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More on Medicare costs

Following up on our earlier discussion of the administrative costs of Medicare and private insurers, Robert Book sent me a report on Illusions of Cost Control in Public Health Care Plans, which is full of numbers and argues that “Medicare’s administrative costs are a lower percentage of the total not because Medicare has cheaper administration, but because it has more expensive patients.” I don’t know enough to evaluate these arguments, but I like that he has a lot of numbers and graphs right out there, so that any disputes can be on specific points.

I do have one question, which probably reflects my ignorance of heath-economics terminology more than anything else. Book writes, “Claims processing is the only category that is at all sensitive to the level of health care utilization.” From my personal experience with the health care system, I associate “administrative costs” with the many levels of clerks and paper-pushers you have to deal with before you get to see a doctor or nurse. I’m not quite sure how “claims processing” is defined, but I see a lot of full-time employees (as well as, I assume, some higher-paid full-time employees in some back room) who aren’t doing anything health-related; they’re just minding the store. And this all seems pretty much proportional to health care utilization: I assume that if people are going to the doctor twice as often, or doing more complicated procedures, there are that many extra visits, that many extra forms to fill out, etc. I’ve been in hospital wards at night where there is no doctor to be seen, maybe no nurse, but three or four administrative employees appear to be continously busy with something or another.

This is not intended as a criticism of Book’s argument, just a thought some of these seemingly neutral terms such as “administrative costs” can be confusing.

7 Comments

  1. Robert Book says:

    Andrew,

    You're correct that this is an issue of health care terminology. When used with respect to a health plan, the term "administrative cost" is from the point of view of the payer (Medicare or private insurance). "Claims processing" is more narrow still — it refers to the payer's cost of receiving a bill, recording and paying it. This is mostly done electronically now, and for Medicare is on the order of a $1 per claim. It is strongly correlated with the number of claims files (i.e., bills sent), not the dollar value of those bills or the intensity of the treatment they represent.

    What you see in the back room at the doctor's office or the hospital is something different. In the Medicare world, this is referred to as "practice expense," but that term also includes other expenses as well — basically, everything except the physician's time. So it includes things like nursing and supplies as well as billing.

    I refer to the billing and the like that takes place in the doctor's office (or hospital) as "administrative costs of providers" and I discuss that in the paper (pages 15-18, or pages 17-20 of the PDF file). This is a substantial cost, and is probably bigger overall than the traditional "administrative cost." It's not very well measured, because it's hard to measure. I cite some attempts in the paper. My suspicion is that this too, like claims processing, is related more to the number of patient visits than to the dollar value of services.

    One important question that can't be answered from the available data is to what extent administrative costs imposed on providers by Medicare differ from administrative costs imposed on providers by private insurance plans. No study of which I am aware that collects data on administrative costs of providers properly separates the two. It may be just that's it's hard to separate in a practice that treats both types of patients.

    In a sense, looking just at administrative costs at the plan level is "looking where the light is better." The motivation for my paper was the fact that some people were seeing the wrong things even when they looked where the light is good! :-)

    Thanks for posting the update. I hope interested people will take a look at the full paper.

    –Robert Book

  2. jonathan says:

    I have a number of comments but I find the report so political that it's difficult to respond coherently in a few lines. For example, he notes that Medicare has limited payments – in a long section about how money has been shifted around. One could argue that's a good thing because the private sector hasn't done this and that a better system would be better at cost control. But rather than argue each point – or any clump of points – I plain don't see the overall point of his argument. Statistics aside, he portrays healthcare as government versus private and uses Medicare as a stalking horse, but a) that's not what's on the table and b) there are other factors, not covered in his report, that affect Medicare's performance.

    Take the first because it's the easiest to discuss. The ideas on the table specifically do not include government running healthcare. There is no single payer being seriously considered by the people running the show. Medicare is specifically not the issue in the healthcare debate and it is an untouchable to the GOP as well as to Democrats. The issue is insuring people who don't have coverage, who can't get coverage, who don't have sufficient coverage or who fail to get coverage.

    If the argument is that Medicare's administration costs maybe aren't as low as the government – under Republicans and Democrats – has claimed, so what? The private insurance industry has done a lousy job of controlling costs and fails to cover vast numbers of people and fails to provide sufficient coverage at rational prices for vast numbers more. If this is somehow supposed to be a defense of private insurance, it fails because it isn't talking about the actual issues. The so-called free market in healthcare doesn't work and this report in no way advances the argument that a freer market would somehow do better at covering people or controlling costs. (Again, he notes that Medicare has reduced payments, which is a form of cost control.)

    Another point which bothers me is similar to what you mention. I come from a medical family and worked in hospitals. I know how much time and money is spent in a practice – private and hospital based – on administration. My numbers are anecdotal, meaning what I've experienced, but a point left out – and which I didn't see in the report at all – was that we assume a level of administrative cost based on the current inefficient system. The argument is that government creates more paper – and thus, I believe, the endless go rounds about the levels of cost in Medicare – but we're dealing with a cobbled together system that is highly inefficient and doesn't cover much of our citizenry. The experience in other countries is more like what business expects from mergers & acquisitions: more efficiency, not less.

    I can give real life examples of inefficiency in the current system. These have nothing to do with the data presented in this report, but the assumption seems to be that this kind of poor design that doesn't provide sufficient coverage at reasonable prices is the floor. That's defeatist and contrary to the experience of most other countries. And it has next to nothing to do with the per patient costs of administration under Medicare.

