• The Heritage Network
    • Resize:
    • A
    • A
    • A
  • Donate
  • Medicare Administrative Costs and Paul Krugman’s "Propaganda Shop"

    In his blog, New York Times columnist Paul Krugman launches an unsubstantiated attack on The Heritage Foundation for our June 25 report showing that Medicare administrative costs are higher than those private health plans, not lower, as Krugman has frequently claimed. We find it somewhat encouraging that his only “refutation” to our basic point consists of (a) an ad-hominem-like attack, and (b) an old quote that is doesn’t refute the point of our report — and is incorrect anyway.

    The point of our paper is that expressing health administrative costs as a percentage of total program costs is silly, since the bulk of program costs are health care claims, and administrative costs are mostly unrelated to the level of health care claims. (Medicare claims processing is only about 4% of administrative costs; the other 96% is unrelated to the level of claims). This is clear from a moment’s thought — if you insure a healthy 25-year-old who never goes to the doctor (or at least, not enough to exceed the deductible), a health plan’s cost for that person is 100%, no matter how efficient the administration is. Private insurance has a lot more people like that than Medicare does.

    The appropriate measure is administrative cost per person, and by that standard Medicare is more expensive than private health plans. This point stands unrefuted, even with the additional quote from Jacob Hacker.

    Hacker refers to a GAO report that says administrative costs (including profit) for Medicare Advantage plans (privately-run managed care plans for Medicare beneficiaries) total 16.7% of total program costs. Hacker claims that “[t]his is a near perfect ‘apples to apples’ comparison of administrative costs, because the public Medicare plan and Medicare Advantage plans are operating under similar rules and treating the same population.”

    This is simply not true. The Medicare Payment Advisory Commission (MedPAC) reports (page 62) that Medicare beneficiaries who report their health status as “excellent” or “very good” are twice as likely to enroll in Medicare Advantage as those who report their health status as “poor.” Any Medicare beneficiary can enroll in Medicare Advantage, but those who choose to do so are, on average, healthier than those who remain in the “traditional” Medicare program. In short, Medicare Advantage plans are not “treating the same population.” They are not “operating under similar rules” either; the Medicare Advantage plans have an entire set of regulations of their own, quite different from the rules of the traditional Medicare fee-for-service system.

    Putting aside the factual errors and the fact that expressing administrative costs as a percentage of total costs is misleading, the GAO report doesn’t say what Hacker says it says. The administrative costs shown in the GAO report include major administrative functions not included in the figures, which are not comparable to those for reported by Hacker for traditional Medicare. Since the bulk of Medicare Advantage plans are HMO plans, the 16.7% figure includes both functions of operating a health plan and functions that occur in doctors’ offices and health plans. In traditional Medicare, the fees paid to physicians and hospitals include an amount attributable to their internal administrative costs. For physicians, that amount averages 17.3% of their fees — this is administrative costs in addition to costs incurred at the Medicare program level. Hacker says this comes up to 2%, but is actually 3% or 6%, depending on whether you count just the cost of the Medicare bureaucracy, or include with that cost the costs other government agencies incur in support of Medicare.

    So even if we believe Hacker’s comparisons between Medicare Advantage and traditional Medicare, a true “apples-to-apples” comparison shows that traditional Medicare’s administrative cost are higher — even using a “percentage-of-costs” approach weighted in its favor.

    In other words, Krugman’s criticism of out report consists of an ad hominem attack, and a quote that doesn’t refute our point based on a report that doesn’t say what he says it says.

    Krugman’s resort to name-calling (he calls Heritage a “propaganda shop”) is welcome, in a way, since it demonstrates that he can’t refute our point based on the plain facts. Regardless, the facts stand, even if Krugman doesn’t like the employer of the person who brought them to light.

    Posted in Obamacare [slideshow_deploy]

    29 Responses to Medicare Administrative Costs and Paul Krugman’s "Propaganda Shop"

    1. Andrew, Michigan says:

      Medicare may have more Admin. cost than Medicare Advantage, but I have a bone to pick with the Medicare Advantage folks. The art of "bait & switch" is running rampant and is a problem that needs to be addressed before ultimate failure.

