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September 12, 2007

A Better Medicare

Jon Cohn writes:

Ramesh also invokes an argument that I've always found a bit unfair: the suggestion that those of us who champion Medicare as a model of successful government-run health insurance ignore its huge cost. Nothing could be further from the truth. We're well aware of the huge costs Medicare imposes on our society. It's just that we're also aware of the even huger cost private insurance imposes.

And let me go a step further and mention the huge cost private insurance imposes on Medicare. Medicare is a Very Expensive Program for the same reasons that American health care is Very Expensive. So long as it operates within a fragmented, patchwork system that largely exists to amp up insurance industry profits, Medicare will largely act as a private insurers whose costs are borne by taxpayers. It will suffer from most all the inefficiencies endemic to the system, save the few where Medicare can act in a self-contained manner (i.e, administrative costs, where they pay 3% compared to the 14% of your average private insurer).

The idea of expanding into Medicare for All is laced with arguments about the cost savings a move towards a nationalized, integrated health system will bring. Lower administration, of course, but also better chronic disease management, and savings from lower prices extracted through government bargaining, and comparative pharmaceutical trials that direct treatment regimens more cost-effectively. Medicare is currently expensive, but less so than private insurance. In a Medicare-for-All structure, in which our health system more closely mimics that of other countries (who pay much less, as Ramesh admits), the savings could well be substantial. The fact of Medicare's cost is an argument for reform, not against, because what's so costly is our health care system, and that's what's being targeted.

September 12, 2007 in Health Care | Permalink


Two supporting comments:

- Medicare insures all that age-qualify (>65. No cherry picking that the private insurers luv so much. And Medicare is almost never cited as refusing to fund some new treatment - and certainly doesn't exclude pre-existing conditions.

- Part of the high cost of Medicare is the subsidy payments made to private insurance companies that offer approved various alternatives to standard Medicare coverage. This subsidy is above (15% or 25%?) what Medicare costs per patient. The GOP Congress/BushCo forced this cost burden on Medicare. And for what? So the insurance companies could afford to compete with the government and still make a profit. Insanity!

Posted by: JimPortlandOR | Sep 12, 2007 6:46:47 PM

And don't forget,

Medicare gets stuck cleaning up all the "preexisting conditions" that went untreated during the patients previous years in the "free market" system.

Posted by: S Brennan | Sep 12, 2007 7:17:58 PM

...except the insurers and HMOs are doing more on the chronic illness front than Medicare now - treatment of diabetes is being standardized because HMOs have been able to use outcomes measures to help steer doctors towards better, standardized practice using incentives; Medicare is only just beginning to make those advances, and is hampered by slow moving beaurocracy and Congressional interference. Medicare for all as a proposal is I think most attractive because it seems easiest - we have a system, it's national, it's got the seniors in it, they prefer it to other things... that's a large chunk of the battle right there. Except that Medicare isn't just expensive, it's not necessarily well administered, and it contributes to the insurance problem (rather than the other way round) by structuring a payment system that incentivizes more treatments and more care because it pays by the procedure, using a complicated method of reimbursement (which, by the way,doctors and hospitals are complaining about because Medicare reimbursements are not rising fast enough to meet costs). And all Medicare does is administer a program... so by what standard would you call only 3% of what it does "administrative"? I've been wondering that for pretty much ever, because it seems - and always has - like a dubious statistic. Before jumping on Medicare for all, let's stop for a minute and ask if the way it goes about determining necessary care, the way it works with hospitals, the incentives it creates, as well its only rudimentary beginnings at evaluating outcomes is really the best approach. We need a national system, sure. It's just that Medicare may not be best simply because it's about all we have to point to in terms of existing framework. If we can do better, shouldn't we start from that premise, not sell a line that says we can contort Medicare to be that better program when, experience shows, Medicare's resistance to change is already pretty clear?

And PS I think this is a big stumbling block on single payer generally - a new single payer system that isn't Medicare simply raises the question of what would happen with Medicare... and that's a hard sell to seniors, however one envisions going about it. Still, I don't think that makes the only alternative rolling Medicare over for everyone.

Posted by: weboy | Sep 12, 2007 7:55:49 PM


This recent development you cite:

"...except the insurers and HMOs are doing more on the chronic illness front than Medicare now"

You one unsupported example. CATO? AEI? RAND?

