Low overhead

In this week's Newsweek for Smart People, Jonathan Alter argues for government health insurance, and touts Medicare's low 3% admistrative cost, versus 10% to 20% for private insurers. He says that health care is an example of something that government does more efficiently than private enterprise.

Medicare's overhead is low for all the wrong reasons.

Medicare does not evaluate or rate its insureds. If you are over 65, you're covered. That saves a lot of front-end administration and indulges an economic model that no business could survive, even under universal coverage. If you do not evaluate the risks, you cannot predict claims and cannot intelligently set a premium.

Medicare barely supervises its payments to providers. File a claim, get a check. That saves a lot of back-end administration, and it leads to repeated substantial fraud, a massive uncontrolled expense.

In the middle, Medicare makes no effort to balance income and expense, because its economic model is precisely backward: healthcare costs whatever it costs, and Medicare sends the bill to the taxpayer. That saves a lot of administration, in the same way that Paris Hilton saves administrative expense by spending whatever she wants.

And yet, paradoxically, Medicare is so stingy with payments, and so buried in paperwork, that many physicians refuse to accept new Medicare patients.

Is it possible that if Medicare staffed up and raised its administrative overhead to 15% of budget, then its overall cost would decrease by a greater absolute amount? Yes. More than possible. Probable.

Medicare's 3% administrative overhead is not evidence of efficiency. It is a consequence of negligence within a system that lacks an incentive for sound management.