Public & Private Health Care Insurance: An Intellectual Joust Between Uncle & Nephew

Across the nation, I’m certain that many households have engaged spirited discussion of ObamaCare, Socialized Medicine, Government Take Over of Health Care, or whatever else people may label heath care reform in the form of universal health insurance coverage—the most impactful of which would be a single-payer system, and for which Medicare may serve as an appropriate surrogate in an effort to argue which system is better: our current fractured insurance mechanism of private insurance market with government insurance for the aged and disabled or the mechanism of government-sponsored, single-payer, universal health insurance.

Just such a discussion occurred at my parents’ home recently when I came over for dinner with them and my visiting Aunt and Uncle. Now Uncle and I enjoy intellectual bantering and don’t take offense to each others’ position, though we hold back no punches, either. This makes for great fun between Uncle and myself, but it also brings along others for a “trying” and perhaps a bit disconcerting experience. As Mom and Dad prepped dinner, the rest of us relaxed in the den. My wonderful and kind Aunt, who only seeks peace and harmony in the family, sat beside me on the couch, while Uncle sat in a chair catty-corner to us.

Uncle and I once worked at the same corporation, and we discussed some of the company affairs (we’ve both left the firm several years ago). This subject very quickly diverted to the contemporary issue of the day: Obama’s efforts to effect significant health care reforms and universal health insurance. I am a decidedly liberal fellow, favoring a Social-Capitalist economy as implemented in Europe, and Uncle is assuredly a Free-Market Capitalism kind of guy.

The great aspect of Uncle, though, is that he is a thoughtful Republican and not an ideological rock like most of the current conservative leadership. I can respect my Uncle’s trait. Still, the discussion racked the nerves of my Aunt, and I could feel her staring daggers into Uncle for continuing retort after retort. She knew what he knew: that it’s fairly easy to get me animated about important social issues and that I take a firm and “energetic” stand while using colorful metaphors. Uncle likes stimulating that side of me just as one might enjoy raucously tickling a child mercilessly on the floor. I fall for it every time!

Well, as can be assumed, we took different positions on the health care issues. Our primary disagreement, though, centered on whether private insurers or government delivered health care coverage at lower cost. I steadfastly maintained that Medicare administrative costs were significantly lower than private insurers, thus allowing the nation to expand coverage to all citizens without adding significant cost to society, and he declared that the opposite was true. As my uncle isn’t a person to blindly make statements as “fact” without having learned from some reputable source, it may be that he read the article—or an editorial based upon it—”Medicare Administrative Costs Are Higher, Not Lower, Than for Private Insurance” by Robert Book, PhD. of the Heritage Foundation (a think tank of dedicated free-marketeer ideologues).

Of course, as an advocate of a single-payer, public health plan, I maintained that a single-payer, public health plan would save costs compared to fee-for-service private health insurance because, as an example of just one reason, the largest government health program, Medicare, has lower administrative costs than private insurance. Some economists even claim that switching every privately insured American to Medicare or something like it could save the nation enough money to cover all currently uninsured Americans.

Public Plan (Universal Health Insurance) advocates like me point out that Medicare has administrative costs of 3 percent, compared to 11, 14, or 22 percent for private employer-sponsored health insurance (depending on which study one cites), and even higher for individually purchased insurance. I attributed the difference to efficiency within government Medicare administration (denying the oft-abused cliché that our public servants are “wastoid” slackers), private insurance companies’ excessive expenditures on marketing, deliberate denials of claims unnecessarily, unrestrained pursuit of immoderate profit, and unconscionable executive salaries.

Hummm… judging by the private insurance firms’ own figures submitted to the SEC for 10k filings, click chart to the right, reality certainly looks like a consistent double-digit percentage of premiums revenue does go to the aforementioned “excessive expenditures,” up to 18%! Plus, the inefficiency costs of denying legitimate claims over and over must be added. I’ll come back to the matter later, but here’s a sneak peek of how the Health Insurance industry views these costs: “the administrative expenses of private insurance plans represent money well spent for their members.”