What's your source for this recent revelation that all private insurers are suddenly working against their interests by subsidizing others with preventive care?

BTW, delusional thinking doesn't count as a source.

Posted by: S Brennan | Sep 12, 2007 8:35:29 PM

The CMS has contributed significantly to the explosive cost growth by their reimbursement policy. Their theory is that if we cut reimbursement we lower costs, but it actually does the opposite effect, because it encourages more patients to be seen and more procedures to be done to make up for the cut and ultimately increases costs.

Posted by: Dingo | Sep 12, 2007 8:52:35 PM

S - I attended a conference recently, with presentations from Medicare as well as a number of other medical organization executives. This is the Medicare presentation:


This is a presentation from an HMO Medical Director in New York state:


There are additional presentations on the site that may be of interest.

You are welcome to say what you like or call me delusional, if it makes you happy. It is not in insurers interest to continue to pay for poor care that increases hospitalizations. Proper management of a disease like diabetes - encouraging regular blood testing, medication, checks for realted illnesses... these help reduce costs down the road. It makes sense for organizations to review what treatments improve outcomes, as a business proposition. That's why they've been doing it. Medicare, until the passage of Part D, was not tasked with reviewing outcomes. Now that they are, they have begun developing measures, often in partnership with providers and provider service organizations. They are still some ways away, from what was described at the conference, from being able to act on the outcome data they are still collecting.

Does that answer your question?

Posted by: weboy | Sep 12, 2007 9:56:15 PM

Weboy: And all Medicare does is administer a program... so by what standard would you call only 3% of what it does "administrative"?

Does a formula like these clear things up?

Total Program Costs minus Funds dispursed to providers equals = Funds Spent on Administration
(100% - 97% = 3%).

I note also for those who don't like the current method of reimbursing providers of Medicare (including me) that the HMO's have tried paying on the basis of capitation (head count of those served), and that just leads to hurried visits, cramped schedules, etc. that the MD's hate because it doesn't allow time for the real practice of medicine, which is by nature, individualized.

Funds dispursed to providers + Funds spent on administration = Total Program Costs
(97% + 3% = 100%)

I'm not in love with Medicare for several reasons often mentioned by progressives (pay per procedure, for instance), but the system is dependable, fair and very low overhead. We shouldn't have to spend a large part of costs on administration or profit, since the high admin of the insurance companies is spent not on improving care but on denying it, and the profit is for what?

Posted by: JimPortlandOR | Sep 12, 2007 9:59:16 PM

Thanks Jim, two thoughts come to mind, one being that 3% of a lot of money... is a lot of money. In dollar terms, does Medicare's 3% amount to more dollars for administration than other providers? I'm thinking they must have billions for administration, even at 3%; I have no idea what the story is there, just thinking out loud...

Second, I think this tends to underline Medicare's role as a payment clearing-house, unable to really examine things like outcomes, develop best practices, or realistically tackle fraud, waste and abuse. To do some of the things insurers do (which they would, probably, have to do as the sole payer), would strike me as leading to an increase in administrative costs. Again, that's off the top of my head. I still tend to think that the overall calculation is fishy; calling Medicare's administrative overhead low by percentage has just never sat well with me (or is it that other business costs that insurers would have are handled for Medicare by other parts of government?), but I'm not going to claim some magic knowledge. I just think it's overselling a benefit of Medicare all to say we can continue to expect administrative costs that fit this calculation; that seems unrealistic; unless we expect Medicare to serve mostly as a payment clearinghouse, and I don't think anyone sees Medicare for all as just that.

PS I agree, the profit motive for private insurers is the problem. But there are answers between the for profit insurers and Medicare - a number of health care providing organizations are non-profit, and we could do more to encourage this structure, for one thing. But also to be contrarian, profit motives drive decisions about managing costs that the lack of such motives do not. That's a big piece of dealing with waste in Medicare, and Medicare for all proposals don't strike me as dealing well wit this issue, at least from what I've seen.

Posted by: weboy | Sep 12, 2007 10:44:49 PM


Your sources...er..ah..notice CATO mentioned. Above, I indicated your source would be political with CATO? AEI? RAND? and what do you know.

