Merton C. Bernstein
Coles Professor of Law Emeritus, Washington University; Former Principal Consultant to the 1982-83 National Commission on Social Security Reform; Founding board member of the National Academy of Social Insurance

Over 15% of the medical care dollar gets spent on “processing bills, claims and payments” according to a McKinsey Quarterly analysis.1 That tots up to some $300 billion a year. In contrast, Medicare spends about 3% of its outlays for administration.

The reason is simple enough: health care providers – doctors, hospitals, laboratories and imaging centers – obtain most of their reimbursement from hundreds of insurers with thousands of insurance programs with different rate schedules. Some large hospitals have a hundred or more rates for the very same procedures depending upon the insurance arrangement for the patient, if any. This balkanized payment system deploys armies of clericals in medical care provider offices to match their billings – roughly a billion a year outside of Medicare – with those nearly countless programs. In addition, insurers often seek to pin the tab on other insurers, as when parents have different coverages from their employers or an injury or illness is allegedly work or accident related.

By contrast, Medicare sets uniform rates within each of its fifteen administrative regions. That makes it much simpler for Medicare to match bills with the appropriate fee. Medicare participants – providers and insurer intermediaries – develop familiarity with Medicare’s procedures and rates. That enables them to process bills more speedily, with fewer mistakes and at lower costs than non-Medicare charges require. Bottom line: Medicare’s system takes less time and much less money.

In addition, analysis of federal data for 2003 (before the Medicare Modernization Act with its subsidies for private insurers and a drug program that prohibits bargaining over charges) shows that the means-tested Medicaid and SCHIP (State Child Health Insurance Program) combined cost four percentage points more to administer than Medicare does. 2 Medicaid and SCHIP must repeatedly ascertain whether applicants meet their low-income tests. Doing so runs up the non-benefit costs. Ditto innumerable other federal/state child health programs, such as well-baby services that focus on low-income people.

Further, Medicare intermediaries do not have the conflicts of interest that can spark controversies between insurers and medical care providers and patients. Whether any particular charge is reimbursed does not affect the bottom line of Medicare insurer intermediaries. But a non-Medicare private insurer determination in favor of reimbursement reduces its profits. And where an insurer acts as an employer’s plan administrator, it always wants to show the employer/client that it is holding down costs. That provides a powerful incentive to deny claims; insurers and their employer/customers even come out ahead by delaying payments.

The multi-billion dollar differences in non-benefit costs between Medicare on the one hand and private insurance and public means-tested programs on the other argue for locating insurance where it costs least – in Medicare. Medicare does not own or provide health services any more than private insurers do. Medicare uses private insurers to perform its detailed administrative clerical work. No “socialism” is involved; only practicality and common sense.

1 Nick A. LeCuyer and Shubham Singhai, “Overhauling the US health care payment system”, The McKinsey Quarterly (June 2007). It used 2005 data from the Center for Medicare and Medicaid Services (CMS). The over 15% includes the more efficient payments for Medicare; hence the non-Medicare component is much higher than 15%.
2 Centers for Medicare and Medicaid Services, National Health Expenditures by Type of Service and Source of Funds, CY 1960-2006.

Posted on: November 18, 2008

Keywords: Social Security

One Comment

  1. Michel December 10, 2008 at 7:43 pm - Reply

    Much is made about Medicare’s
    Much is made about Medicare’s low administrative costs, but is the lowest level the right level?“Little discussed is the division of the Medicare budget between “mandatory” dollars to pay for services and “discretionary” dollars to pay for administration. In short, in many situations the CMS cannot spend $1 million to save $10 million” (R. Berenson.

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