Medicare Extension
By Frank Hagan | Related entries in health care reformDetails are still sketchy, but the Senate compromise on health care is described by the Washington Post in this morning’s edition:
The short answer — subject to Senate revisions — is that those without employer-provided insurance would have more options for buying coverage, but if they are younger than 55, their money would go to a private insurer, no matter what. Rates would be more competitive than what they are offered now, but possibly less so than under a “public option.” And if they are between 55 and 64, they might be able to buy into Medicare early, though at what prices remains to be seen.
As congress moves toward health care reform the comparison between private health care insurance firms and the existing government programs like Medicare becomes more important. While many private health insurance companies are already non-profit, the administrative expenses in private firms are said to be from 10 to 20% of total expenditures. Medicare is quoted at under 6%, or 8 to 9% when assistance from other government agencies is included.
The premium cost for someone 55 and older buying into the Medicare system has not been determined, but it is expected to be equivalent to the cost of private group insurance. Guaranteed eligibility would attract those who cannot obtain private insurance due to pre-existing conditions. It is possible that the premium cost could offset the extra expenditures for the younger group of people. And I expect subsidies to be in place for low to moderate income people.
I have never been able to determine the exact accounting rules used to calculate Medicare’s administrative costs; private companies generally use something like GAAP (Generally Accepted Accounting Principles), a set of accounting rules used to prepare, present, and report financial statements. But the government does not; financial details are reported on a cash basis, and administrative costs are often allocated to a program based on its share of total government expenditures. There is an argument that Medicare’s administrative costs per person are higher than in the private insurance business, as Robert Book has noted at Heritage.org:
Medicare patients are by definition elderly, disabled, or patients with end-stage renal disease, and as such have higher average patient care costs, so expressing administrative costs as a percentage of total costs gives a misleading picture of relative efficiency. Administrative costs are incurred primarily on a fixed or per-beneficiary basis; this approach spreads Medicare’s costs over a larger base of patient care cost.
But you can slice and dice the numbers a lot of different ways. One long and detailed paper supporting the idea of a public plan, written before the current administration took office, is provided by Jacob Hacker (pdf file). Hacker uses Medicare’s lower administrative costs as a reason for implemention:
The CBO study suggests that even in the context of basic insurance reforms, such as guaranteed issue and renewability, private plans’ administrative costs are higher than the administrative costs of public insurance. The experience of private plans within FEHBP carries the same conclusion. Under FEHBP, the administrative costs of Preferred Provider Organizations (PPOs) average 7 percent, not counting the costs of federal agencies to administer enrollment of employees. Health Maintenance Organizations (HMOs) participating in FEHBP have administrative costs of 10 to 12 percent.
Note that FEHBP, the Federal Employees Health Benefit Program, is rumored to be the model for a national private insurance exchange for those under 55. Unlike a government “public option”, this exchange would be an array of private company plans administrated by the federal government. Minimum requirements for the plans are set by the government, and employees are able to choose among providers. Historically, rate increases paid by the employee for the FEHBP generally exceed those of private group plans administered by employers, running at 7 to 8% per this year, as opposed to 5% (pdf file).
One advantage of extending voluntary Medicare coverage to those 55 and older is that many people entering the system at 65 are in frail health, with undiagnosed diabetes or heart disease. If preventative care is started at 55 overall program costs could be reduced. The problem is that making the system the “insurer of last resort” would mean that only those in poor health or unable to pay for private insurance would take advantage of it. It remains to be seen if overall savings would result.
Cross posted to FrankHagan.com
This entry was posted on Thursday, December 10th, 2009 and is filed under health care reform. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.
December 10th, 2009 at 12:58 pm
[...] Cross posted to Donklephant [...]
December 10th, 2009 at 3:14 pm
The Exchange will be an improvement on existing models even if it’s admin costs are 15% because it’s intended to replace an individual market whose admin rates start at 15% and go up from there. It’s not unusual for poorly-run plans to have admin costs above 30%.
Where do you get a 5% number for large employers? I’ve found references that put it as low as 7%, but none that say 5%. Regardless it’s pretty clear the main determinant in administrative costs for a plan is it’s size.
IMO it’s clear we could have done a lot better in terms of cost-control with this bill. The cheapest would be simply merging Medicare and Medicaid, forcing everyone whose job doesn’t provide coverage to by in, and subsidizing those who can’t afford it. That would be a huge plan, so admin costs would be low (probably 5-6%), and it would be non profit which reduces costs a little more (most for-profit insurers have margins of 3%).
Trouble with that is the moderates and conservatives consider free-market rhetoric to be more important than cutting costs. And in this case they chose to call the market an Exchange.
December 10th, 2009 at 4:36 pm
Nick, the “5%” number is for the rate of increase this coming year in premiums for employer sponsored plans, and is from the non-profit Kaiser Family Foundation in a report found in this pdf file. The report provides a survey of private insurance plans, and contains the difference in cost between 2008 and 2009 (found on page one, right under the “Health Insurance Premiums” heading. It is also the percentage of change in my own insurance premium for 2010 (we just had open enrollment). I’ll add the link to the story.
The 10 year increase in worker contributions in premiums is 128% total (some math whiz will have to figure out what that would be in annual increase, compounded yearly … I come up with about 3% annual increase over ten years, compounded annually, to reach a result that is 134% higher).