Dr. Book of the Heritage Foundation, however, like my uncle, just doesn’t see the private administrative costs as “excessive expenditures.” Book posits that “on a per-person basis Medicare’s administrative costs are actually higher per person than those of private insurance—this despite the fact that private insurance companies do incur several categories of costs that do not apply to Medicare.” He maintains that we’re using “Fuzzy Math.” Book does accept that Direct Costs of administrative functions for Medicare, as reported in federal budget data for 2000-2005, are about 3 percent of total Medicare outlays, substantially lower than the 11-14-22 percent range noted above for private insurance programs (click chart below). Books analysis adds in the indirect costs of Medicare that are supportive to their effort but which expenses remain on the budget books of other agencies or departments. Fair enough.

But, Book’s analysis depends almost exclusively upon his and the Heritage Foundation’s philosophical bent and personal preferences; i.e., he floods Medicare with the implied costs of a tax burden that cannot be avoided to fund Medicare against the choice freedom of voluntarily opting to pay for one’s own premiums. Having no choice in paying your premium (Medicare Tax): huge “burden” costs from lost “freedom of choice.” Having personal choice to pay or avoid health insurance premiums: well, in a word, “priceless.”

Book and his counterparts are quick to point out the cost of what they perceive as loss of freedom of choice and which I and other Progressives perceive as the legitimate costs of living in a civil and healthy society. What Book disingenuously fails to address or even value is the costs to society by having an all or nothing health care system, where one has great access to care or no access to care. Nor does he count the productivity impact of a less healthy populous. Nor does he consider the costs of administering care through the emergency room for those without insurance, etc., etc. So, as this could keep going “on and on” from both sides, like an energizer bunny, let’s as a first approximation say that these two perspectives are a wash and cancel each other out. Thus, we are left to address the real markers of efficiency and administration costs: Direct and Indirect Costs of actually administering a health insurance program.

Beyond Direct Costs, I would agree that to some extent this lower proportional administrative cost characteristic of Medicare does indeed originate from a measurement bias: Medicare beneficiaries are older and less healthy as a group than members in private health-insurance programs, so that average patient claims for Medicare exceed those care costs for the average private health insurance patient. This relationship provides a lower administrative cost when expressed as a percentage of total Medicare costs compared to private insurance, but it’s fairly easy to rectify by looking at the numbers differently. For Medicare in 2005, outlays other than for administration were about $345 billion for 42 million enrollees, or about $8200 per enrollee. For private insurance in 2005, with about 165 million enrollees under age 65, benefits were about $621 billion, or about $3765 per enrollee. No surprise here; older people are simply more care-intensive than their younger counterparts.

So, I will concede that if some or most administrative functions display scale economies, the general comparison of administrative cost percentages is biased against the private programs.

The benefits figures per enrollee noted above even suggest that this bias is not likely to be trivial; at the same time, though, it is difficult to accept that it is sufficiently large to make the direct administrative costs of Medicare and private plans comparable as a proportion of outlays or premiums. So, it should be accepted that the direct administrative costs of Medicare are lower by “some” rather substantial amount (or proportion of total program spending) than those of private insurance programs; although, the difference between 3 percent and 11-14-22 percent for direct costs overstates the true difference.

What is needed, then, for a more accurate picture of administrative cost burden, is computation of the direct and indirect non-benefit (“administrative”) costs for Medicare as a proportion of total Medicare outlays. As noted, the direct administrative costs of Medicare as reported in the CMS data are about 3 percent of Medicare outlays, roughly one-quarter or less of the 11-14-22 percent net cost of private health-insurance premiums. Inclusion of proportional shares of the costs of general federal government functions and what’s known as the “administration of justice” increases the non-benefit cost share of Medicare outlays to about 6 percent, or about twice the figure often asserted,… but still roughly half the figure for private health insurance. click table below

In short: The reported (direct and indirect) administrative costs for Medicare, at 6 percent of outlays, are about twice the proportion commonly asserted, but still only about half the net cost of private health insurance!

