The High Price of Too‐​Low Administrative Costs

Supporters of “Medicare‐​for‐​All” (and other reforms that would give the U.S. government primary responsibility for purchasing everyone’s medical care) boast that Medicare demonstrates that government can reduce administrative costs below those in America’s bloated, inefficient private sector. They’re wrong, as Ben Zycher ably demonstrates.


But even if Medicare’s administrative costs are lower, that’s not a virtue. 


Why? As David Hyman wryly argues in Medicare Meets Mephistopheles, Medicare keeps administrative costs down by shoveling money out the door with very little oversight. Similarly, Tyler Cowen argues that administrative costs are efficient if they pay for themselves by reducing unnecessary spending.


Today’s New York Times offers an illustration of how Medicare’s too‐​low administrative costs leads to waste:

Medicare spends billions of dollars each year on products and services that are available at far lower prices from retail pharmacies and online stores, according to an analysis of federal data by The New York Times. The government agency has paid above‐​market costs for dozens of items, a comparison of Medicare figures with retail catalogs finds.


For example, last year Medicare spent more than $21 million on pumps to help older and disabled men attain erections, paying about $450 for the same device that is available online for as little as $108. Even for a simple walking cane, which can be purchased online for about $11, the government pays $20, according to government data.


These widespread price discrepancies, including those for oxygen services, have been noted in dozens of regulatory reports.

Private insurers incur administrative costs to make sure they (and their customers) aren’t getting ripped off. Medicare doesn’t. The Times article also illustrates why Medicare usually can’t:

[W]hen officials and politicians have tried to cut these costs, they have often encountered a powerful foe: the companies that sell these devices, who ask their elderly customers to serve, in effect, as unpaid lobbyists, calling and writing to their representatives in Congress, protesting at rallies, and even participating in political attacks against individual lawmakers who take on the issue.


“These industries rely on a basic threat: If you mess with us, we can turn the seniors against you,” said former Senator Alan K. Simpson, Republican of Wyoming, who tried cutting Medicare payments while he was in Congress…


Many of those battles focus on the $427 billion Medicare program. Because of fierce patient and corporate lobbying, for instance, Medicare still pays prices for many items that are based on rates established in the early 1980s, when devices were often much more expensive than they are now.


Even as the actual cost of many machines and services has fallen, Medicare has only occasionally lowered what it pays.

To argue for single‐​payer on the basis of Medicare’s administrative costs is the equivalent of arguing that, because I can set fire to a pallet of $100 bills with a cigarette lighter and a can of gasoline, I should be entrusted with even more pallets of cash because my administrative costs are such a small share of the money involved.


So staggeringly efficient, this Medicare.