Medicare Blog

what are the administrative costs of medicare

by Prof. Gilberto Walter V Published 2 years ago Updated 1 year ago
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What percentage of Medicare claims are administrative costs?

One of the most common, and least challenged, assertions in the debate over U.S. health care policy is that Medicare administrative costs are about 2 percent of claims costs, while private insurance companies’ administrative costs are in the 20 to 25 percent range.

Is Medicare more efficient than private insurance?

One of the most common, and least challenged, assertions in the debate over U.S. health care policy is that Medicare is much more efficient than the private sector. Critics of the private sector health insurance industry like to boast that Medicare administrative costs are about 2 percent of claims costs, while private insurance companies’ administrative costs are in the 20 to 25 percent range — or more.1 That assertion is nearly always followed by a policy recommendation: Switch everyone to a government-financed health care system — or just put everyone in Medicare — and the country will save so much in administrative costs that it can cover all of the 46 million uninsured with no additional health care spending.2 Sound too good to be true? It is.

Is Medicare administrative cost hidden?

The primary problem is that private sector insurers must track and divulge their administrative costs, while most of Medicare’s administrative costs are hidden or completely ignored by the complex and bureaucratic reporting and tracking systems used by the government.

Is Medicare getting more efficient?

Is Medicare Getting More “Efficient”? Based on Tables 1 and 2, one can see that the administrative cost figure for Medicare has been decreasing and is estimated to continue downward — making Medicare look as if it is getting even more “efficient” as time passes. Higher costs in early years were partly due to startup program costs — which private insurers also have — but the primary reason for the decrease is clearly the acceleration in Medicare benefits (averaging about 8 percent growth per year) versus the estimated increase in program administrative costs (abut 3 percent per year). Using Table 2 as a basis, even with the unreported costs (see Table 1, Medicare ii), Medicare over time looks better and better relative to the private market because private administrative costs will likely remain roughly the same as a percentage of claims. Why are benefits growing faster than administrative costs? There are least two reasons: increased economies of scale and the high, and growing, cost of treating seniors. Private Sector Economies of Scale. Certainly one reason for Medicare’s declining percentage of administrative costs is greater economies of scale, but the private sector also can achieve economies of scale. Large employers have lower administrative cost ratios than small employers, and not much more than Medicare.

What percentage of Medicare is administrative expenditure?

The latest trustees’ report indicates Medicare’s administrative expenditures are 1 percent of total Medicare spending, while the latest NHEA indicates the figure is 6 percent. The debate about Medicare’s administrative expenditures, which emerged several years ago, reflects widespread confusion about these data. Critics of Medicare argue that the official reports on Medicare’s overhead ignore or hide numerous types of administrative spending, such as the cost of collecting taxes and Part B premiums. Defenders of Medicare claim the official statistics are accurate. But participants on both sides of this debate fail to cite the official documents and do not analyze CMS’s methodology. This article examines controversy over the methodology CMS uses to calculate the trustees’ and NHEA’s measures and the sources of confusion and ignorance about them. It concludes with a discussion of how the two measures should be used.

What is CMS in Medicare?

The Centers for Medicare and Medicaid Services (CMS) annually publishes two measures of Medicare’s administrative expenditures. One of these appears in the reports of the Medicare Boards of Trustees and the other in the National Health Expenditure Accounts (NHEA).

Why is administrative cost lower in Medicare?

Expressing administrative costs as a percentage of total costs makes Medicare's administrative costs appear lower not because Medicare is necessarily more efficient but merely because its administrative costs are spread over a larger base of actual health care costs. Administrative Costs per Person.

What are administrative costs?

Administrative costs can be divided broadly into three categories: 1 Some costs, such as setting rates and benefit policies, are incurred regardless of the number of beneficiaries or their level of health care utilization and may be regarded as "fixed costs." 2 Other costs, such as enrollment, record-keeping, and premium collection costs, depend on the number of beneficiaries, regardless of their level of medical utilization. 3 Claims processing depends primarily on the number of claims for benefits submitted.

What is Medicare beneficiary?

Medicare beneficiaries are by definition elderly, disabled, or patients with end-stage renal disease. Private insurance beneficiaries may include a small percentage of people in those categories, but they consist primarily of people are who under age 65 and not disabled.

How much does Medicare cost?

Advocates of a public plan assert that Medicare has administrative costs of 3 percent (or 6 to 8 percent if support from other government agencies is included), compared to 14 to 22 percent for private employer-sponsored health insurance (depending on which study is cited), or even more for individually purchased insurance.

How much higher was Medicare in 2005?

In the years from 2000 to 2005, Medicare's administrative costs per beneficiary were consistently higher than that for private insurance, ranging from 5 to 48 percent higher, depending on the year (see Table 1).