If we accept the validity of this comparison of administrative and other significant non-benefit costs of Medicare with those of private health-insurance plans, and if we accept Medicare as a surrogate marker for a large single-payer, universal health insurance system,… then several core conclusions may be reached:

  • Administrative costs for private health insurance, defined broadly, are in the range of 11-14-22 percent of total premiums.
  • Administrative costs reported directly in the Medicare budget, combined with a proportional allocation of the costs of other federal government administrative functions, yield a figure of 6 percent of Medicare outlays as the total administrative costs for Medicare. This more complete assessment is, indeed, twice as high as the proportion of Medicare outlays commonly asserted, yet still well below the administrative costs of private insurance by at least half.
  • A single-payer, universal health insurance system—such as exists in every other industrialized nation on the planet—would yield net savings of about $100 billion (as of 2006) annually in total administrative costs, therefore providing approximately $2100 toward health-care benefits for each of the 47 million individuals currently uninsured.
  • Under the single-payer system, we can assume “some” increase in average health-care consumption by the currently uninsured (meaning these citizens will obtain needed care they previously neglected), and most estimates peg this at about $1000 to $1700 per currently uninsured citizen—resulting in an annual net cost savings between about $19 billion and a savings of about $53 billion in our new health insurance system universally covering all citizens.
  • Accordingly, the argument that the administrative cost savings yielded by a shift to a single-payer system would be sufficient to cover the uninsured is likely accurate and highly beneficial financially, and that’s before adding the benefits of a healthier society able to work and to work more productively.

Libertarians and Republicans would, nonetheless, object and maintain that in contrast to private insurance, single-payer systems would have the effect of creating and increasing cross-subsidies among patient and voter groups because eligibility for health insurance, “premiums” per person, and tax payments to pay the insurance premiums would no longer be based upon one’s health status. Accordingly, the fundamental question underlying the issue of relative administrative costs is far more basic: should health-insurance be a market-predicated commodity no different from the market for pork bellies… or should health insurance and, hence, access to health care itself be viewed as a right of citizenship.

Of course, this is a values question that never lends itself to cold academic analysis, and addressing the topic thoroughly would take up lots of internet bandwidth. However, I will say that the answer is self-evident, as evident as the fact that “all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness. — That to secure these rights, Governments are instituted among Men…”

U.S. health care access should be—as in all other civilized industrial nations—a right of citizenship, not a privilege for the fortunate or economic royalists. All other freedoms promised in America’s declaration to independence and embedded in our Constitutional Rights are impossible or unfulfilled without adequate health and healthcare. It’s really JUST THAT SIMPLE!

Take note: the proposition that a single-payer, universal-health-insurance system would “cover” everyone is not the same as proposing that all services demanded would be “covered” (i.e., approved for public payment). Universal health insurance does not repeal the basic laws of economics. Resources by definition are limited everywhere and at all times. Just as market processes in general allocate—that is to say, ration—resources through the price mechanism, a single-payer system will not avoid similar allocation decisions. In the case of single-payer systems, non-price and science-based criteria prove relatively more important in practice.

Such non-price criteria include waiting lists (“queuing”—where patients are properly triaged to address instances based upon the severity and urgency of the patient issue), exclusion from coverage of certain superfluous services or products (as is currently implemented in private health insurance networks; cosmetic surgery, for instance… or, as I experienced after severe spinal surgery, such durable mechanical equipment as a stationary commode chair), exclusion of specific classes of patients, such as the elderly, from certain procedures as organ transplants, and the like.

Despite Palin’s absurd demagoguery about “Death Panels,” for instance, extraordinary efforts at end of life, to merely delay the inevitable outcome, is the largest expense to the Medicare system. Why? Does it really matter if we, as an eight-five year old person, pass away today or in two weeks? No. And, HELL NO! when it comes at a cost of up to over-a-hundred-thousand dollars. Wouldn’t a more effective and humane allocation of care be to provide the same individual with a dignified and peaceful transition, where pain is relieved and family may lovingly express themselves.

