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Medicare Extension

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Details are still sketchy, but the Senate compromise on health care is described by the Washington Post in this morning’s edition:

The short answer — subject to Senate revisions — is that those without employer-provided insurance would have more options for buying coverage, but if they are younger than 55, their money would go to a private insurer, no matter what. Rates would be more competitive than what they are offered now, but possibly less so than under a “public option.” And if they are between 55 and 64, they might be able to buy into Medicare early, though at what prices remains to be seen.

As congress moves toward health care reform the comparison between private health care insurance firms and the existing government programs like Medicare becomes more important. While many private health insurance companies are already non-profit, the administrative expenses in private firms are said to be from 10 to 20% of total expenditures. Medicare is quoted at under 6%, or 8 to 9% when assistance from other government agencies is included.

The premium cost for someone 55 and older buying into the Medicare system has not been determined, but it is expected to be equivalent to the cost of private group insurance. Guaranteed eligibility would attract those who cannot obtain private insurance due to pre-existing conditions. It is possible that the premium cost could offset the extra expenditures for the younger group of people. And I expect subsidies to be in place for low to moderate income people.

I have never been able to determine the exact accounting rules used to calculate Medicare’s administrative costs; private companies generally use something like GAAP (Generally Accepted Accounting Principles), a set of accounting rules used to prepare, present, and report financial statements. But the government does not; financial details are reported on a cash basis, and administrative costs are often allocated to a program based on its share of total government expenditures. There is an argument that Medicare’s administrative costs per person are higher than in the private insurance business, as Robert Book has noted at Heritage.org:

Medicare patients are by definition elderly, disabled, or patients with end-stage renal disease, and as such have higher average patient care costs, so expressing administrative costs as a percentage of total costs gives a misleading picture of relative efficiency. Administrative costs are incurred primarily on a fixed or per-beneficiary basis; this approach spreads Medicare’s costs over a larger base of patient care cost.

But you can slice and dice the numbers a lot of different ways. One long and detailed paper supporting the idea of a public plan, written before the current administration took office, is provided by Jacob Hacker (pdf file). Hacker uses Medicare’s lower administrative costs as a reason for implemention:

The CBO study suggests that even in the context of basic insurance reforms, such as guaranteed issue and renewability, private plans’ administrative costs are higher than the administrative costs of public insurance. The experience of private plans within FEHBP carries the same conclusion. Under FEHBP, the administrative costs of Preferred Provider Organizations (PPOs) average 7 percent, not counting the costs of federal agencies to administer enrollment of employees. Health Maintenance Organizations (HMOs) participating in FEHBP have administrative costs of 10 to 12 percent.

Note that FEHBP, the Federal Employees Health Benefit Program, is rumored to be the model for a national private insurance exchange for those under 55. Unlike a government “public option”, this exchange would be an array of private company plans administrated by the federal government. Minimum requirements for the plans are set by the government, and employees are able to choose among providers. Historically, rate increases paid by the employee for the FEHBP generally exceed those of private group plans administered by employers, running at 7 to 8% per this year, as opposed to 5% (pdf file).

One advantage of extending voluntary Medicare coverage to those 55 and older is that many people entering the system at 65 are in frail health, with undiagnosed diabetes or heart disease. If preventative care is started at 55 overall program costs could be reduced. The problem is that making the system the “insurer of last resort” would mean that only those in poor health or unable to pay for private insurance would take advantage of it. It remains to be seen if overall savings would result.

Cross posted to FrankHagan.com