Stuart Guterman, Senior Program Director, Medicare's Future, The Commonwealth Fund
Charlotte S. Yeh, MD, FACEP, Regional Administrator (Region I), Centers for Medicare & Medicaid Services
Mary Reich Cooper, MD, JD, Vice President and Chief Quality Officer, Lifespan Corporation
Michael F. Cannon, Director of Health Policy Studies, CATO Institute

And your World Congress PAC says it's to: "convene CEOs and senior executives from all segments of the health care industry"

Yep, that's an independent group...again, delusional thinking doesn't count as a source.

Posted by: S Brennan | Sep 12, 2007 10:50:52 PM

In a Medicare-for-All structure, in which our health system more closely mimics that of other countries (who pay much less, as Ramesh admits), the savings could well be substantial.


Other countries' systems have lower costs because they were able to manage cost growth better than the US-- in the 1980's.

Ratio of health care growth to GDP growth since 1990 (source: OECD)

The best:
Canada 1.06
Norway 0.97
Ireland 1.06
Sweden 1.13

your "favorites":
France 1.60
Germany 1.75

Others frequently cited:
Japan 3.85
UK 1.90
Australia 1.85
Spain 1.46
New Zealand 2.00

Here are the totals:
OECD average of 28 countries 1.51
European Union average of 14 countries 1.44

And the suspense... US 1.50

So the US is no different than the average of OECD countries or the EU. A few single-payer systems are better than most single-payer systems. The favored "hybrid approaches" have performed worse than the US. The more restrictive Canada/UK approach was a mixed bag- one better than the US, one worse than the US. This isn't good evidence that single-payer systems work better on cost growth than the status quo in the US, which we know is broken.

Time to find a solution would work better than that we have now, and stop stating that the single-payer cost advantage which was born in the 1980's is relevant to health care reform in 2007.

Posted by: wisewon | Sep 12, 2007 11:56:03 PM


Good comment and analysis as usual. I want to add the following: First, three of the four countries on your "best" list are very small (and comparatively homogeneous) in population – Norway, approximately 5 million people; Ireland, also 5 million; and Sweden, a bit over 9 million. The U.S. is over 300 million and far more diverse racially, ethnically, and culturally. Second, very few people here want the Canadian system because of the wait times caused by deliberate restrictions on supply of hospital capacity and medical technology (MRI's, etc.). Third, Paul Levy, CEO of Beth Israel Deaconess Medical Center in Boston, posted about what he learned at a conference he attended last month in Iceland with representatives from the five Nordic countries. The post includes information about how medical spending decisions are made at the national level which most people don't fully appreciate. You can access it here. Mr. Levy has also stated in the past that if BIDMC had to accept Medicare rates from all patients, his hospital could no longer provide the same level and quality of care that it does now even with no uncompensated care. Cost shifting to private insurance payers allows BIDMC (and most other hospitals) to offset payment shortfalls from Medicare and Medicaid. That would no longer be possible under Medicare for All.

There are quite a few ways besides single payer to achieve universal coverage, but controlling medical cost growth (relative to GDP growth) will be far more challenging. Strategies such as explicit rationing using QALY metrics, withholding interventions based on age, and deliberate restrictions on supply through Certificate of Need requirements and the like will probably ultimately have to be part of the equation. I don't think Americans are ready for any of those rationing approaches at this time. The day they will be ready may be hastened, however, by making sure that any eventual universal coverage approach we pass is financed in a very transparent way at the individual level such as a payroll tax, dedicated value added tax or combination of the two to insure that taxpayers fully and clearly understand just how much their health insurance is costing them.

Posted by: BC | Sep 13, 2007 7:21:01 AM

Sorry, I linked to the comment section of Paul Levy's post instead of his main post about the conference. The correct web address is: www.runningahospital.blogspot.com. Scroll down to his August 27th post titled: "Observations from Iceland."

Posted by: BC | Sep 13, 2007 7:46:30 AM

For a worthwhile discussion of the administrative cost issue between Medicare and private payers, see Bob Laszewski's June 25th post, along with the comments, here.

Posted by: BC | Sep 13, 2007 10:38:33 AM

Does anyone have any comment on why native groups in the following socialized medicine countries: Canada, New Zealand and Australia have such bad outcomes in infant mortality and life expectancy?


