates.
The regulatory elephant of unfunded liabilities often treads heavily in the private garden, as calculated by Litow in his 1994 study. I therefore believe that overall costs of Medicare administration are much higher than 8 percent and not too far from Litow's 1994 27 percent estimate.
These numbers try to compare disparate realities. For another example, these administrative cost estimates are calculated by dividing total costs by the total dollar amount of claims. Medicare recipients, being on average older and in poorer health than private health insurance customers, run up higher medical costs, estimated at $6,600 per person in 2003, compared with private sector insurance spending $2,700 per person. Medicare recipient spending is more than twice as much as private insurance spending. This makes the denominator in the division calculation more than twice as much. If the spending amount were the same, a twice-higher denominator would cause the percent calculation to be halved. Size matters when an elephant is included in the denominator.
Matthews notes "even if the numbers show Medicare's administrative cost as lower than the private sector, variations such as higher average per-person claims could vastly underestimate Medicare's true administrative costs."
In addition, it's impossible to measure the aggravation, anxiety and anger induced by abusive Medicare administrative efforts and prosecutions by government officials. The price tag for these liabilities can't be calculated. But government harassment does drive doctors away from seeing Medicare recipients, adding real human costs.
Finally, there really isn't a valid comparison of government "efficiency" in Medicare administration with free choice in private medicine or life.
If you like government efficiency, go to Cuba, where almost everybody is efficiently poor.
If you prefer freedom, cut the size and power of government so that people can deal with each other as human beings instead of as apparatchik cogs in the wheels of a grinding government machine. Editor's Note: Robert J. Cihak wrote this week's column. Contact Drs. Glueck and Cihak by e-mail. Robert J. Cihak, M.D., is a Senior Fellow and Board Member of the Discovery Institute and a past president of the Association of American Physicians and Surgeons. Michael Arnold Glueck, M.D., is a multiple-award-winning writer who comments on medical-legal issues.
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