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Why Medicare-For-All Would Not Reduce Costs

[This post was written by Charlie Baker, President and CEO of Harvard Pilgrim Health Care, Inc., one of New England’s leading non-profit health plans.]

I heard this idea promoted at a luncheon I was at last week — that the best way to fix health care in the U.S. would be to move to a “Medicare-For-All” system.  Needless to say, I find this odd — since I think many of the things people hate most about our existing system — too procedure driven, doesn’t support primary care and prevention, favors technology over face-to-face interaction, doesn’t support multi-disciplinary approaches to care delivery, etc. — derive from the rules of the game set up and enforced by…Medicare!!!  Yikes!

But aside from that, the two things I always hear about why it’s a good idea are — Medicare has lower Administrative costs than private health plans and they’re a ”better” payer than the private plans.  Hmmm…Let’s take the first one.  What I’ve heard before is that Medicare only spends 4% of its money on a per beneficiary basis on administration, while the plans spend 14% per member on administration — a big difference.  This is interesting, but misleading.

Medicare beneficiaries are over the age of 65.  They spend almost three times as much money on health care as a typical private plan member — most of whom are under the age of 65.  If the Medicare member typically spends $800 per month on health care, and 4% of that is spent on administration, that’s $32  a month on administration.  If the private health plan member typically spends $300 per month on health care, and 14% of that is spent on administration, that’s $42 a month — a much smaller difference.  But we’re not done yet.  Medicare is part of the federal government, so its capital costs (buildings, IT, etc.) and benefit costs (health insurance for its employees and retirees (!), pension benefits, etc.) are funded somewhere else in the federal budget, not in the Medicare administrative budget.

Private plans have to pay for these items themselves.  That’s worth about $5-6 per member per month, and needs to come out of the health plan number for a fair comparison.  Now we’re almost even.  And finally, Medicare doesn’t actually process and pay claims for all of its beneficiaries.  It contracts with health plans around the country to do much of this for them.  That’s not in their administrative number, either — and it is, needless to say, in the private health plan number.

People push and pull these numbers all the time, and there may be “some” difference between Medicare and the private health plans on administrative spending as a percent of total spending.  But it’s not huge, if you try to compare apples to apples.

On the payment issue, the numbers I’ve seen suggest that nationwide, private plans — on average — pay somewhere between 120 and 125 percent of what Medicare pays for hospital and physician services.  In other words, private plans pay MORE than Medicare pays, not less!  If people want Medicare For All, they need to be prepared to either dramatically raise Medicare rates and payment — and therefore, Medicare costs — by a lot of money — 20 to 25% by this estimate — or kick the bejeebers out of the physician and hospital communities and make them eat the difference.

Medicare-For-All is not as simple as it seems.

*This blog post was originally featured at the Let’s Talk Healthcare blog.*

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