North Dakota does not have Socialized medicine but life expectancy is 78.7 years:

“North Dakota,78.7,75.8,81.7,1.0448,1.0401,1.0827,1.05588”


Should the world outside of Japan should follow North Dakota's model that is a private system with a shortage of Doctors and long drives for many to Doctors and Hospitals.

Or does this imply that what Robin Hanson says that health care has little impact on health?

Posted by: Floccina | Sep 13, 2007 11:56:35 AM

OMG, did Floccina just compare life expectancy of Native groups in foreign countries to the average life expectancy of ALL residents of North Dakota?

Holy cow, I believe she did!

Posted by: Tyro | Sep 13, 2007 12:35:57 PM


It's pretty clear from your post that:

"what [insert name hear] says [about] health care has little impact on"

the cherry picking of data.

Posted by: S Brennan | Sep 13, 2007 12:40:18 PM


The post at the link you provided is quite disingenuous. First, the fact that Medicare doesn't pay taxes on the taxes it receives is one of it's strengths as a program. Adding 3% to Medicare's admin costs is like deducing that the Indianapolis Colts are so good because of Peyton Manning and making him play for the other team.

In addition, trying to inflate Medicare's administrative costs by factoring its "share" of federal debt servicing is absurd. Medicare is already unable to access that money precisely because it's applied to debt servicing.

Therefore, if we refrain from gaming the numbers, we see that Medicare has admin costs of about 3%, while Laszewski's cherry-picked insurance companies clock in around 17%. And, even if we accept the idea that covering seniors is more cost-effective than covering everyone, the real difference between Medicare and Humana (why the sudden switch? Why not look at Wellpoint and United Health?) is still 7%. That's not chump change.


If you look at healthcare expenditures as a percentage of GDP from 1999-2004 instead of throughout the 1990's (Excel file here), then we see that Germany - one of Ezra's favorites, remember - had a growth rate of 1.9, whereas the USA had one of 4.8.

We also need to remember that using GDP as our benchmark is problematic. The US has far higher rates of inequality than Europe, which means that our GDP can grow quite a bit without seeing any benefit to anyone but the very rich. This is of course exactly what has been happening the last several years. What this means is that the effects of rising costs are spread out across society more in European countries than here, where the middle and lower classes feel the pinch much more.

Obviously costs are an issue. But you and BC are arguing against the idea that simply switching over to a nationalized health plan would magically solve all of our cost problems, something that no one advocates. I can see why you're so quick to accuse others of conflating and over-simplifying their opponents' views, since it appears to be your preferred method of debate.

Posted by: Stephen | Sep 13, 2007 1:26:14 PM

We should note that three significant things occured during the 90s that slowed health care inflation: first, the country began a massive transition to HMOs, whose cherry-picking strategies allowed health care cost rises to abate. Next, there was a lot of public pressure for private insurers to prove that their own systems were sustainable in order to blunt any public pressure for national health coverage. Finally, like most insurance companies, health insurers were probably able to make a profit off of returns of a rising stock market, allowing them to avoid raising premiums. Once the "crisis" of a Democratic presidential administration had passed and once insurers/hmos were no longer able to make large profits on investments, health care costs started rising quickly once again.

Posted by: Tyro | Sep 13, 2007 2:03:47 PM

Well, I see that the anti-single payer trolls have sharpened their skills considerably. Too bad for them that most Americans aren't big readers.

Let's see here, we have an old favorite, comparing the rate of growth of an expense instead of comparing the actual expense. Hackneyed, but at least an honest effort to mislead.

Weboy, OTOH, simply mixes up his own pancake batter and serves the hotcakes with a confident smile. Standardizing diabetes treatment is good? Well, maybe- if you choose the right standards. Depend on it, on a different day Weboy will claim that Medicare is bad because it standardizes treatments.

Memo to Weboy- 3% is on the very low end of administrative expenses in health care, comparing with 10-20% for private insurers even by the extremely slippery and devious figurings of the linked-to Laszewski. Sure, a 5% savings ain't much when you're buying a loaf of bread, but it adds up when you buy $500 billion worth of medical care.

