Central to this study is the recognition that there are more costs in running the Medicare program than just paying claims costs that are regularly included, and are more transparent, in any private-sector assessment of administrative costs. For example:
Company Policies: Executives and boards of directors consider, debate, and decide company policy. In Medicare, that function is often handled by Congress and its legislative staff. Setting program policy requires time and money not reflected in Medicare’s official administrative cost estimates.
Just imagine, for example, all of the congressional and administrative staff time and effort that were devoted to creating, debating, promoting, opposing, and ultimately passing the Medicare Modernization Act of 2003. One might compare it to a huge new corporate venture or restructuring. Yet not a dime of the money and time spent on that months-long public debate appears in Medicare’s administrative costs.
Management: Businesses must include management costs in their administrative costs: Medicare doesn’t. The salaries of professionals at the Centers for Medicare and Medicaid Services (CMS), from Dr. Mark McClellan down, are excluded from Medicare’s administrative cost estimates, as are the building costs to house that part of the leadership team. Private insurers don’t have that luxury.
Raising Capital: Private industry has to raise capital, usually by selling stock or borrowing funds. And if an insurance company borrows money to pay for a building, it must pay interest on the loan. In other words, in the private sector there is a cost of capital.
Of course, the federal government also raises capital and borrows money to pay Medicare claims, and it even pays itself interest on some of that borrowed money.
But it includes none of these costs in its administrative estimates. It simply takes (or will take) the money from taxpayers. And while Medicare’s “cost of capital” is big now, it will grow exponentially in the future as Medicare outlays grow faster than the Part A payroll tax.
Premiums and Commissions: One of the most common complaints is that the private sector has to pay agents to market and sell its products, which, critics contend, the government doesn’t have to do.
Well, not exactly. You may have noticed that CMS has been heavily involved lately in promoting the new Medicare drug benefit. Nothing wrong with that, but those are marketing costs, which are ignored in Medicare’s administrative numbers.
Premiums are the primary way private insurers obtain the funds they use to pay claims. But the government also has to bring in funds in order to pay Medicare claims. How does it do that? Through taxes. Employers, the IRS, and the Social Security Administration are, in effect, the sales force and collection arm for the Medicare program. Workers and employers currently each pay half of the 2.9 percent payroll tax that funds Medicare Part A.
Employers, of course, have to handle the administrative functions of getting that money to the government. Thus, that part of Medicare’s “premium collection” actually shows up in employers’ administrative costs–including, ironically, those of insurers collecting that 2.9 percent for the government–rather than Medicare’s.
Revenue to Pay the Government’s Share of Part B: Seventy-five percent of Medicare’s costs come from general revenues collected by the IRS. And the Social Security Administration collects the 25 percent of the Part B program that comes from seniors’ Social Security checks. Yet again, those “collection costs” are ignored in estimates of Medicare’s administrative costs.
Claims Processing and Fraud: Medicare pays claims, millions and millions of them. The claims volume is so heavy that there is little time to do anything else, such as scrutinizing and reviewing the providers’ bills, checking with providers when something looks amiss, and withholding payment until discrepancies have been resolved.
Instead, Medicare is set up to catch problems primarily in cases of massive fraud and abuse, and it does that through the Inspector General in the U.S. Department of Health and Human Services (HHS), not CMS. In other words, while insurers see claims oversight as responsible stewardship and a collaborative effort to ensure proper payment, HHS operates it more as a policing effort.
Premium Taxes: Every state imposes a tax on insurance premiums collected, usually running in the 1 percent to 3 percent range. Those taxes are factored in as part of a company’s administrative costs.
Medicare has no equivalent. And this highlights the point that a part of the insurance industry’s administrative costs are not because the private sector is inefficient, but because government is taxing it and imposing regulations and unfunded mandates (it tells the private sector to do something, but doesn’t reimburse its costs).
There is something a little disingenuous about imposing unwanted taxes and regulations on an industry and then criticizing it because its administrative costs are higher than the untaxed government program.
— Merrill Matthews