From an article by Princeton medical economics specialist Uwe Reinhardt, published in the New York Times:

According to a C.M.S. actuary, for the traditional Medicare program excluding money contributed by Medicare to private Medicare Advantage plans on behalf of beneficiaries choosing those plans, as much as 98 cents is paid to providers for every $1 appropriated by Congress for Medicare. (The 93.8 percent shown in the next chart includes Medicare dollars channeled through Medicare Advantage plans.)

In fairness, it must be added that traditional Medicare basically sets prices and then just pays bills. It makes no active attempt to manage care (utilization controls, disease management, coordinating care and so on), because it has not been allowed by Congress to do so. It is almost as if Congress did not want traditional Medicare to be a prudent purchaser of heath care for the elderly.

From the viewpoint of prudent purchasing, most economists would probably judge these prices too low. On the other hand, the fact that traditional Medicare just pays bills more or less passively may be precisely the reason that it is still so popular among the elderly. Traditional Medicare still offers beneficiaries completely free choice of providers and therapy — a degree of freedom that many younger Americans in insurance plans with limited networks of providers no longer enjoy.

The ratio of P.H.C. to N.H.E. for private insurance reflects what is known as the medical loss ratio, or M.L.R., on which I have written a post previously. It is the fraction of the premium an insurer pays out for “health benefits.” The overall average of 88.3 percent for private insurance includes M.L.R.’s ranging all the way from a low 55 percent for small insurers selling policies to individuals and small employers, mainly through insurance brokers, to M.L.R.’s above 90 percent for large insurers performing merely administrative services (e.g., negotiating fees or claims processing) for self-insuring large employers.

Beezer here.  It’s clear that the government programs, and those of large employers who self-insure, are more efficient than private plans.  That said, the government programs passively pay whatever the provider charges, which doesn’t sound all that efficient–particularly when it comes to the supplemental Medicare Advantage programs where the government explicitly prohibits Medicare from negotiating prices.  Our take away is that medical care is one of those industries where paying for the bulk of service is most efficient via direct taxation:  A single payer type of setup.  

Tags: Medicaid, Medical Loss Ratio, Medicare, Medicare Advantage, New York Times, Private Medical Insurers, Uwe Reinhardt

This entry was posted on Saturday, October 1st, 2011 at 5:49 am and is filed under Economics, Health Care. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.