2011 Primer on Medicare Spending and Financing

Kaiser Family Foundation

Administrative Costs

The costs of administering the Medicare program have remained low over the years – less than 2 percent of program expenditures. As such, program administration is not a contributing factor to Medicare’s expenditure growth. Administrative costs include all expenses by government agencies in administering the program (HHS, Treasury, the Social Security Administration, and the Medicare Payment Advisory Commission). Also included are the cost of claims contractors and other costs incurred in the payment of benefits, collection of Medicare taxes, fraud and abuse control activities, various demonstration projects, and building costs associated with program administration.



Medicare Administrative Costs Are Higher, Not Lower, Than for Private Insurance

By Robert A. Book, Ph.D.
The Heritage Foundation
June 25, 2009

“The fact is that, in recent years, Medicare administrative costs per beneficiary have substantially exceeded those costs for the private sector, this despite the fact that, as critics note, private insurance is subject to many expenses not incurred by Medicare. Contrary to the claims of public plan advocates, moving millions of Americans from private insurance to a Medicare-like program will result in program administrative costs that are higher per person and higher, not lower, for the nation as a whole.”


The costs of administering the Medicare program remain at less than two percent of program expenditures. Several other reports have been circulated claiming that the administrative costs are much higher. Some of these recalculations add in administrative costs that they claim were excluded from the Medicare numbers, such as the administrative costs of claims contractors, costs of collecting Medicare taxes, and the costs of policing fraud and abuse.

Not only are these costs already included in the “less than two percent” calculation, resulting in true double counting by those challenging the numbers, but the costs they estimate are often pie in the sky, resulting in even greater embellishments of the numbers.

They also play with the numbers, using calculations based on per beneficiary services, or excluding those non-administrative services that the private insurers force on us, and using this as a distraction to dismiss as irrelevant the true percentages paid for administrative services.

Not only do they claim that Medicare administrative costs are understated, they also claim that the true administrative costs of insurers are very close to or even less than their “corrected” Medicare numbers. If that is true, then why have the insurers claimed that they will have difficulty keeping their own administrative costs down to fifteen to twenty percent, a requirement of the Affordable Care Act? And that fifteen to twenty percent doesn’t even include the tremendous administrative burden that they place on the health care delivery system.

So Heritage’s Robert Book claims that a Medicare-like program would result in higher administrative costs for the nation as a whole, than would private insurance.

How do we confront this? Do we simply reply that their circus antics are not credible, and walk away? Or do we simplify our rhetoric and call them what they are – liars? That might not sell well to a public that clings to the lies of the right, while rejecting the process of critical thinking.