Conservative bloggers such of Avik Roy and Jeffrey Anderson are criticizing Obamacare by rehashing old arguments about fraud. Both noted that Medicare lost $48 billion to fraud in 2010 in contrast to $12.7 billion in profits earned by private insurers. Roy mocks Obamacare Visa-advertisement-style as being “priceless.”
However troubling we might find fraud, the real issue at hand is not fraud but total costs—the bottom line for taxpayers. That means we must contextualize the $48 billion in terms of Medicare’s total expenditures, as well as the total expenditures and profits of the most equivalent entity in the private sector.
As Jacob Hacker argues, the closest equivalent to Medicare is Medicare Advantage, Medicare’s privately administered cousin. Since Medicare Advantage has to follow the same regulations as Medicare and must treat the same population, comparing these two entities allows us to avoid a lot of the confusion found in comparisons between Medicare and purely private insurance companies.
Medicare spent $528 billion in 2010. Fraud therefore accounts for 9.1 percent of total Medicare spending. Medicare spends another 2 or 3 percent on administrative costs, bringing its total costs to 12.1 percent, at most. In contrast, in 2006 Medicare Advantage's administrative costs (10.1 percent) and profits (6.6 percent) totaled 16.7 percent. In short, even after considering fraud, Medicare is 4.6 to 5.6 percent cheaper than its nearest private equivalent. It is remarkable that this gap would be even greater if we included the presumably lower levels of fraud suffered by Medicare Advantage.
Comparing Medicare and Medicare Advantage allows us to factor out many confusing elements that we would otherwise have to deal with if we compared Medicare to pure-play private insurance companies. We don’t have to concern ourselves with things like Medicare’s premium collection, which is handled by the IRS, because Medicare Advantage enjoys these same services. Moreover, unlike Robert Book, we need not consider whether it is best to compare visits per patient or expenditure in dollars. The very similar nature of Medicare’s and Medicare Advantage’s customer base and rules regarding payments obviates the need to ask these normally important questions.
Comparing Medicare and Medicare Advantage allows us to factor out many confusing elements that we would otherwise have to deal with if we compared Medicare to pure-play private insurance companies. We don’t have to concern ourselves with things like Medicare’s premium collection, which is handled by the IRS, because Medicare Advantage enjoys these same services. Moreover, unlike Robert Book, we need not consider whether it is best to compare visits per patient or expenditure in dollars. The very similar nature of Medicare’s and Medicare Advantage’s customer base and rules regarding payments obviates the need to ask these normally important questions.
Excellent post. I think this is a useful way of establishing ceteris paribus so that we are comparing apples with apples. I would think it would be useful to delve into the fraud aspect a bit. Who is committing the fraud? Are there not parallels in the private sector which should be accounted for?
ReplyDelete