      1. BAIT – Medicare Advantage is baiting consumers (many who are easily confused with the topic) with the aspect of simplier billing stating (with their hired representatives in the booth at Wal-Mart & Shopping Malls) that the consumer will only have one bill wheras many Medicare reciepients have numerous "secondary or supplemental coverages" thus creating more paperwork for the senior. The second promotional point is less overall "out-of-pocket" expenses.

      2. SWITCH – The privatized Medicare Advantage companies have the ability to change benefits "at a whim" many times unbeknownst to the consumer/senior. A simple example is they start with a minimal copay of maybe $5 for an office visit and abruptly change it to a $40-$45 copay after the senior is established for 1 or 2 years. This is diminishing the overall health of our seniors right through their pocketbooks. Medicare does not do this.

      This is why I am advising my friends to partake of Medicare rather than Medicare Advantage. Both systems have the potential to work and work well, Medicare could simplify procedures with secondary insurers and Medicare Advantage may want to consider less promotion and improved benefits that the populus has come to expect out of this entitlement. Overall both systems wether it be Medicare or Medicare Advantage are very confusing for the typical senior in which I think Washington needs to address with simplification.

    2. Barb -mn says:

      More proof, defying truth! It would be interesting for civil lawsuits to commence on the basis of defamation, misrepresentation, misleading, etc.

      Heritage Foundation, Robert Book, thank you for all your work and standing the ground of honesty.

    3. Spiritof76 says:

      So the Commie from Al Jazeera of the West had shown his true colors. He has no facts but only spin, just like Al Gore and his man-made global warming hoax.

      This is a clear example of why the rag New York Lies is going bankrupt.

    4. Alex Lawson, DC says:

      Can you go through this Milliman report and show how it is wrong? I always thought that administrative costs were lower for Medicare than ESI

      The report was commissioned by The Council for Affordable Health Insurance (CAHI) a research and advocacy association of insurance carriers active in the individual, small group, HSA and senior markets. CAHI's membership includes insurance companies, small businesses, providers, nonprofit associations, actuaries, insurance brokers and individuals. Since 1992, CAHI has been an active advocate for market-oriented solutions to the problems in America's health care system.

      http://www.cahi.org/cahi_contents/resources/pdf/C

    5. Pingback: » Financial News Update - 07/06/09 NoisyRoom.net: “Extremism in the defense of liberty is no vice. Moderation in the face of tyranny is no virtue.” Barry Goldwater

    6. Myra, FL says:

      To Andrew,Michigan:

      I may, possibly, be wrong, but I don't think Medicare Advantage Plans can change their co-pay amounts without permission (or at least "approval") from the government. Plus, there are many different versions of MAP…some charge no co-pays. Some charge different co-pays for services by "in-network" vs "out-of-network" providers. Further, these plans are not exactly "privatized"…they all are funded to some extent by the government. And they are all regulated to some extent by the government.

      All MAPs MUST provide at least the same benefits available with "traditional" Medicare, but may, and often do, provide many additional benefits. It just depends on what the individual may want, or be able to, pay. Much closer to private insurance than "traditional" Medicare.

      I do agree that it can be very confusing when one is trying to decide which coverage to sign up for and I believe that help in choosing should be easily accessible to everyone who is eligible for Medicare. Most communities do, in fact, provide programs where volunteers help one plow through all the paperwork.

    7. Leon, TX says:

      While this defense by Heritage makes some sense, it seems to me there is still a big hole in it. This is the assumption that administrative costs are roughly proportional to number of people covered. This is justified by the statement that, for Medicare, "administrative costs are mostly unrelated to the level of health care claims". First of all, nothing in that statement implies proportionality to number of people covered. Second, the fact that this is true for Medicare does not imply that it is true for the private health insurers with whom the comparison is begin made.

      Intuitively, it seems implausible to me that the marginal administrative costs for the hypothetical "healthy 25-year-old who never goes to the doctor" are the same as those for an elderly obese man with kidney problems and a failing heart. Admittedly, "implausible" is not the same as impossible, and maybe my intuitions are just wrong. But if so, some explanation of why this is so is required.