What percentage of health insurance premiums are administrative costs?

In recent years, these so-called "administrative costs" have accounted for 11.4--13.2 percent of total health insurance premiums. [7]

How are administrative costs measured?

In the case of private insurance, administrative costs are measured by the difference between premiums collected and claims paid. The result is that this includes some costs that are not really "administrative.".

How are administrative costs calculated?

Administrative costs are calculated using faulty arithmetic. But most important, because Medicare patients are older, they are substantially sicker than the average insured patient — driving up the denominator of such calculations significantly.

What are the government agencies that administer Medicare?

First, other government agencies help administer the Medicare program. The Internal Revenue Service collects the taxes that fund the program; the Social Security Administration helps collect some of the premiums paid by beneficiaries (which are deducted from Social Security checks); the Department of Health and Human Services helps to manage accounting, auditing, and fraud issues and pays for marketing costs, building costs, and more. Private insurers obviously don't have this kind of outside or off-budget help. Medicare's administration is also tax-exempt, whereas insurers must pay state excise taxes on the premiums they charge; the tax is counted as an administrative cost. In addition, Medicare's massive size leads to economies of scale that private insurers could also achieve, if not exceed, were they equally large.

Is Medicare tax exempt from state taxes?

Private insurers obviously don't have this kind of outside or off-budget help. Medicare's administration is also tax-exempt, whereas insurers must pay state excise taxes on the premiums they charge; the tax is counted as an administrative cost.

Is Medicare more expensive than private insurance?

And by that measure, even with all the administrative advantages Medicare has over private coverage, the program's administrative costs are actually significantly higher than those of private insurers.

How much does Medicare cost?

In 2018, Medicare spending (net of income from premiums and other offsetting receipts) totaled $605 billion, accounting for 15 percent of the federal budget (Figure 1).

What percentage of Medicare is spending?

Key Facts. Medicare spending was 15 percent of total federal spending in 2018, and is projected to rise to 18 percent by 2029. Based on the latest projections in the 2019 Medicare Trustees report, the Medicare Hospital Insurance (Part A) trust fund is projected to be depleted in 2026, the same as the 2018 projection.

How fast will Medicare spending grow?

On a per capita basis, Medicare spending is also projected to grow at a faster rate between 2018 and 2028 (5.1 percent) than between 2010 and 2018 (1.7 percent), and slightly faster than the average annual growth in per capita private health insurance spending over the next 10 years (4.6 percent).

Why is Medicare spending so high?

Over the longer term (that is, beyond the next 10 years), both CBO and OACT expect Medicare spending to rise more rapidly than GDP due to a number of factors, including the aging of the population and faster growth in health care costs than growth in the economy on a per capita basis.

What has changed in Medicare spending in the past 10 years?

Another notable change in Medicare spending in the past 10 years is the increase in payments to Medicare Advantage plans , which are private health plans that cover all Part A and Part B benefits, and typically also Part D benefits.

How is Medicare's solvency measured?

The solvency of Medicare in this context is measured by the level of assets in the Part A trust fund. In years when annual income to the trust fund exceeds benefits spending, the asset level increases, and when annual spending exceeds income, the asset level decreases.

How much will Medicare per capita increase in 2028?

Medicare per capita spending is projected to grow at an average annual rate of 5.1 percent over the next 10 years (2018 to 2028), due to growing Medicare enrollment, increased use of services and intensity of care, and rising health care prices.

What is administrative cost?

Administrative costs are the expenses incurred by medical insurers that are not strictly medical, such as marketing, customer service, billing, claims review, quality assurance, information technology and profits. Is the gap between private and public health insurance providers’ administrative costs really that high?

Why are administrative expenses higher in commercial markets?

Historically, administrative expenses were much higher in the commercial market because insurers did a lot of underwriting, or using the health status of individuals or groups to determine their premiums. The Affordable Care Act was designed to curb that spending.

What do private insurers do?

In addition, private insurers create provider networks, which is where they determine which doctors will offer which services under each plan and negotiate reimbursement rates. They also review which drugs will be most effective and affordable.

Is Medicare Advantage competitive with Medicare?

Glied pointed out that private Medicare Advantage plans are "pretty competitive with traditional Medicare," but also tend to operate at higher administrative costs. "They bring costs down in other ways but they have to use administrative spending to do that," Glied said.

Does Medicare piggyback on Social Security?

But because much of Medicare piggybacks off Social Security, other administrative costs such as enrollment, payment and keeping track of patients are left to the Social Security system.

Is Medicare a single payer?

Experts told us that a single-payer system for the United States would have lower administrative costs than today’s private insurance, but it likely wouldn’t be able to achieve administrative costs as low as the existing Medicare program.

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