Individuals demanding procedures that are not “covered” in effect are rationed out of the market—mitigated, though, to the extent that they choose to pay privately for the excluded goods and services, or—as is available at reasonable cost in all other industrialized nations—choose to obtain private insurance to provide the additional desired services. Moreover, “Death Panels,” as it were, have proved socially acceptable and effective in other nations. If little Sarah were correct in her assertions, then the U.S. should have a higher age at one’s death on average than the nations with such “Panels,” since the implication is that the “Panel’s” main purpose is to facilitate the early demise of expensive seniors.

Well, guess what, the U.S. has the lowest average age at death of all! Suck on that Palin and conservatives. Nations with universal health insurance provision and the equivalents to Palin’s “Death Panels” have longer life spans than the U.S. This fact and others are borne out in the following table (Argentina being the one exception in some parameters, as it is actually a developing industrial nation):

Now, let’s return to how the Health Insurance industry would have us view their high and excessive administrative costs. An editorial by Kerry Weems and Benjamin Sasse in the Wall Street Journal argued that “the administrative expenses of private insurance plans represent money well spent for their members,” stating:

But the comparison between public and private plans is a false comparison. Private insurance and public benefits are not the same business….Many who favor a public plan as part of comprehensive health-care reform dismiss the administrative “overhead” of private plans as having little or no value….In fact, the administrative expenses of private insurance plans represent money well spent for their members. Here are four reasons: First, private insurers must build provider networks….Second, private insurers must negotiate rates….Third, private insurers must combat fraud — or go out of business….Fourth, private insurers must incur the administrative cost of marketing.

All reasons posited above, aside from number four, are costs that a public plan, including Medicare, must also incur. Therefore, one may appropriately conclude that it’s possible to achieve the first three by spending only 2-3% on direct administrative costs, as our civil servants have proven. So either the private sector is extremely inefficient in spending on the first three reasons, or it’s extremely profligate in spending on the last one. Most likely, we’re looking at a combination of the two. Still, none of this means better service for the insured.

It’s a bit perverse to argue that higher administrative costs translate into better quality health care or that highly consolidated health insurance markets are too busy negotiating prices with providers to lower administrative spending, yet that is exactly what these apologists for the health insurance industry would have one believe with their Wall Street Journal editorial. Medical loss ratios, an indicator of how much revenue insurance companies spend on care vs. how much they keep as profits, have dropped precipitously in the last decade—meaning, as more and more people lost insurance or discovered that they don’t have enough insurance to cover their medical expenses, insurers have grown richer.

Moreover, allocation breakdowns of private plans’ administrative dollars remain unavailable and Weems and Sasse’s WSJ argument is merely a hypothesis at best. Yet, an apples-to-apples comparison of private plans participating in government-subsidized Medicare Advantage indicates how private firms allocate administration costs compared to traditional Medicare—and, suggests that the latter is far more efficient.

As opposed to our previous discussion above, here, Medicare and Medicare Advantage treat the same population, yet according to the non-partisan Congressional Budget Office, the Medicare public plan spends less than 2 percent of expenditures on administrative costs, “compared with approximately 11 percent of spending by private plans under Medicare Advantage.” Even adding the three percent “indirect non-benefit (‘administrative’) costs for Medicare,” as determined above, reveals the fact that the private firms of Medicare Advantage assign more than twice as much as Medicare for total administrative costs for the very same patient base! The Government Accountability Office has also concluded that these private plans are channeling the extra subsidy towards increased profit, not improved benefits.

