How to Think Clearly about Medicare Administrative Costs: Data Sources and Measurement

By Kip Sullivan
Journal of Health Politics, Policy and Law, February 15, 2013

Abstract

The Centers for Medicare and Medicaid Services (CMS) annually publishes two measures of Medicare’s administrative expenditures. One of these appears in the reports of the Medicare Boards of Trustees and the other in the National Health Expenditure Accounts (NHEA). The latest trustees’ report indicates Medicare’s administrative expenditures are 1 percent of total Medicare spending, while the latest NHEA indicates the figure is 6 percent. The debate about Medicare’s administrative expenditures, which emerged several years ago, reflects widespread confusion about these data. Critics of Medicare argue that the official reports on Medicare’s overhead ignore or hide numerous types of administrative spending, such as the cost of collecting taxes and Part B premiums. Defenders of Medicare claim the official statistics are accurate. But participants on both sides of this debate fail to cite the official documents and do not analyze CMS’s methodology. This article examines controversy over the methodology CMS uses to calculate the trustees’ and NHEA’s measures and the sources of confusion and ignorance about them. It concludes with a discussion of how the two measures should be used.

Two Official Yardsticks

Medicare’s administrative costs were $8 billion in 2011, or 1.4 percent of total Medicare spending of $549 billion that year. Those figures come from the latest annual report of the Medicare trustees, prepared by OACT (Office of the Actuary within the Centers for Medicare and Medicaid Services). As I document below, the $8 billion includes costs incurred directly by CMS (notably, the salaries of CMS staff and payments to insurance companies to process claims) as well as costs incurred by other federal agencies on Medicare’s behalf (e.g., tax collection services provided by the Internal Revenue Service, Part B premium collection services provided by the Social Security Administration and the Railroad Retirement Board, and fraud prevention services provided by the Federal Bureau of Investigation).

The latest NHEA, also prepared by OACT, is for 2010. According to it, Medicare’s overhead totaled $31 billion that year, far more than the $7 billion reported by the trustees for 2010. That $31 billion constituted 6 percent of total Medicare spending in 20102 — much higher than the 1 percent rate reported for that year by the trustees. The difference between the trustees’ measure of overhead and the NHEA measure is due almost entirely to the fact that the NHEA defines Medicare’s overhead to include not only the $7 billion in administrative expenditures reported by the trustees for 2010 but also the $24 billion in administrative expenditures incurred by the insurance companies that participate in Parts C and D.

Selecting the Right Yardstick

The NHEA measure tracked the trustees’ measure quite closely for the first twenty years of Medicare’s existence. But since the mid- 1980s, which is when the percentage of Medicare beneficiaries insured by insurance companies began to rise beyond the negligible levels of the 1970s, the NHEA measure of Medicare’s overhead has risen dramatically while the trustees’ measure has continued to decline. As of 2010, the latest year for which data from both measures are available, the NHEA measure was 4.5 times larger than the trustees’ measure — 5.9 versus 1.3. This enormous disparity between two measures that used to be almost identical should long ago have triggered inquiries within Congress and the US health policy community as to whether the higher administrative costs associated with the growing privatization of Medicare are justified.

http://jhppl.dukejournals.org/content/early/2013/02/11/03616878-2079523….

In his article, Kip Sullivan has finally laid to rest the distortions and obfuscations of those who contend that Medicare’s administrative costs are much higher than commonly cited percentages – 1.4 percent in 2011. Not only has he shown that the other government costs that allegedly were left out are actually included, but he has also shown that the other official measure of Medicare’s administrative costs shows how much more it is costing us to fund the administrative excesses of the private Medicare Advantage and Part D drug programs – an egregiously wasteful use of our Medicare funds.

Quoting Sullivan, “This enormous disparity between two measures that used to be almost identical should long ago have triggered inquiries within Congress and the US health policy community as to whether the higher administrative costs associated with the growing privatization of Medicare are justified.”

It should also have triggered the question: Why haven’t we yet enacted an improved Medicare for everyone?