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Health Care Costs

PERSPECTIVE

Does U.S. Tax-Financed Health Spending Really Incur Waste?

The authors assert that this recycling incurs waste in the form of the high overhead and profits siphoned off by private insurers and that no added value is created in the process. That is merely a hypothesis, not a fact. Even so, they throw down the gantlet before policy analysts and policymakers who propose ever more of such recycling in the future, either to provide insurance coverage for the uninsured or to "privatize" Medicare along the lines originally proposed by Henry Aaron and Robert Reischauer and, more recently, in the Breaux-Frist I proposal (S. 357).¹ The rationale for the recycling is that it will either (1) yield society more value per tax dollar raised, (2) allow society to achieve the same value with fewer tax dollars, or (3) do both.

So far, the proponents of the recycling have treated the presumed superior efficiency of the private sector as an axiom—that is, a proposition requiring no proof because its truth is self-evident. That attitude may be rooted in the early and mid-1990s, when private insurers succeeded in keeping the annual growth in employers’ premiums in the low single digits, while Medicare spending per beneficiary continued to rise in the high single digits. Furthermore, private health plans then proposed to use new information technology to pay only for efficient, evidence-based medicine and to empower the insured with consumer-friendly databases to facilitate efficient choices among competing plans.

This felicitous vision so far has failed to materialize. Therefore, it is incumbent upon the proponents of recycling tax funds through the private sector to demonstrate convincingly, with appeal to empirical support (not just preferred axioms), precisely why the benefit-cost ratio of that policy would exceed one. In this regard, I have been disappointed by the manifest reluctance among executives of private health plans to respond to my questionnaire on that very issue.²

Administrative costs.

 
On the cost side, we can "guesstimate" at least some tentative answers even without the executives’ help. Medicare now absorbs about 2 percent of the funds it collects for administration.³ Surveys conducted by Sherlock Company suggest that private health plans under Medicare+Choice now devote an average of about 8 percent of total premiums for Medicare enrollees to sales, general, and administrative expenses (SG&A).⁴ If one assumes that the plans need an additional 2 percent of those premiums for profits, then they would need at least eight cents more per premium dollar than Medicare does to administer that cash flow. It is doubtful that the plans can procure health care at prices lower than those paid by Medicare. They might obtain the extra eight cents per premium dollar through tighter utilization controls, but providers might decry it as "rationing" and fuel yet another backlash against managed care. In the end, beneficiaries might have to cover the added SG&A and profits through higher premiums.

These considerations suggest that it would be difficult, on the basis of available data, to rationalize the Breaux-Frist I proposal with appeal to overall cost savings. Therefore, for its benefit-cost ratio to exceed one, the proposed recycling would have to yield added benefits per dollar of health spending on the elderly.

Consumer satisfaction.

Top Administrative costs. Consumer satisfaction. Providers' administrative costs. Disease management. Politics. NOTES

 
Those added benefits are unlikely to be found in higher consumer satisfaction with the administration of their benefits by private health plans. In a 1998 nationwide survey undertaken by the Henry J. Kaiser Family Foundation and the Harvard School of Public Health, for example, respondents were asked: "What kind of job does each do serving health care consumers?"⁵ Among both young and old, Medicare garnered a higher fraction of respondents’ answering "Good" than did any other type of insurance plan. The responses were surprising, because the benefit packages offered to Medicare beneficiaries by private insurers have been more generous than Medicare’s own benefits. In an earlier nationwide survey on Medicare policy, 35 percent of respondents favored turning over Medicare to private health plans, while 58 percent wished Medicare left "as it is today."⁶

Providers’ administrative costs.

Top Administrative costs. Consumer satisfaction. Providers' administrative costs. Disease management. Politics. NOTES

 
The proponents of recycling may argue that private health plans visit fewer administrative costs on the providers of health care than does Medicare, even if one includes providers’ costs of financing the higher float inherent in the much slower payment by private health plans. For all one knows, however, the obverse might be the case. I am not aware of a credible study that compares the relative administrative costs that Medicare and private plans visit on providers. Such a study would be timely.

Disease management.

Top Administrative costs. Consumer satisfaction. Providers' administrative costs. Disease management. Politics. NOTES

 
If the recycling of Medicare dollars through private insurers is to yield added benefits to society overall, they probably would have to come from superior disease management in the private sector, in a way that appeals to the elderly and their physicians. To make that case, one need not argue that the traditional Medicare program could not conceivably be a more efficient disease manager as well. The argument might be that, at the behest of the providers of care, and for purely political reasons, Congress never has allowed Medicare to be a prudent purchaser and manager of health care, and it never will.

Politics.

Top Administrative costs. Consumer satisfaction. Providers' administrative costs. Disease management. Politics. NOTES

 
Finally, a rationale for the Breaux-Frist I reform might be simply that even if it raised overall health spending on the elderly somewhat, the reform would limit taxpayers’ risk exposure to those rising expenditures. It would not be an economic rationale for recycling, but a purely political one that ought to be debated openly on those terms.

Editor's Notes

 
Uwe Reinhardt is the James Madison Professor of Political Economy at Princeton University’s Woodrow Wilson School of Public and International Affairs.

NOTES

Top Administrative costs. Consumer satisfaction. Providers' administrative costs. Disease management. Politics. NOTES

 

1. H.J. Aaron and R.D. Reischauer, "The Medicare Reform Debate: What Is the Next Step?" Health Affairs (Winter 1995): 8–30.
2. Available from the author upon e-mailed request to reinhard{at}princeton.edu.
3. Sherlock Company, PULSE (Newsletter) (September 2001): III.
4. 2001 Annual Report of the Board of Trustees of the Federal Hospital Insurance Trust Fund, sec. I.B, www.hcfa.gov/pubforms/tr/hi2001/secib.htm (15 March 2002). For younger enrollees, 15–20 percent of premium is absorbed by SG&A and profits. As a percentage of total premium, the load factor is lower because the premiums for elderly persons are much higher.
5. Henry J. Kaiser Family Foundation and Harvard School of Public Health, National Medicare Policy Options Survey (Menlo Park, Calif., and Boston: Kaiser/Harvard, August 1998).
6. Kaiser/Harvard, Medicare Poll (May 1995).

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