    8. travis, seattle says:

      You say:

      "So even if we believe Hacker’s comparisons between Medicare Advantage and traditional Medicare, a true “apples-to-apples” comparison shows that traditional Medicare’s administrative cost are higher — even using a “percentage-of-costs” approach weighted in its favor."

      How does the math work? Add another 3-6% to admin costs of 2% for medicare and you get 5-8%. That isn't equal to 11-17% for the private sector.

    9. Glen, FL says:

      Does it make you all feel better too remove opposing views through censorship?

    10. E. Kinney, Novato, C says:

      All analyses should include the cost of malpractice suits with the purpose of reducing tort lawsuits. Tort Reform eliminates costly medical tests that now are used to protect the doctor from being sued

      Analyses should be done on third party payer programs versus the individual shopping for cost benefits in making payments under medical savings accounts. Example: An employee receiving $l2,000 annually in a savings account will take very good care of that money. The same employee will have an inexpensive, catostraphic insurance policy for the big, rare bills. How can we argue and compare that to third party payer or to single payer party(Government)Single payer insurance does not offer competition in the market. The matrix for analysis should have: a) single payer (no competition); b) Third party payer, where no-one has responsibility to conserve; and c) Medical Savings Accounts where the individual will carefully monitor his savings account with the year-end savings going to the individual. All plans should include tort claim costs until Congress eliminates that cost.

      Tell Congress we need good analyses and these stats take time. Slow down.

    11. Pingback: Healthcare and Heritage « WolfBrothers

    12. RaDena, Texas says:

      Excellent rebuttal!

      I was quite heartened to see that most of the comments on Krugman's article were not complimentary.

    13. Pingback: They Didn’t Have Those Levitra Ads In The Old Soviet Union. Score One For Them. « Around The Sphere

    14. Pingback: Beating on Krugman « Brian Simpson

    15. Paul, Iowa says:

      The $509 for 2005 Medicare costs seemed awfully high to me, so I looked up the numbers. According to the Trustees' Report, Medicare spent $6.1 billion in 2005 when it had 42.5 million beneficiaries. That works out to $144 per person, less than a third of the $509 that Mr. Book claims.

      Mr. Book's does not provide a line-by-line reconciliation of the $144 and the $509. He does reference a paper by Benjamin Zycher at the Manhattan Institute, so I read it. Zycher increases Medicare costs by adding his own estimate of other government costs that are not in the Trustee's numbers. However, his methods are highly questionable.

      For example, Zycher adds $7.2 billion of expense by allocating 17% of the total Federal bill for "administration of justice". His "reasoning" is that Medicare is 17% of the non-defense budget, therefore it must consume 17% of the "administration of justice". I'd estimate that courts and law enforcement sometimes get involved in lawsuits and fraud involving Medicare, but no more often than they do for private insurance, so the correct addition for this activity is $0. Zychers other steps are also questionable.

      I think Book owes his readers a better explanation of how the $144 became $509.

      (Note that the justice dept and the FBI do have a special fraud unit for Medicare, but it is already included in the $6.1 billion. Also note that Mr. Book references a study from CAHI that has similar problems to the Zycher study, though not as severe. Therefore their additional costs are not as high.)

    16. Brooke, Califonia says:

      Perhaps this is a simplistic view of the matter, but how is an argument for or against the severity of administrative costs relative to the NEED for government run health care? I understand the basic logic that if less dollars are spent to cover administrative costs, then more dollars can be spent on patient care and benefits. However, the bigger issue seems to be that our government is moving quickly to overhaul a system based on 15% of the US population (~45 million people). Furthermore, this 15% is a flawed number as it includes individuals who choose not to insure themselves or are between insurers. I believe this % of the 45 million "uninsured" accounts for approximately 40-50% of that number (45 M). Therefore, we are talking about 27 million people(or less) who are truly uninsured (if we assume 40%). How does our government have the audacity to cite a health care crisis based on such a small percentage of the population? Much of the smaller uninsured figure is comprised of illegal immigrants because the census is mandated to count all people in the United States (legal or otherwise). Anytime our government has acted quickly under the guise of a crisis the American people are left with higher taxes, more government involvement and less liberty (we have seen this from both the left and the right – most recently under the Paulson Plan and the Stimulus Bill).