As for BC and his idea that Americans aren't "ready for rationing", apparently he's not part of the 45 million whose current "ration" allotment is zero. Maybe a third of us have some sort of inheritance or good job that makes us think health care isn't rationed. Two thirds of us know that postponing doctor visits as long as possible is all part of figuring out what you're going to have to do without.

Congratulations, Ezra, you've become a go-to place for the anti-single payer trolls. And we can see from their posts that they realize vast majority of Americans want single payer, because they pretend to be for it, just not like this or right now.

Reminds me of some girls I've known. Maybe a box of roses and a candlelight dinner will win them over.

Posted by: serial catowner | Sep 13, 2007 6:53:24 PM


A few comments.

First, large, self-insured employers pay insurers less than $20 per member per month (PMPM) for claims processing, network access, and, if they want it, disease management. That works out to 5%-6% of medical spending for those employers. At the other extreme, administrative costs are extremely high (north of 25%) in the individual, underwritten insurance market. However, young, healthy people who can pass the underwriting screen can buy health insurance at very low cost. While I'm a believer in both community rating and universal coverage, the fact is that these young, healthy people would pay 3 to 4 times more for insurance with community rating and low administrative costs than with underwriting and very high administrative costs.

In a paper posted on the Hamilton Project website discussing the possibility of allowing people below age 65 to buy into Medicare, authors Anderson and Waters estimate that the premium would have to be about $4,000 per year for an adult between 18 and 64 years old and $1,100 or so per child based on Medicaid spending per child insured by that program (in 2006). Since the current Medicare program spends over $10,000 per beneficiary on average, 3% for administration works out to $300 per year per member or $25 PMPM vs less than $20 PMPM for large employers with Administrative Services Only (ASO) contracts with insurers. By the way, highly regarded non-profit insurers such as Harvard Pilgrim Health Care spend about 90% of revenue on medical care and 10% for administration and profit. The profit margin for them is about 1%-2% of revenue.

I've said before that my own preference is for vouchers financed by a payroll tax. I think it would be preferable to have private insurers competing for my business. If I'm not satisfied, I can switch at the next annual enrollment period. With one size fits all single payer, I'm stuck with that system whether I like it or not. Much praised Medicare, for example, has a roughly $1,000 deducible for each hospitalization and a 20% copay for Part B services with no out of pocket maximum. Low income seniors generally cannot afford a Medigap policy which is why Medicare Advantage is popular among that group. The Part D drug plan is a lot less than perfect, mainly because of the infamous donut hole, but at least beneficiaries have plenty of choices which they seem to like.

Finally, I think it's legitimate to subtract out what private insurers pay in taxes when comparing their efficiency to Medicare. From a taxpayer perspective, those taxes are equivalent of a credit card company giving me a 3% cash rebate on each purchase. It reduces the net cost. Moreover, the IRS and, to some extent, employer human resources departments do Medicare's revenue collection for it. Those costs are not included in Medicare's calculation of administrative expenses, nor are the costs of Medicare's own employees or the rent for its office space. About 45% of Medicare's budget comes from general revenues, not Medicare payroll taxes. To the extent that the federal government has run a deficit in all but three or four of the 43 years that the Medicare program has existed suggests that it should bear its pro rata share of federal debt service costs. Blaming recent defense spending, the war in Iraq and the Bush tax cuts is disingenuous.

Posted by: BC | Sep 13, 2007 6:56:42 PM

we can see from their posts that they realize vast majority of Americans want single payer

If that's true, then the three leading Democratic candidates for President should be advocating for it. But they're not. How come?

Posted by: BC | Sep 13, 2007 7:04:29 PM

Blaming recent defense spending, the war in Iraq and the Bush tax cuts is disingenuous.

Why is that? The amount of revenue lost because of Bush's tax cuts is known, as is the cost of the war in Iraq. If that money was available for other things, then we might not have a deficit.

You missed the point about why we can't add in some "share" of federal debt servicing to Medicare. The money that goes toward servicing debt is a separate line item in the budget. That is to say, the Federal Government doesn't allocate money to each department and then figure out each department's share of the federal debt which must then be paid from those departments to the Treasury. Just like with the war in Iraq, that money is simply not available to be used on Medicare. In other words, Medicare's budget is already reduced by the exact amount that you and Laszewski want to add in as administrative costs.

