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Government Apples and Private Oranges

July 5, 2009, 3:40 pm

Bruce McQuain has a really good post debunking the meme that Medicare overhead costs are lower than those of private insurers.  You should read the whole post, but the short answer is:

  • Medicare participants are older and less healthy than those insured privately, so the denominator for their overhead ratio is much higher
  • Comparing overhead costs per plan participant, Medicare costs are higher than private
  • The comparison is apples and oranges, because private firms pay account differently than does the government
  • Lower Medicare overhead has tradeoffs, as it lets fraud through which is not counted as a cost

I can't add to Bruce's post, except to say that as someone in the business of trying to privatize government functions, we see the apples and oranges problem all the time.  I am constantly having cost discussions with government bodies, and they frequently leave out most of the following when they compute their costs:

  • Insurance  (e.g. liability, property).  They say the government is self-insured, but the government does not charge its divisions any cost for this implicit guarantee.  I have to pay real money for it.
  • State / local taxes.  Private companies have to collect and pay many state and local sales, excise, and property taxes that the feds do not pay.
  • Pensions / retirement benefits.  The government grants fat pensions and retirement medical benefits to its employees but does not accrue or put any funds away in the present to pay for these.  Private companies do  (and in fact would go to jail for not doing so).
  • Capital spending and rent.  This varies by entity, but most government bodies do not see full depreciation of the capital assets they are using in their budgets.  Ditto for the value of the space they are occupying - they often get valuable space rent and/or depreciation free.
  • Services from other government divisions.  Sometimes transfer prices are charged, and sometimes they are even close to market rates, but most times they are not
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Category: Government, Health Care

3 Comments

  1. gadfly:

    You forgot administrative overhead. HIPPA is only the agency charged administering medicare claims. It is part of Health & Human Services which then is topped by the appropriate staff members in the Administration, served by the GSA and supported by all of the Congressional staffs and legislative support functions.

    Government can never be cheaper than private enterprise.

    July 5, 2009, 8:24 pm

  2. gadfly:

    You forgot administrative overhead. HIPPA is only the agency charged administering medicare claims. It is part of Health & Human Services which then is topped by the appropriate staff members in the Administration, served by the GSA and supported by all of the Congressional staffs and legislative support functions.

    Government can never be cheaper than private enterprise.
    P.S. - Sorry, forgot to tell you great post!

    July 6, 2009, 1:52 am

  3. Dr. T:

    Medicare has another advantage. When it calculates overhead, it basically just adds salaries, purchases, software contracts, etc. Medicare does not consider the costs of the buildings, parking lots, and shared government employment costs (employee payroll and benefits processing, security costs, shared costs for shipping and receiving and mail handling, etc.).

    Private insurers, when calculating overhead, have to include the amortized cost of the buildings or their rental costs. They have to include shared business costs if health insurance is just one division of a larger corporation. This is known as "fully-loaded" costs.

    July 6, 2009, 3:17 pm