      Medicare and Medicaid alone have extremely high unfunded commitments that will be paid by future generations. Why in the world would the tax paying American public willingly leverage the future of our children under a new program that will cost taxpayers (making more or less than $250k) nearly $1.5T (CBO estimates) and only insure an additional 6 million people (taking the 45 million uninsured to 39 million). I guarantee, the government will find a way to insure those "left behind" by the current legislation through another piece of legislation that will further saddle our liberty. Finally, haven't we learned that every time the government tell us something will cost $X, we typically end of paying $3X?

      This is not a left or right, democratic or republican issue, this is an American issue and the question is whether we feel we can be responsible for our health and health maintenance and that of our family's or whether we want the government (or likely a non-elected administrative group) to make the decisions for us. Ultimately, will there be a population of people who cannot care for themselves and/or pay for insurance? Absolutely. This is where public and private involvement is imperative and has proven to work. The group mentioned previously is not the majority and it is everyone's responsibility to help if we are part of a civil society.

      We need to fight for more doctor-patient relationships and provide incentives for the best and brightest to practice medicine. We also need to find better ways of insuring people for life rather than each time they change a job. By implementing a carry for life system, the insurance company can better estimate costs over a life time and set premiums accordingly. Finally, each American must take a stake in their health and rely less on insurance to cover them for the occasional cold, but rely on insurance to be there when they have unexpected medical ailments that are life threatening. We need to change the mindset that it only costs us a $10, $15, $25 co-pay to see the doctor, while the typical primary care physician is only making a small percentage more to bill and collect (it may take 120 or more days, which ultimately decreases the value of a doctor's dollar earned)! That is our responsibility as consumers. We don't need to government to tell us that, we are too well-equipped to surrender our health to someone else. Once we implement a system that is patient-physician focused, we can have the discussion about those individuals who cannot take care of themselves without intervention (government or private or both).

    17. Neal Lambert, Smiths says:

      To President Obama, Senator Levin, Senator Stabenow

      You where obligated to take an oath of office. In that oath you swore to uphold the constitution of the United States of America. The rule of law guaranteeing freedom, life, and liberty to all citizens of the United States

      The United States choose a form of government based on capitalism. Free trade being the hallmark of capitalism.

      During the last 6 months the new administration has proposed changes that are contrary to the long and successful way of doing business. It appears that we are being lead into a multism type of way of life. A mixture of socialism, Marxism and Fascism is the way your administration is leading us.

      The cap and trade that narrowly passed the house of representative would place a damaging burden on especially people and family’s that use utilities’. Those rely on fossil fuels. Global warming is not accepted in all quarters as an absolute.

      Atomic power, if allowed to come on line over the next few years, could alleviate the carbon issues you think we face. Some say carbon is causing the problem of global warming. Global warming is not new. It has happened many times over the life of the planet earth. Please vote no on all legislation concerning this issue.

      Government run health care has no place in a free market.

      Put Medicare and medicade under private control to stop fraud that is now rampant. Government set controls and regulations, malpractice insurance costs are excessive. Put a ceiling on damages that would be paid in malpractice cases. Vote no on any increase government intervention in health care. Costs of procedures could be reduced as well as hospital and nursing home costs.

      Illegal aliens: This must be stopped because of the cost in welfare, hospitalization, education, and social security. By not stopping it you are breaking the rule of law which you took and obligation to uphold. Amnesty does not appear in the constitution. What are you doing about the group that wants to take the southwest back to Mexico. Why have you not arrested them for sedition?

      Government run industry and financial institutions must be held to a minimum. By helping the entity to become whole and then vacate the enterprise. No outside party group of non-vested entity should be allowed to own, manage, or have a voice in the business.

      The word fair does not appear anywhere in the constitution we do have rights.

    18. Barb -mn says:

      Brooke, I appreciate you're comment. The government will continue to deceive the public in various areas (health, man-made global warming, etc.) so to result in panic or desperation or indoctrinated and manipulated thinking of the citizens they serve.

      This will gain the power and control the government continues to gain from people of a "FREE" society.

    19. Dennis D says:

      Krugman accuses an organization of propaganda ?? Does he realize he works for the New York Times??