As for taxes, and I hate to have to repeat myself, but since the fact that Medicare doesn't have to pay taxes to itself is merely one of its features. Yes, that's one of the reasons that they can keep their administrative costs down, and therefore included in the rational for those who want to expand it. Same thing with the other costs you mention that Medicare doesn't incur.

The whole point about private industry is that it's supposed to do everything the government does, only cheaper, while providing profit at the same time. If private insurers can't keep up with Medicare's efficiency unless we add a bunch of bogus costs, then too bad for the market.

I'm not trying to present Medicare as the best plan. All I care about is an honest portrayal of the different systems out there, and Laszewski doesn't provide that.

Posted by: Stephen | Sep 13, 2007 7:32:19 PM

All I care about is an honest portrayal of the different systems out there

I agree with you on this, though we clearly disagree on certain aspects of the Laszewski analysis. At any rate, the financial model I have in mind for Medicare competing with private insurers in the under age 65 marketplace is the Postal Service. Medicare would set a community rated premium per adult and per child and would have to cover all of its costs from its premium income with no additional supplement from general federal revenue. Each year, it would have to update its premiums to cover anticipated costs on a breakeven basis. To the extent that it has to borrow money from the Treasury either to cover short term deficits, upgrade its technology infrastructure or provide office space for its staff, etc., it would have to pay an interest rate equal to the Treasury's borrowing costs on that debt just as insurers have to pay interest costs on any money they borrow from banks or through the sale of notes and bonds to investors. The paper by Anderson and Waters posted on the Hamilton Project website that I mentioned in a previous post describes this in some detail. The existing Medicare program for the 65 and older population, including its financing mechanism, could remain unchanged.

Posted by: BC | Sep 13, 2007 8:08:47 PM

[vast majority of Americans want single payer] - If that's true, then the three leading Democratic candidates for President should be advocating for it. But they're not. How come? Posted by: BC | Sep 13, 2007 7:04:29 PM

Here you go BC

For the first half of 2007, Democratic candidate Hillary Clinton, senator from New York and the leading fund-raiser, collected $63.1 million, of which $1.7 million, or 2.7%, was from the health sector (see table). Senator Barack Obama of Illinois, the second-leading fund-raiser among the Democratic candidates, collected $58.9 million; $1.2 million, or 2.1%, was from the health sector...In her 2006 Senate reelection campaign, Clinton raised $51.6 million — more than any other Senate candidate — including $1.6 million from the health sector. Among Senate candidates, she ranked first in terms of contributions from doctors and other health care professionals, second in contributions from hospitals and nursing homes, fourth in contributions from the insurance industry...In the 2004 and 2006 cycles, more than three fifths of the health sector funds went to Republicans. This contrasts with the beginning of the 2008 cycle, during which the fund-raising advantage went to the Democrats...the health care industry spends substantially more money lobbying Congress and federal agencies than it does on elections (see Figure 2). In 2006, the health sector spent $351.1 million to lobby the federal government — an amount that accounted for 13.8% of all spending on lobbying and nearly equaled similar spending by the financial sector, which ranked first"

- The New England Journal of Medicine


Posted by: S Brennan | Sep 13, 2007 8:13:29 PM

Apparently BC subscribes to the theory that "If we can't dazzle them with brilliance, we'll baffle them with bullshit".

I stared at his posts for a while, wondering if a flower vase would appear and then turn into two faces looking at each other. No such luck.

Who are these "large self-insured employers"? Around here Boeing is pretty big, and they buy policies with Group Health for their employees- not self insurance as the term is generally recognized. MultiCare is a large group of hospitals and clinics, but, like Boeing, they buy insurance policies for their employees- in fact, as far as I know, every major hospital in the region buys insurance policies for their employees.

If hospitals aren't self-insuring, who would be?

But if you step back a little from BC's posts, a curious pattern emerges- he would prefer that a payroll tax be used to subsidize the private insurers who, by his own admission, charge 20% or more for administrative costs.

Sometimes when you pick the hard stuff out of an oyster, it's not pearls, just sand.

Posted by: serial catowner | Sep 14, 2007 1:02:02 PM

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