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The debate of the excess funding of Medicare Advantage relative to the actual cost to care for a Medicare Beneficiary brings us to a fundamental question: Is Medicare Advantage Good for America?

The Single-Payor agrument goes like this: The cost of administering Medicare is 3.1% and the excess payment to Medicare Advantage companies is 12%. So, if we eliminated the excess payment, we could save 9-12% (depending on your point of view) in Medicare costs on the 1 in 5 Medicare Beneficiaries who are enrolled in a Medicare Advantage plan.

However, there are a number of “indirect costs” which are not included in the widely quoted administrative cost of Medicare. This comes from an AMA position paper on the subject of Public v. Private.

Here are some of the costs associated with Medicare, but which are not included in Medicare’s Admin figure:

*
Tax collection to fund Medicare—this is analogous to premium collection by private insurers, but whereas premium collection expenses of private insurers are rightly counted as administrative costs, tax collection expenses incurred by employers and the Internal Revenue Service do not appear in the official Medicare or NHE accounting systems, and so are usually overlooked


Medicare program marketing, outreach and education


Medicare program customer service


Medicare program auditing by the Office of the Inspector General


Medicare program contract negotiation


Building costs of the Centers for Medicare & Medicaid Services (CMS) dedicated to the Medicare program


Staff salaries for CMS personnel with Medicare program responsibilities


Congressional resources exhausted each year on setting Medicare payment rates for services


In addition to those indirect costs listed in the AMA paper, I would add the following:


* Cost of Capital - A private insurance company must raise capital via a combination of Equity and Debt. The shareholders of the equity (stockholders) require a return on investment, or profit, in order to put up their capital. Debt capital has a price tag which is the rate of interest on the debt. Although Medicare advertises zero cost of capital, there is an inherant cost which is borne by the taxpayers with a single payor system. Keep in mind that although Part A claims are funded by the Medicare Trust Fund, 75% of Part B claims are funded by the General Treasury. Thus a portion of the interest payments on the National Debt could be attributed to Medicare, resulting in a direct capital cost to taxpayers.

Also, there is some administrative cost shifting which occurs when Medicare Beneficiaries enroll in Medicare Advantage. Although none of the cost of Outreach, Education, Marketing, Customer Service or Auditing is included in the widely publicized Medicare Administrative Cost figure, these unaccounted for costs would surely be higher in the absence of the efforts of Medicare Advantage companies and Insurance Agents in servicing and educating their clients.

Some of the excess payment to Medicare Advantage is also returned to the Treasury in the form of Corporate Taxes and Payroll Taxes of employees (which, ironically, help fund some of the Admin Costs which Medicare doesn’t count!)

Although a portion of the 12% difference between Original Medicare Payments and Medicare Advantage Payment go to the Medicare Advantage company (profit, taxes, commissions, etc.), a portion of the excess payment is returned to the Medicare Beneficiary in the form of extra benefits and reduced out of pocket costs. Roughly half goes to the Medicare Beneficiary and half goes to the Medicare Advantage plan.

The profit motive behind Medicare Advantage assures that there is some scrutiny in the payment of claims and some care coordination/management for the very sick to help them manage their disease. In absense of a private insurance option, Medicare could become a “claims paying machine” with little incentive to control claims costs. Ironically, the more claims which Medicare pays, the better the administrative cost ratio appears (admin cost ratio = admin costs/claims, so increasing claims payments will lower the admin cost ratop). Alternatively, by scrutinizing claims, you would, theoretically, increase admin costs and reduce claims which would increase the admin cost ratio in 2 ways, but that would, ultimately, reduce the overall cost to the taxpayer. Essentially, some administrative costs are “good”!

In summary, I believe that, while the costs of Medicare Advantage are too high and should be coming down, the drastic cuts proposed in HR 6331/S. 3101 would unduly harm the Private alternatives currently available to Medicare Beneficiaries. These cuts would pave the way to a single payer system. I believe that the more moderate cuts to Medicare Advantage proposed in the Grassley-Baucus compromise would enable Medicare Advantage to continue as an alternative to Original Medicare. Medicare Advantage should continue to be available as a choice to seniors and, also, as a hedge against the potential of run-away costs driven by a single-payer “claims paying machine” which has no financial incentive to control costs.