Nothing in this effort will result in lower total expenditures (more people covered will mean more expenses). It may result in lower costs due to reductions in emergency room visits and advances in preventative care, but that remains to be seen. Most people seem to agree that we want to cover those that cannot provide their own coverage, but I doubt that “feeling” will persist when young people are compelled to enroll in a medical plan and pay 12% of their income to provide it. The tax impact on the rest of us will be much less than the “young, invincible” workers, many of whom elect not to pay for health insurance.
It may make some of them into conservatives in the end!
December 10th, 2009 at 4:57 pm
The quickest and best fix to bringing more competition into the Healh Insurance markets is simply to drop the prohibitions on interstate sales, leaving a national market rather than fifty state markets.
Frank is spot on re: admin costs. Medicare admin costs are not what I would call honest. Among other things, Medicare can (and does) farm out fraud investigations (and cost of same) to other branches of government for criminal investigation. And they figure their admin on a group population which has heavier usage (elderly), making more of the admin cost directly applicable to usage rather than to planning or wellness and such. And….well, it’s just not a true figure for comparison with private companies, non-profit or otherwise. Apples and oranges.
Cut costs? Once again, I can’t see how putting greater demand on a program that’s already running in the red is going to lower costs or improve service.
December 10th, 2009 at 5:16 pm
I corrected the “7 to 8% per year” to “this year”; the anticipated increase is actually a bit higher than 8% for 2010, and the increase last year was reported variously at from 2% to 10%. Not sure why the disparity for 2009, unless its because of the breadth of choices available to federal employees (some 180+ plans are offered).
I started the article with a bit about Medicare fraud, as the Miami Herald has been doing a great job of investigating it, resulting in increased enforcement there. But I couldn’t validate some of the stats, such as that for every $1 spent on fraud investigation, $1.55 is saved. Medicare’s expenditures on fraud investigation are masked by, as Tully said, being hidden in other departments such as the FBI. But they take notice when the Miami Herald tells them that Dade County represents 1/2 of all Medicare costs for durable medical equipment provided for diabetic home health care. You would think someone would notice that.
Fraud prevention and investigation is part of the “administrative cost” a private insurer incurs, and they have a much lower incidence of fraud. But its hard to get at the core numbers with the government’s method of accounting.
December 10th, 2009 at 9:34 pm
@Frank
I’m not getting your math. a 3% rise every year for a decade leads to 134%. That’s only a 34% increase. Regardless it’s not a great idea to base your projections on one or two years increase. There’s just too much variation between years for it to work well.
In terms of total expenditures these probably will increase under the new system. But they increase anyway, and hopefully this will reduce hose increases to a more manageable level.
As for young invincibles remember they get the same subsidies everyone else does. And the taxes that pay for those subsidies don’t automatically go up just because costs go up. That means that it will be virtually impossible for anyone to pay 12% of their income on health care without further Congressional action. And IMO future Congressional action will probably be a lot stronger on cost controls because the Progressive caucus will want to protect their hard-won universal plan.
As for Medicare costs, do you guys mean to tell me that in your states no state police ever investigate insurance fraud? Because I just googled state investigates insurance fraud and got loads of hits. They seem to be either run-of-the-mill cops or special departments paid for by taxes on insurance companies. And last time I checked a tax was not an administrative cost.
@Tully:
You want a single national market, with one set of regulations, to increase competition? You’ll get it. It’s called the Exchange.
December 11th, 2009 at 1:29 am
Nick, private insurance companies have investigators, hire independents, and really check apps for medical equipment … its part of the reason they get so many complaints. They initiate many of the claims to the law enforcement agencies. Medicare is a slam dunk; pay a wino $100 to use his number, and you can “sell” thousands in equipment to him. Dade County in Florida alone has millions in Medicare fraud every year. Medicare needs to improve in this area, but because there’s no incentive to do so, they won’t. They don’t care about the money. They are not judged on profit or waste (and are probably only judged on “administrative expenses” in their budgets, so ferreting out fraud and abuse can only be done if it doesn’t cause them to go over budget).
On the math … that’s how its done in many of the articles. Its compounded annually. In an Excel spreadsheet, put “3000″ in a cell (say, B4). In C4, put the formula “=B4+(B4*.05)” and the result is 3000 plus 5% (3,150). Copy the formula over the next 8 cells and you have the cost plus 5% compounded annually. At the end of the series, you end up with 4,653.98. Divide that by your original “3000″ and you get 155% of the original cost over 10 years. That is the way many of the articles express the rise in premiums, I think in an effort to make it sound worse than it is … “premiums are 155% of 10 years ago”.
The Kaiser Family Foundation has better charts that really show the increase in terms of dollars, and employee share of costs (not always the same).
December 11th, 2009 at 1:32 am
To get a 134% increase over ten years, you need an annual increase of just about 8.9%.
Nick, are you open to an honest discussion on admin costs or not? Private firms have their own internal fraud investigators, and medicare doesn’t. Is it really hard to believe that there’s a cost difference associated with that? I don’t have a hard time believing that the cost gap is smaller than what medicare’s accounting suggests.
One area where medicare probably has way lower costs is in marketing and recruitment. At least they don’t spend money on cheap crap like free mousepads and water bottles pens and coffee mugs to hand out at open enrollment fairs.
December 11th, 2009 at 1:44 am
I dug into the confusion s’more.
Wait for it…
A result that is 134% higher would not be the same as 134% of the original cost. If you have $100, then 134% higher is $234. 134% of $100 is $134.
A useful factoid to hold onto is that a quantity will double in a decade with annual growth of just over 7%, about 7.2%.