Medicare Prescription Program SANS Private Insurance Companies

If the dollars the U.S. spends on Medicare belonged to a country, it would be the 4th largest economy in the world!* We spend far more on health care than any country while the quality of that health care is abysmal in comparison.

Medicare administrative costs are generally assumed to be approximately 2%, while private insurance companies' administrative costs are projected in the range of 20-25%.** Quite a difference. Medicare costs between 18-23% less.*** Some argue that Medicare's actual administrative costs are closer to 5.2% while private insurance companies are closer to 16.7%. Even if that were true, the difference in costs is still quite remarkable. Medicare would still cost 11.5% less. The figures are staggering. Using the most conservative number of 5.2%, the Medicare cost of administering just ONE BILLION dollars in health care is $52 million. Conversely, the private insurance would charge $167 million. Private insurers charge right at three times the amount that it costs Medicare to administer its program.

The next question, of course, is why do we pay private insurance companies more than $100 million extra to administer every billion dollars of health care? Good question. Unfortunately, we do not spend $1 billion ($1,000,000,000 - that is 9 zeros) a year on our health care. Instead, we spend close to $2 TRILLION on health care every year! That is $2.000,000,000,000 (as in 12 zeros). The numbers are staggering.

People who advocate using private insurance companies claim that those costs would be far less if we omitted profits and several other line items. True. But are the private insurance companies willing to forgo their profits in order to be competitive with Medicare? I think not. Those same advocates point out that should the government not collect enough from our taxes, the cost of funding Medicare claims would raise Medicare's administrative costs considerably. True again.

However, given the savings, our government might consider Medicare funding a priority. Now could Medicare improve its services? Sure. Although it has a tight administrative budget, in 2001, it kept its claims at approximately $1-2 per claim vs. $6-10 for private insurance companies.****

Medicare could improve savings and prevent errors in the following ways: Tighten its oversight: Verify contractor report data, performance, accountability and management of contractor finances.

• Make its internal management controls consistent.
• Congress can make Medicare's Part D (prescription drug program) open to low bids like the Veteran's Administration.
• Cap all prescription costs as does every other industrialized country in the world.

My suggestion: Omit the middleman, the insurance companies, and put caps on what the large pharmaceutical companies can charge for medications. Doing either would save us a fortune. Imagine how much we would save is we did both. Then we could insure everyone in the country. Of course, the insurance companies and pharmaceutical companies will probably disagree. More about pharmaceutical companies later. Stay tuned.

Sources:* United States Health Care Expenditures Spending Levels Elements of Contemporary Practice, Health Care Economics: The Larger Context: Introduction. Posted June 7, 2006 Medscape Today.
** Medicare's Hidden Admin Costs: Comparison of Medicare and The Private Sector January 10, 2006, sourcing Mark Litow, Ph.D., of Milliman, Inc.
*** Ibid
**** USGAO Testimon-The Committee on Finance, US Senate, Medicare Management Current and Future Challenges, Statement of Wm. J Scanlon Dir, Health Care Issues, June 19, 2001.