"Private insurance companies in this country spend between 12 and 18 percent on administration costs. The cost of administering the Medicare program, a very popular program that works well for our seniors, is 2 percent. We can save approximately $500 billion a year just in administration costs." - Bernie Sanders on Sunday, September 17th, 2017 in an interview.

Sanders’ “2 percent” in the above quote refers to administrative costs per average Medicare beneficiary. However, Medicare’s administrative workload (and hence payroll) is more a matter of the complexity and number of beneficiary claims than the dollar value of these claims. By extension, administrative costs per beneficiary should not be expected to track the size of their medical bills.  For instance, there’s no reason to think a $10,000 invoice should take 10 times as much administrative staff time to process as a $1000 invoice, or that five $1000 invoices would take half as much staff time as one $10,000 invoice. Since Medicare beneficiaries are older and sicker than the general population, their medical bills will be higher and the cost-ratio of administration to expenditures will be lower.  That in itself doesn’t make Medicare more efficient than private insurers. See Medicare for All the Answer to Sky-High Administrative Costs? and The Myth of Medicare's 'Low Administrative Costs for more on this point.

Efficiency isn’t the whole story anyway. Medicare expenditures shouldn’t be taken as a given, because Medicare pays for things that shouldn’t be paid for at all. That’s because much of what is saved in administrative costs is lost in fraudulent billing and unnecessary medical care.  In 2012, the Institute for Policy Innovation estimated  that private insurers lose perhaps 1 to 1.5 percent in fraud while Medicare and Medicaid may be closer to 10 to 15 percent*. If those fraud rates are accurate and still hold, that means in 2017 Medicare and Medicaid lost between $128-$193 billion in fraud, while insurance companies lost around $18 billion (based on expenditure totals from Centers for Medicare & Medicaid Services).

Why is it is so much easier to commit fraud against Medicare than against private insurance companies? Partly because the Medicare billing system is easy to game (see, for instance, “upcoding” and “inflated risk scores”) and partly because Medicare doesn’t require preauthorization as a condition of payment for medical services and items. As one doctor put it:

“Without a doubt, there is much more fraud committed in Medicare/Medicaid than in private insurance plans. Medicare requires no preauthorization. A doctor, hospital, home care or medical supply company sends a bill electronically and a government check comes through the mail.”

Now consider this: in 2016, the U.S. life and health insurance industry generated a total revenue of 851.9 billion U.S. dollars and in 2017 the net profit of US health insurance companies ranged from 4% to 5.25% - less than $45 billion net profit for the entire industry. It would appear, then, that Medicare and Medicaid lose $83-$143 billion more in fraud per year than insurance companies make in profit. Of course, these are back-of-the-envelope calculations based on old estimates of fraud, but you get the picture.

A few years ago Medicare actually experimented with preauthorization in several “demonstration projects”. Averaged across demonstrations, billings for medical services and items dropped to half of what was being charged before implementation of preauthorization procedures. The Government Accountability Office recently came out with a report on these demonstration projects. The report’s title says it all: “Medicare: CMS Should Take Actions to Continue Prior Authorization Efforts to Reduce Spending”. Hopefully, the federal government will take note and increase Medicare’s administration budget to hire additional staff to implement preauthorization procedures as well as to beef up utilization review (after-the-fact review of medical care already provided).

Bottom line: Medicare’s skimping on administration loses more money than it saves. But Sanders’ “2%” figure for administering Medicare is misleading anyway, because it’s based on administrative cost per expenditure per beneficiary which makes no sense. As one commentator puts it:

“…total Medicare expenditures per beneficiary are nearly two and a half times the health spending per person in private insurance plans.  Thus, even if Medicare administrative costs per person were identical to private insurers’, Medicare’s administrative cost percentages would still appear two and a half times smaller. It’s important to understand that insurer administrative costs don’t rise and fall proportionally with total health claim costs.” Charles Blahous, The Costs (Administrative and Otherwise) of Medicare for All

So where does that leave Sanders’ contention that Medicare-for-all would save $500 billion in administrative costs if it just followed Medicare’s example? Well, you’d have to knock off at least a hundred billion just to account for what Medicare loses due to inadequate spending on administration and then knock off whatever it costs other agencies to do adminstrative work for Medicare. But the biggest adjustment of all would be from correcting Sanders’ math on the administrative costs of private health insurance companies. Where does that $500 billion figure come from?

For the sake of argument, let’s assume that private insurers spend between 12-18% of their revenue on administration, as Sanders contends. According to the Centers for Medicare & Medicaid Services, private health insurance companies spent $1,183.9 billion in 2017, about a third of national healthcare expenditures. This is quite a bit more than what they generated in revenue the year before (see above), but I’ll just go with the CMS figure and add $60 billion to account for unspent revenue/profit. Adding it all up, administrative costs for private health insurers would have been about $1244 billion in 2017 and 12-18% of $1244 billion equals $149-$224 billion total for insurer administrative costs that year. Once you account for how much Medicare loses in fraud and delegates to other agencies, Sanders’ $500 billion “savings” more or less disappears.

There must be a better way to achieve universal healthcare without breaking the bank. There is. Next

* More recently, James Cosgrove, who directs health care reviews for the Government Accountability Office, reported that the Medicare Advantage improper payment rate was 10 percent in 2016.

Reference:

“Medicare: CMS Should Take Actions to Continue Prior Authorization Efforts to Reduce Spending” United States Government Accountability Office Report to the Committee on Finance, U.S. Senate/ GAO-18-341 April 2018 https://www.gao.gov/assets/700/691381.pdf

 Updated February 3, 2019