Privately Run Medicare Plans are Really Expensive

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Austin Frakt draws my attention today to a new article about the administrative costs of Medicare. Exciting stuff! Long story short, Kip Sullivan of the Minnesota chapter of Physicians for a National Health Program wants everyone to understand just what’s involved in figuring out the true administrative costs of Medicare. The cost of collecting payroll taxes is one frequently overlooked element, for example. More interestingly, though, there’s a large and growing gap between the overhead calculations of the Medicare Trustees and those of the National Health Expenditure Accounts. Why is that?

According to Sullivan, the Treasury’s calculation of administrative costs does not include those incurred by Medicare Advantage and private, Part D (drug) plans….The trustees’ and NHEA measures were fairly close until the 1980s. Then they diverged as enrollment grew in Medicare Advantage and its predecessor programs. In 2006, Part D drug plans became available and the two types of administrative costs diverged further still. As traditional Medicare’s administrative costs went down, those of private plans grew.

The chart below shows what happened. When Medicare was run traditionally, overhead was fairly low and getting lower (dashed blue line). Then private plans were introduced and total overhead costs started to flatten (black line). By 1997, total overhead was about 1.4 percentage points higher than traditional Medicare alone. In that year, Medicare Advantage was introduced, and by 2005 the gap had widened to 2.1 percentage points. Then privately run prescription drug plans were introduced, and now the gap is 4.5 percentage points.

In the case of prescription drugs, it’s possible that higher overhead is justified by the lower overall program costs we get from having a lot of competing plans. In the case of Medicare Advantage, it’s just pure waste. We have higher overhead and higher overall costs, with very little benefit to show for it. As Sullivan says, this should “long ago have triggered inquiries within Congress and the US health policy community as to whether the higher administrative costs associated with the growing privatization of Medicare are justified.”

HERE ARE THE FACTS:

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ONE MORE QUICK THING:

Our fall fundraising drive is off to a rough start, and we very much need to raise $250,000 in the next couple of weeks. If you value the journalism you get from Mother Jones, please help us do it with a donation today.

As we wrote over the summer, traffic has been down at Mother Jones and a lot of sites with many people thinking news is less important now that Donald Trump is no longer president. But if you're reading this, you're not one of those people, and we're hoping we can rally support from folks like you who really get why our reporting matters right now. And that's how it's always worked: For 45 years now, a relatively small group of readers (compared to everyone we reach) who pitch in from time to time has allowed Mother Jones to do the type of journalism the moment demands and keep it free for everyone else.

Please pitch in with a donation during our fall fundraising drive if you can. We can't afford to come up short, and there's still a long way to go by November 5.

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