Thursday, February 04, 2010

The Myth of Magic Medicare

Insurance companies are greedy. Everything its CEOs work for is to make as much profit as possible. They are hesitant to do anything that increases their revenues, and anxious to adopt anything which decreases their costs. Until today, I didn't think anyone would disagree with this until tonight, when Congressman Anthony Weiner went on The Daily Show.

Congressman Weiner argues that Medicare should be expanded to all citizens, citing its very low administration costs (about 3% of its total payouts) as a way to save money. Insurance companies, by contrast, have about 12% overhead.

What magic has Medicare mastered to keep its overhead so low, magic that continues to allude our greedy insurance companies? It's not economies of scale. Medicare has about 45 million customers, while AIG covers 74 million. Even if you adjust for the fact that AIG covers people worldwide while Medicare only works within the US, such a massive difference in overhead is hard to explain with just economies of scale. After you measure your customers in the millions, those efficiency gains from volume tend to disappear. Otherwise we'd have far fewer insurance companies (I counted 31 health insurance companies in the US from this Wikipedia list with 27 confirmed as currently active). It's hard to think of another argument which could possibly justify this vast difference in overhead between the public and private sectors. I wonder how Rep. Weiner explains it; perhaps insurance companies don't care as much about profits as we thought. Or government is far more cut throat than anyone possibly imagined. Or maybe the folks at Medicare has some sort of genie/manager.

Now you could argue that Medicare doesn't have to worry about paying for advertisers nor state taxes. That's a lot better but 9 percentage points for TV commercials and taxes is hard to believe. There are two other explanations which justify this difference and neither of them help Weiner's argument.

First, Medicare covers only those over 65. Since the elderly, on average, need more medical assistance than the rest of us, the payouts in relation to administration costs drastically increase. It's not that Medicare has some secret which keeps overhead low; its payouts are just biased upward.

Second, Medicare spends very little money investigating the claims it accepts. And medical insurance fraud is a big problem. Just because you're spending less money, doesn't mean it's actually saving money.


Anonymous said...

The only thing our Government needs to be efficient at is war. The other necessary and legitimate Federal Government activities such as regulating interstate commerce and banking can afford to be less efficient. If everything else was left to the states, We the People, would be far more productive and happy. UB

Anonymous said...

On the other hand, Medicare doesn't work hard to weasel out of its obligations the way insurance companies do. Yes, there are people who abuse Medicare the system. But on the flip side the insurance companies do it as well and with more disastrous consequences.

UB, I've seen no evidence that We the People would be better off if more things were left to the states. First the states have enough problems without the additional responsibilities of protecting We the People from businesses. Second it would create a lot of redundancy and waste which is far less efficient than the federal version. Third, businesses would have potentially 50 different sets of rules to follow and 50 agencies to fool into thinking they're following the rules and that's bad for them.