  3. Dick McQueen says:

    I've been trying to follow health care economics, and read Book's piece of 6/25/09. Using approximately his numbers, taking $800 million claims processing as 4% of adm costs gives $20 billion in Medicare adm costs. Then if $20 billion is .25% of total outlay, this total outlay is $8 trillion. And if $8 trillion is divided by 40 million medicare recipients, each costs $20 million. Have I or has Book or someone else slipped a decimal point here? But even if this figure is 1000 times high because of some calculating error, isn't $20K/patient also high?

    Or if my 40K medicare recipient figure is off, could it be that far off?

    Andrew Gellman comments on Worcester costs as $10.2K/patient, with Mass at $8.3K and US at $9,4. While these figures seem low to me for elderly, they must be within range.

    Can someone help me here?
    Dick McQueen OR 503 622 0162 dkmqn@yahoo.com

  4. Helen DeWitt says:

    Of course, the administrative cost is not just that of the salaries of the staff. If you are very very very sick, you may just barely have the strength to pick up a telephone, or (miraculously) take a taxi to a clinic. You may not have what it takes to get through a series of social interactions, plus form-filling. You may be on some kind of medication whose side-effects include poor memory, drowsiness, nausea… in other words, you may be in no condition to marshal the documentation needed to get care.

    I once had a breakdown and went to stay with my mother in DC. My mother was unable to arrange a meeting with someone who could prescribe medication. I did not have the energy to cope with the American system; I did have enough energy (just) to book a flight to London. Where I could walk into a clinic off the street and see a doctor in half an hour. Paperwork: I had to give my name and an address.

    I won't say that the care offered by an overworked doctor in a five-minute meeting was the best one could ask for. But it was something that a patient suffering from clinical depression could have access to.

    Admin-free.

    Q: Might it make better economic sense to let Americans buy UK passports?

  5. jonathan says:

    I don't like to respond twice – or even often – but I have to say that statistics are useful when they're in the context of an argument. I've now read this report twice. It's well-enough written but a) it's biased in its approach and that comes through nearly every paragraph (and that affected how I responded) and b) as noted in my first comment, so what? So what? So what?

    Take bias. The report is political. It's conclusions are political – speaking broadly in unsupported ways about what the effects of government intervention are. It's impossible to take seriously as objective research a report that draws such unwarranted inferences and which allows them to infect the text in great measure.

    Take the second point, which is nearly impossible to separate from the first. The political point that is fairly clearly made is that more government insurance is bad. Let's assume that this report is objective in its approach to the date and its analysis – which is doubtful, but let's go there. How is this report useful? Maybe one could say that design of a larger insurance system that covers all or nearly all Americans would need to consider certain cost pressures and inefficiencies – but those are hard to find in the paper because the point is directly political, to say that Medicare is less cost-effective than believed. I can think of other ways this kind of data analysis might be useful but you can't separate statistics from how they are used. In this case, so what? The report doesn't address the issues that Congress is dealing with and in two readings I found very little that could be pulled away from the outright bias and direction of the report to bear on the actual debate.

    I can't leave without noting the degree of bias. Take a look at the conclusion, which is the easiest page to reach because its the last. It reads in part: by its nature, any public plan would be driven by congressional interventions, bureaucratic processes, and lobbying rather than by
    incentives to innovate in the financing and delivery of quality, efficient health care. [Outright statement of bias.] This same phenomenon was evident with Fannie Mae and Freddie Mac, “public plan” mortgage companies that were established to compete with private lenders to “keep
    them honest” and increase levels of home ownership. [Unbelievable departure from this report to lending practices, more than tarring by association; this kind of bias-laden statement should be anathema to objective analysis.] Driven by congressional interventions, an implicit government guarantee, and lending policies at odds with economic reality, these public mortgage companies collapsed and threw the entire financial system into chaos. [Mr. Book clearly knows very little about finance and recites a specific party line that has zero to do with the contents of his paper except …] A “Freddie Doc” would eventually produce similarly disastrous results. [This is a "Daily Show" moment. From a measure of cost-efficiency in Medicare to the total collapse of the medical system! Wow! It's impossible to take this work seriously and, frankly, every bit of data and all the analysis must be absolutely suspect.]

    Sorry for taking up so much of your time.

  6. Andrew Gelman says:

    Helen:

    I was very impressed by the Taiwanese medical system. My wife needed some medical treatment when we were there, and everything was fast and efficient, despite the language barrier. They gave us a reasonable bill at the end of it all.

    My impression is that many other countries have health care systems that are much better than the U.S., but that much of the debate turns on whether there is a good way for the U.S. to get to such a system, or whether expectations and practices here are such that getting to a Taiwan-like system is impossible, in practice. I think discussions about cost (such as Robert Book's, linked to above) are ultimately addressing questions of what can be done in the U.S., considering that the current system, with all its problems, is a starting point.

    I'd also like to again point people to the work being done at Harvard's Department of Heath Care Policy. My impression is that these people really know what they're talking about.

  7. Keith O'Rourke says:

    That was the summary I got from a health economics colleague about 15 years ago

    "health care systems[that]are much better than the U.S., but that much of the debate turns on whether there is an affordable [good] way for the U.S. to get to such a system"

    along with Canada getting their system in place just by a fluke of good luck that avoided strong reactions from Canadian and US physician groups

    Keith