Ken’s Take: I would like to see more real economics in the public option debate. A fundamental question: though counter-intuitive, does the gov’t run more efficient healthcare insurance programs than private industry?
Here are some facts … more “takes” follow.
Private insurers’ profits (included in administrative costs) explain some of Medicare’s cost advantage.
But profits represent only 3% of the insurance industry’s revenues.
* * * * *
By some estimates, Medicare’s administrative costs are only 3% of spending compared with 13% or more for private insurers. So, a government run healthcare plan is widely presumed to enjoy an advantage in overhead.
As for administrative expenses, any advantage for the public plan is exaggerated, say critics. Part of the gap between private insurers and Medicare is statistical illusion: Because Medicare recipients have higher average health expenses ($10,003 in 2007) than the under-65 population ($3,946), its administrative costs are a smaller share of total spending. A public plan, with younger members, wouldn’t enjoy this advantage.
* * * * *
The main advantage of a public plan would be the congressionally mandated requirement that hospitals and doctors be reimbursed at Medicare’s rates — as much as 30% lower than rates paid by private insurers.
With such savings, the public plan could charge much lower premiums and attract lots of customers.
Excerpted from IBD: Promise Of The Public Plan Is A Mirage, 10/23/2009
http://www.investors.com/NewsAndAnalysis/Article.aspx?id=510101
Ken’s Take:
(1) I’ve argued before that the private health insurers don’t really make that much money. The industry ranks #35 among major industry groupings, and the 3% rate is far downscale. Since private insurers handle about 1/2 of all healthcare spending — using the above 3% number — if you eliminate all private healthcare profits, the “savings” would be about $30 billion annually. That’s statistically significant but — in my opinion — not compelling.
(2) At first blush — again, using the above numbers — the gov’t admin advantage (3% to 13%) is significant. First, assuming that the number of transactions handled is proportional to the dollars of healthcare expenses — then the 3% to 13% advantage carries thru ona transaction basis. Even when you “normalize” the data per patient Medicare seems to have an advantage — Medicare administers a subscriber for $300 per year ($10,000 times 3%) versus $500 per year for private insurers ($4,000 times 13%). That’s significant.
What’s going on? My bet: scale economies. While some private healthcare insurers seem big, their size pales in comparison to the government programs. Why? Because of the limits on selling insurance across state lines. There are something like 1,500 private insurance programs. All have admin staffs, computer systems, etc.
My conclusion: there are way too many private insurers, not too few. Consolidate that industry down to a handful of companies, and Medicare’s admin cost advantage would disappear — practically overnite.
(3) I’ve also pointed out the vicious cycle that’ll occur if doctors are squeezed with reimbursement rates far below “market prices” and sometimes below cost. Eventually, the private plans get snuffed, and more important, the base of healthcare suppliers — docs and hospitals will shrink. That means rationing.
* * * **
The Homa Files 
Leave a comment