The truth is borne out in The Commonwealth Fund’s review of mandated insurance for residents of Massachusetts:

In Massachusetts (MA)—the first state to attempt universal healthcare insurance through private health insurers—on average, MA organizations’ self-reported actual profit margin was 5.1 percent of total revenue, which is approximately $1.14 billion more in profits in 2005 than these MA organizations projected… Nearly two-thirds of beneficiaries enrolled in health benefit plans offered by MA organizations for which the percentage of revenue dedicated to profits was greater than projected and the percentage of revenue dedicated to expenditures (medical and non-medical combined) was lower than projected.

Thus, our takeaway point: high administrative spending and excess profit retainment are responsible for skyrocketing health care costs and excess spending in the health care system. According to analysis by the McKinsey Global Institute, excess spending on “health administration and insurance accounted for as much as 21 percent of the estimated total excess spending ($477 billion in 2003)” and 85 percent of this excess overhead “can be attributed to the highly complex private health insurance system in the United States.”

Take a different look at further proof of this relationship between Private and Public health insurance: click chart at right


It’s also worth noting that other industrialized nations provide their citizens with universal, high quality health care while spending very little on administrative overhead (i.e., efficiently). The graph below is clear. Indeed, it is demonstrably possible to provide highly effective health care without spending a fortune on administration. Only in America do we continue to insist on rewarding those who spend our health care dollars so inefficiently. The question again begged is, “does our national government exist to secure the rights and enrichment of lifeless corporations or does our government exist to ensure the promise that ‘all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness. — That to secure these rights, Governments are instituted among Men…’?” click chart below

I suppose that we can expand the discussion beyond administrative costs to see whether private health insurance markets or universal, single-payer systems better contain overall healthcare expenditures, thus freeing up capital for mobilization in markets and industries that might help stem the decline of the United States: click chart below

Humm… looks like the free-market’s private health insurance and the U.S.’s current fractured health system actually burden the nation with “excess health spending” and contribute to our continued national decline in wealth, industry, education, and most other components marking a highly functional society. Pity… the answer has been in front of us for years.

“Excess health spending” in this context refers to the difference between what a country spends per person on health care, and what the country’s gross domestic product per person should predict that country would spend. (The prediction is based on trends in other countries in the Organization for Economic Cooperation and Development.) The word “excess” here should not be taken as “excessive” unless one could demonstrate that what the other OECD nations spend is appropriate and what we spend is ipso facto wasteful. So, let’s see…

The United States spends nearly 40 percent more on health care per capita than its GDP per capita would predict. Given the sheer magnitude of the excess spending, it is fair to ask American health care providers what extra benefits the American people receive in return for this enormous extra spending. After all, translated into total dollar spending per year, this excess spending amounted to $570 billion in 2006 and about $650 billion in 2008. The latter figure is over five times the estimated $100 billion or so in additional health spending required to attain truly universal health insurance coverage in this country.

The McKinsey Global Institute estimated that about 85 percent of this excess administrative overhead is attributed to the highly fractured private health insurance system in the United States. Product design, underwriting and marketing account for about two-thirds of that total. The remaining 15 percent is attributed to public payers that are not saddled with the high cost of product design, medical underwriting and marketing, and that therefore spend a far smaller fraction of their total spending on administration.

Two studies using more detailed bilateral comparisons of two countries illustrate even more sharply the magnitude of our administrative burden relative to that in other developed countries.

One of these is an earlier McKinsey study explaining the difference in health spending in Germany and in the United States. The researchers found that Americans received $390 per capita less in actual health care but spent $360 more per capita on administration.

A second, recent study of administrative costs in the American and Canadian health systems was published in The New England Journal of Medicine. The study used a measure of administrative costs that includes not only the insurer’s costs, but also the costs borne by employers, health-care providers, and governments – but not the value of the time patients spent claiming reimbursement. These authors estimated that Americans spent $1,059 per capita on administration compared with only $307 in purchasing power parity dollars (PPP $) spent in Canada.

More and more Americans are being priced out of health care as we know it. The question is how long American health policy makers, and particularly the leaders of our private health insurance, can justify (hoodwink) this enormous and costly administrative burden to the American people and to the harried providers of health care.

Well, we know private health insurers’ answer:

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