-Anne

Let me first preface my comment by saying I’m every bit the advocate for healthcare reform that the great Paul Krugman is. And I’m a card-carrying liberal Democrat who’s all for an egalitarian solution to our healthcare delivery and finance problems.

But there’s just one problem with the on-going suggestion that Medicare somehow has lower admin costs than private insurance. I’m in the health insurance analysis business, and can tell you from publicly available information that there is no inherent difference in Medicare admin costs versus the private commercial insurers admin costs for, say, a privately insured 35-year-old.

The misunderstanding arises from expressing the admin costs as a percent. Does anybody bother to ask, as a percent of what? The ratio we’re talking about, in the health benefits business, is known as the administrative cost ratio, or ACR. You get that number by dividing the average monthly amount spent on administration of the health benefit by the average monthly premium.

So ACR = admin/premium.

Knowing that, you have to realize that the average monthly premium for our hypothetical commercially insured 35-year-old runs around $300 per-member, per-month these days. So if, as we know, commercial insurers are spending 13 percent on admin, then that’s about $39 PMPM, which is about right.

But here’s where the statistics start to mislead. It costs much more to treat folks in Medicare. That only makes sense. These folks are older, some of them are sick, some of them are dying. The average monthly premium for Medicare folks — and I’m using private Medicare HMOs for my basis, but their costs are about 10 percent lower than the government-provided Part A/Part B fee-for-service plan that most seniors use — runs in the neighborhood of $750 to $900. Add on the 10 percent higher costs of non-managed fee-for-service Medicare and you’re at around $1,000 a month for each senior. If we believe Krugman’s assertion — and we should, because it is probably correct — that Medicare’s admin costs are around 2 percent, well, what’s 2 percent of $1,000? Around $20. Throw in the fact that Medicare doesn’t have to account for the money it borrows (which commercial insurers do, under admin), throw in the fact that Medicare can’t market or advertise, and has no sales costs (which commercial insurers must, under admin), and throw in the fact that Medicare can house all its workers in rent-free, peroperty-tax-free buildings (which commercial insurers can’t, so adds to admin), and you easily make up that other $19 per-member, per-month.

So I’m making two points here. First, when they say commercial insurers’ admin is 13 percent and Medicare’s is 2 percent, just remember that it’s 13 percent of $300 versus 2 percent of $1,000, NOT 13 percent and 2 percent of the same number.

But the other point is, once you know that, you realize that it is not voodoo, or some inherent goodness of government processing systems or the ability to negotiate better rates that gives Medicare an admin advantage over commercial private insurance. Its no marketing, it’s no interest/borrowing costs, and no rent/taxes that makes up what is actually a smaller difference than what the out-of-context numbers might lead you to believe. And it is an advantage that will go away the minute you start trying to expand Medicare to cover all the commercially insured folk. In other words, Medicare-for-All will make Medicare more like commercial insurance, not the other way around.