Medicare - Bernie Madoff would be proud!

I continually go to the San Francisco Chronicle for inspiration because their far-left orientation ensures a steady supply of foolish articles to debunk. I’m rarely disappointed, and this is an example: When Republicans lose their principles, by David Sirota, Creators Syndicate, Friday, March 13, 2009.

Mr. Sirota challenges Republican principles of competition between government and private suppliers of services, and Republican belief that private medical services are better than government such as Medicare. To further his point, Mr. Sirota chooses his facts narrowly. He reports “that private insurers spend up to 30 percent of their revenue on administrative costs (read: salaries, paperwork, etc.) while government programs spend just 5 percent, and polls show Medicare recipients are far more satisfied with their health care than those in the private system.”

I guess I will accept Mr. Sirota’s statement that “polls show Medicare recipients are far more satisfied with their health care than those in the private system.” They should be. They’re not paying for Medicare. Medicare is an enormous Ponzi scheme, just like Bernie Madoff’s only with an unfunded liability a thousand times greater than the piddling fifty billion Madoff swindled.


Madoff took money from newer investors to pay earlier ones, just as Medicare takes money from current workers to fund the retired. However, Medicare has reached a “Madoff moment” when income from current workers is less than what is paid out. In other words, Medicare is bankrupt, and if Medicare was a private company, the government would shut it down because of insolvency. In its current state, Medicare has an unfunded liability for future retirees of about 45 trillion dollars, which is just about equal the annual World GDP before the recession shrunk it.

But Mr. Sirota’s argument was really about the costs of private insurers compared to government programs.

Where to start? First, the phrase “that private insurers spend up to 30 percent of their revenue on administrative costs” does not mean that private insurers spend 30 percent of their revenue on administrative costs. Technically, if even one private insurer spends 30 percent on administrative costs, Mr. Sirota’s statement is true. However, the average for private insurers’ administrative costs is 14.1 percent, less than half the 30 percent that Mr. Sirota slyly suggests.

As I continued my research, I found support for Mr. Sirota’s claim that the “government programs spend just 5 percent.” However, I suspected that Mr. Sirota was slyly comparing private insurer “lemons” to government “apples.” As a CPA, I knew that private insurers would have to declare all their revenues and the expenses that generated those revenues. As an Air Force financial manager for fourteen years, and an auditor involved with defense contracting for another twelve years (and two years of healthcare auditing at Kaiser Permanente, Oakland), I knew that a lot of government costs are difficult to identify when making cost comparisons.

For an “apples to apples” comparison between private insurers and government programs, are there relevant costs that government does not include in “administrative costs?”

You bet there are, and in my humble opinion (based on over a quarter century of experience in government accounting), if properly identified and measured the government administrative costs would exceed private insurer costs significantly. By how much it would take too much time and effort for me to determine, given my modest resources, but my experiences indicate that the lack of a profit motive (and the desire to amass as many resources as possible to make doing the job easier, but not more efficiently) results in large, bureaucratic, costly, and inefficient government services.

Is Mr. Sirota telling us that government is driven to be efficient, and private insurers aren’t? Might there be some Medicare administrative costs that are ignored in Mr. Sirota’s comparison?
Indeed there are (from the American Medical Association Proposal for Reform):

• 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 are overlooked
• Medicare program marketing, outreach and education
• Medicare program customer service
• Medicare program auditing by the Office of the Inspector General (which is costly but does little to eliminate the enormity of Medicare fraud)
• Medicare program contract negotiations
• 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 expended each year on setting Medicare payment rates for services

A pair of studies of Medicare administrative costs that included unreported expenditures on the program made by numerous government agencies concluded that Medicare administrative expenditures were at least three times the amount reported in the federal budget in 2003—$15.0 billion vs. $5.2 billion.
(The following are the studies cited above)
(Litow ME. Medicare versus Private Health Insurance: The Cost of Administration.
Milliman Inc. Published January 6, 2006.)
(Matthews M. Medicare’s Hidden Administrative Costs: A Comparison of Medicare and the Private Sector Council for Affordable Health Insurance. Published January 10, 2006.)

(We can easily relate this information to the statistics cited by Mr. Sirota. The tripling of costs would equate to a tripling of the government administrative cost percentage from 5.2 percent to about 15 percent.)

Advocates of a single-payer system (also known as a government-run health system) frequently cite the Canadian system as an example for the United States. Remarkably, many Canadians don’t rub their system in our faces, because they don’t like its rationed care and long waiting lines. In fact, private medical providers have sprung up in Canada because the Canadian health system often cannot provide adequate health services.

Another administrative cost analysis—possibly the most comprehensive and methodologically rigorous to date—examined a wide array of costs borne by insurers, health care providers, and patients in the United States and Canada, paying particular attention to indirect costs of carrying out basic administrative functions. The study calculated costs, net of associated benefits, of explicit and implicit methods of collecting revenues, curbing use of services and paying providers. For example, longer waiting times in Canada implicitly keep utilization of health care services in check, generating indirect costs to patients from delayed treatment and missed work. The study found that indirect, hidden administrative costs dwarfed monetary expenditures, concluding that true administrative costs are many times higher in Canada than in the United States.
(Danzon PM. Hidden overhead costs: is Canada’s system really less expensive?
Health Aff. 1992;11(1):21–43.)

A final point, one that I’m sure Mr. Sirota would never acknowledge, is that the federal and state governments drive up the costs of private insurers by requiring them to comply with myriad regulations and reporting requirements rather than operating in a uniform and standardized health care environment.

Both overregulation and arbitrary differences in regulation create unnecessary administrative costs and prevent cost-savings from economies of scale. Private insurers also must pay premium taxes, usually counted as an administrative expense, driving up administrative costs as a percentage of total costs and creating the appearance of reduced efficiency.

As I look back over Mr. Sirota’s article, and compare it to information readily available on the Internet, I arrive at some conclusions. The first is that Mr. Sirota thinks that now is the time, with Democrats in charge, to push big government proposals that don’t pass the smell test; i.e., that government programs are more efficient and cost effective than private ones. The second is that, given the liberal bias and the weak financial condition of journalism, Mr. Sirota does not have to worry about the kind of investigative reporting that would leave him red faced in embarrassment.

In conclusion, Mr. Sirota counts on ignorant and apathetic Americans accepting that Republicans are too beaten down to stand up for their principles of supporting competition between private businesses and government programs.

Au contraire, Mr. Sirota, Republicans (like me) welcome the opportunity to have the government compete with private insurers for healthcare resources. Right now the government has a monopoly on health insurance for Americans over 65 and is able to maintain its monopoly only because it does not have to operate within the accounting standards it requires of private companies. Only by privatizing Medicare is there any chance of saving it and preventing future generations from facing ruinous tax increases, means testing of the wealthy (and eventually of the almost-wealthy), and draconian rationing of health services.

By the way, Mr. Sirota, as long as we’re throwing competition between the government and private businesses on the table, why don’t we consider privatizing education?

And Social Security, of course.

Talk about a Ponzi scheme.