Still Hoping For Cheap Healthcare Reform

Timothy Noah, a writer whose work  I respect a lot, recently published a story arguing for a national single payer health plan that included among its arguments the idea key idea that Medicare has administrative costs that are one third that of private insurers. I found this number extremely suspicious, and have now tried to spend a while tracking it down. Noah attributes it to a study from the Lewin Group. According to that study, administrative costs for small group private insurance plans are 31.7% of claims, compared to what the plan estimates at 13.2% for public plans.

Even for small firm plans--costs for large companies will be much, much smaller--this is a stunning number. But it's impossible to trace back from the Lewin study where that number comes from (the footnotes don't tell you). A recent and much more wonky Lewin report detailing the assumptions used by their health care models, however, includes some similar numbers on administrative costs (look at table 49, on page 107), and those do get a footnote. That footnote lists the source as a Hay Group study that was presented to Congress in 1990. I've seen other links to that study with the date as 1988, and some questions about the methods. I can't find those now, but really it doesn't matter: the bottom line is that the numbers that the Lewin Group is relying on here are a full 20 years old.

There's no question in anybody's mind that insurance for individuals and small groups is overpriced. Part of any health care solution is bringing down those costs to the levels that large employers pay. But what I find mistaken in Noah's and the Lewin report is the underlying hope that health care reform can be accomplished at low cost merely by trimming the fat of insurance company profits and administrative costs. That's not true. There are still health insurers with way out of line administrative costs. But in most cases, they're not. Medicare has lower costs where it provides lower reimbursements (and, it should be noted, transfers a lot of the administrative costs to health care providers). And that's reflected in the number of doctors who won't take it. If doctors and hospitals were required to accept the rates of a single payer system, that would change. But I would question whether there is any political appetite to make doctors the only people in the country who have government mandated rates.

PS: Oddly, the Lewin Group itself, it's worth noting, is a subsidiary of a company called Ingenix, which is itself a subsidary of UnitedHealthcare. So whichever side you're on, you can at least credit the health insurers with providing the data to hang them with.