    20. Russell Smith, Dubli says:

      Why don't you just read the report? It is dry reading, but it appears to me to be extremely logical if you take it slowly. To help those who want the link, it is http://www.cahi.org/cahi_contents/resources/pdf/C

      Paul Krugman, the economist Nobel Laureate, I am sure will be able to read it. It would be nice if Paul put his skills to work for trying to explain economics instead of being just a Keith Olberman with a sharpened pencil instead of tongue.

    21. Andy Logar, Santa R says:

      The only reason Krugman won the Nobel in economics is that he never missed an opportunity to inveigh against GW Bush. The quality of his columns does not reflect a superior intellect (in my opinion).

    22. ken, miami says:

      The ad-hominem attack is a logical fallacy, of course. But as a causal reader of this site, one casnnot help but notice that the conclusions of your "scientific" studies unfailingly support a consistent point of view. Everyone knows your conclusions will be before reading any article in here. I've never seen anyone on this site change their mind or go against the set world view presented here. I guess you are the unique group that's correct 100% of the time.

    23. Len, Asheville says:

      Book's commentary is all smoke and mirrors. Ask any doctor how much time is spent on billing and other administrative matters not related to delivery of medical services. It is considerable. Medicare is single-payer, and therefore the myriad administrative costs of private health care insurance are kept centrally–4% vs. 16% for private insurance. The fact that more people under Medicare are likely to visit their doctors than younger people shows that even with this extra administrative burden, Medicare administrative costs are far lower.

    24. Patricia Erwin says:

      The Heritage Foundation lost its credibility the day it was founded. It's laughable that any

      Heritage employee, by him or herself,could take on Paul Krugman. How many did you squeeze into the conference room to take on Krugman? Book, and other Heritage mouthpieces haven't got what it takes to get the facts straight, analyze material without bias, and reach conclusion that are counter to Heritage ideology. Please tell me of an honest, unbiased, informative report authored by a member of the Heritage Foundation. Heritage should hold on to the little bit of credibiity they have in the eyes of some and stay out of the health care debate.

    25. Pingback: Medicare’s Low Administrative Costs Cost You $60 Billion a Year | Conservative Principles Now

    26. vulcan alex, tenness says:

      I don't know about anybody else, but for my father an advantage program was a very good solution for many years. You need to be somewhat healthy and be able to fight the system but the costs to you can't be beat. You also don't need three levels of insurance. The previous post is probably by a biased person who does not want the restrictions on caregivers that the advantage plans have. For my father a plan that cost only the basic amount turned into a 10K / year expense under Medicare and associated insurances.

    27. Sharmarke says:

      Your main point fails: the figures only stand because more than 3 times as many people are on private health insurance as they are on Medicare in the United States.
      See, it's like dividing 60,000,000 by 10,000,000 people as opposed to dividing 60,000,000 by 30,000,000 people (for the sake of argument). The quotient of the former equation exceeds the quotient of the latter.
      What's important, therefore, is simply administrative costs as a share of total health care costs, or premiums.
      Another misleading piece of propaganda from Heritage.

    28. Sharmarke says:

      Your main point fails: the figures only stand because more than 3 times as many people are on private health insurance as they are on Medicare in the United States.
      If you have 30 slices split amongst 1 person as opposed to 3, then the slices/person ratio will be higher for the former case than for the latter.

    Comments are subject to approval and moderation. We remind everyone that The Heritage Foundation promotes a civil society where ideas and debate flourish. Please be respectful of each other and the subjects of any criticism. While we may not always agree on policy, we should all agree that being appropriately informed is everyone's intention visiting this site. Profanity, lewdness, personal attacks, and other forms of incivility will not be tolerated. Please keep your thoughts brief and avoid ALL CAPS. While we respect your first amendment rights, we are obligated to our readers to maintain these standards. Thanks for joining the conversation.

    Big Government Is NOT the Answer

    Your tax dollars are being spent on programs that we really don't need.

    I Agree I Disagree ×

    Get Heritage In Your Inbox — FREE!

    Heritage Foundation e-mails keep you updated on the ongoing policy battles in Washington and around the country.

    ×