Thursday, October 1, 2009

In Health Care, Magnitude Matters

I think no virtue goes with size.

Ralph Waldo Emerson, 1803-1879

Government is either organized for benevolence or organized madness; Its particular magnitude permits no shade.

John Updike, 1932-2009

This is my #1001 blog. I’ve decided magnitude matters. It must. Why else would I continue this madness?

Today I ran across two numbers of the same magnitude - $450 billion for the annual Medicare budget and $450 billion for annual revenues of the health plan industry.

Why would these numbers matter?

Well, it might mean these two equally massive entities compete with other. Indeed, they might be jealous of each other – one public , one private. They might even threaten each other’s existence. Consulting firms estimate 110 to 131 million Americans would switch out of private plans to go to a cheaper public option, which would be run by Medicare.

Democrats champion, protect, and worship Medicare. Republicans, favor, protect private health plans, and criticize Medicare. Democrats say Medicare does not ration, and private plans “cherry-pick” and deny care. Republicans say Medicare rations by not paying providers and not approving innovative new procedures.

Each says the other is more “efficient” Maybe The comparable sizes of Medicare and the private health plan industry helps put matters in perspective.

The size matter came to my attention when I was reading two articles in the Wall Street Journal and the New York Times - two newspapers of comparable circulation and influence on opposite sides of the political aisle.

In the October 1 WSJ, Scott Gottlieb, MD, resident fellow of the American Enterprise Institute and a former senior official of Medicare wrote in “How the U.S. Government Rations Care,” that Medicare has bizarre and arbitrary and arcane means of rationing. Gottlieb says, “Consider the $450 billion Medicare program. It provides a model for - indeed its bureaucracy could well end up running – the “public option” health plan Mr. Obama wants to offer all Americans under 65.” He points out it is almost impossible to appeal Medicare denials, whereas with a private plan patients can always appeal or switch plans. The Medicare bureaucracy, he adds, is "inpenetrable."

On the same day, in tge Econometrix Blog, Uwe Reinhardt, the esteemed Princeton health economist, walks us through the Wellpoint, Inc, most recent income statement. In 2008, Wellpoint’s total revenues were $61,579 billion. Of that 93.2% came from premiums and 6.3% from administering claims of self-insured employers. Its “medical loss ratio,”the amount spent on health benefits and drugs was 84.4 % ot total revenues. Its total marketing and selling expenses were 14.4% of total revenues and its net income (profits) were 4.07% of total revenues.

These kinds of comparisons lead to spirited discussions of whether Medicare-run public option would be more efficient, would save money, and would make private insurers more “efficient,” less profitable at the public’s benefit.

Unfortunately, the differences in structure and mission of public and private plans causes the size argument to break down – Medicare and private health plans are different animals.

In comtrasting the two, keep these facts in mind.

(1) Democrats and Republicans are comparing apples and oranges because Medicare is not subject to many of the costs that private plans are;

(2) If you compare similar services on a per patient basis, private health care companies are more efficient than the government;

(3) Medicare is administered largely by private insurance companies – the federal medical programs which are primarily internally administered are even less efficient than private insurance plans (even including all the costs which private companies bear and which the government is exempt from).

Why You Cannot Compare Medicare with Private Insurance

First, private insurance plans must pay government taxes and assessments up to 5% of premiums. These add to the "overhead" costs. Medicare is exempt from these costs.

Second, in determining the overhead costs for Medicare, the government excludes the cost of its own employees who enroll recipients, perform outreach and education, handle customer service, and do auditing and other functions. Private plans include these in overhead.

Third, insurance companies have to collect premiums. The IRS does that for Medicare.

Fourth, private companies do underwriting; their premiums have to cover their costs. Medicare deficits have to be covered by taxpayers.

Fifth, the cost of servicing the public debt is not included in Medicare costs—and Part B is 75% subsidized by general revenues, not beneficiary premiums. If a private insurance company borrows money, the interest paid goes to its overhead.

Comparing on a Per Patient Basis

Even including all the advantages that Medicare has over private plans, if you compare administrative costs on a per patient basis, private plans are far more efficient that Medicare.

Dr. Reece's latest book, Obama, Doctors, and Health Reform ( can be obtained at,, and

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