Medicare’s Hidden Costs Extensive, Expensive, Report Says

Published March 1, 2006

In January, the Council for Affordable Health Insurance released a study, “Medicare’s Hidden Administrative Costs: A Comparison of Medicare and the Private Sector.” The following article and sidebar are adapted from that study.

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’s administrative costs compose about 2 percent of claims costs, while private insurance companies’ administrative costs are in the 20 to 25 percent range or more.

That assertion is nearly always followed by a policy recommendation: Switch everyone to a government-financed health care system, or just put everyone into 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.

Sound too good to be true? It is.

Not Comparable

It is very difficult to do a real apples-to-apples comparison of Medicare’s true costs with those of the insurance industry. 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. (See sidebar, “Some Hidden Costs.”)

In addition, even though the private sector’s administrative costs are higher than Medicare’s, that isn’t “wasted money” that could go toward insuring the uninsured. Consumers receive significant value for those additional dollars.

Some activities that may increase administrative costs may also improve the quality of care. The private sector, for example, implements policies such as disease management that are intended to lower health care provider costs and improve outcomes.

Moreover, unlike Medicare, private insurers prefer the ounce-of-prevention approach. They scrutinize individual provider claims more closely, challenge questionable procedures, and determine whether, in the company’s opinion, a claim is valid or needs to be reconsidered. Members of the medical community often complain that some insurers take this responsibility too seriously or even abuse it, frequently resulting in late, reduced, or denied payments.

Hidden Costs

The government doesn’t reflect all of the costs of doing business in its official estimates of Medicare administrative costs–but that doesn’t mean they don’t exist. Or that taxpayers don’t pay those costs. They do.

A hidden cost is still a cost, even if taxpayers don’t know they are paying it.

Merrill Matthews Jr. ([email protected]) is director of the Council for Affordable Health Insurance.

For more information …

The full text of the January 10, 2006 report, “Medicare’s Hidden Administrative Costs: A Comparison of Medicare and the Private Sector,” is available online at