Broback's Blog

Many on the left tell us the solution is Medicare-for-All, because Medicare is so much more efficient than private insurers, spending a mere 2% on overhead compared to 20% or higher for private plans. Extraordinary claims require extraordinary proof, and the idea that a bureaucratic agency with no obvious incentive for efficiency is inexplicably efficient certainly qualifies. Yet many in the media are prepared to pass along this claim as a found item.

This requires overlooking a lot. Even if overhead-to-medical spending were the right measure, much of Medicare’s overhead is hidden on the books of other agencies, including Health and Human Services, which provides management, and the IRS, which handles revenues.

Then there’s the fact that Medicare keeps overhead low by under-spending on fraud prevention. Why? Because health-care providers are a powerful force in every congressional district and find Medicare audits annoying. The government’s own accountants suggest tens of billions of dollars are being left on the table by Medicare failing to match private spending on policing caregivers.

But these are the tiddly objections. Ask yourself: If the overhead ratio is the right measure of insurer efficiency, which is the least efficient insurer? Answer: The one with the healthiest customers, who consume little or nothing in the way of medical services. An insurer with perfectly healthy customers would spend 100% of revenues on overhead.

Medicare serves the oldest and sickest Americans, and necessarily shovels out a high percentage of its revenues on medical care. But this tells you nothing about whether it’s getting value for money. And most of the real evidence suggests not—up to a third of Medicare spending is useless and merely exposes beneficiaries to unnecessary medical risk.

This is a guesstimate, of course, but one with many fathers. A study last year by Rand Corp. and former Medicare chief Donald Berwick found between $166 billion and $304 billion of unnecessary spending in $900 billion in annual Medicare and Medicaid spending. A Dartmouth study in 2003 found that high-utilization Medicare regions spend 60% more per patient than low-utilization regions, with no difference in outcomes. A 2005 Harvard study found that end-of-life spending on comparable Medicare patients varied by a factor of five among California hospitals.

Look, if Medicare had cracked the secret of administering large sectors of the economy more efficiently than the private sector can, we’d be wise to hand the entire economy over to Medicare. We don’t hear too many making this argument. Most understand that our real problem is a systematic insensitivity to the price and value of medical services that afflicts government and private plans alike.