The false comparison between the costs of private and public medical plans

April 23, 2009

Free Market Foundation

Many who favour a public health insurance plan as part of comprehensive health care reform dismiss the administrative “overhead” of private plans as having little or no value. However, the administrative expenses of private insurance plans represent money well spent for their members, say Kerry N. Weems, an independent consultant, served 28 years in the U.S. federal government and most recently headed Medicare and Medicaid, and Benjamin E. Sasse, former U.S. assistant secretary of health, advises private equity clients and a professor at the University of Texas.

Private insurers must build provider networks:

These networks can include high-value providers and exclude low-quality providers.

Except for certain circumstances, including criminal acts, Medicare is forbidden from excluding poor quality providers.

Medicare lets in everyone who signs up, so one question to ask is: Will the public plan have Medicare’s indifference to quality or invest in the cost of a network?

Private insurers must negotiate rates:

Medicare just fixes prices using a statutory and regulatory scheme.

And anyone who imagines a public plan would be less costly than private plans must consider the following: In the many procedure categories where Medicare’s statutory price does not cover full provider costs, shortfalls are shifted to private payers who end up subsidising the public program.

So, will a public plan negotiate rates or simply use fiat as a means of gaining subsidies from private insurance?

Private insurers must combat fraud or go out of business:

Indeed, these payers have every incentive to invest in antifraud personnel and strategies down to the point where return and investment are equal.

Medicare has a dismal record with regard to fraud, waste and other abuse: According to Medicare’s own most recent data, payments made in error amount to over $10 billion annually. (Medicaid’s payment errors in 2007 equalled a whopping $32.7 billion, according to a report by the Department of Health and Human Services.)

Even with the inclusion of the budget of the inspector general for the Department of Health and Human Services, Medicare spends less than one-fifth of 1 per cent on antifraud measures a small fraction of what private plans invest in their efforts to build a network of honest providers.

Will a public plan also haemorrhage from fraud because of chronic Congressional underinvestment?

Source: Kerry N. Weems and Benjamin E. Sasse, Is Government Health Insurance Cheap? The false comparison between the costs of public and private medical plans, Wall Street Journal, April 14, 2009.

Republished from Daily Policy Digest, National Centre for Policy Analysis, US.

For text: http://online.wsj.com/article/SB123966918025015509.html

For more on Health Issues: http://www.ncpa.org/sub/dpd/index.php?Article_Category=16

FMF Policy Bulletin/ 21 April 2009