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The Affordable Care Act’s Persistently High Administrative Costs
By admin | May 28, 2015
Health Affairs Blog
May 27, 2015
The Post-Launch Problem: The Affordable Care Act’s Persistently High Administrative Costs
By David Himmelstein and Steffie Woolhandler
Last year we, and many others, drew attention to the chaotic and costly roll out of the Affordable Care Act’s (ACA) exchanges. The chaos is mostly over (unless King prevails over Burwell), but the costs will linger on. The roughly $6 billion in exchange start-up costs pale in comparison to the ongoing insurance overhead that the ACA has added to our health care system — more than a quarter of a trillion dollars though 2022.
Bloated Administrative Costs
Between 2014 and 2022, CMS projects $2.757 trillion in spending for private insurance overhead and administering government health programs (mostly Medicare and Medicaid), including $273.6 billion in new administrative costs attributable to the ACA. Nearly two-thirds of this new overhead — $172.2 billion — will go for increased private insurance overhead.
Most of this soaring private insurance overhead is attributable to rising enrollment in private plans which carry high costs for administration and profits. The rest reflects the costs of running the exchanges, which serve as brokers for the new private coverage and will be funded (after initial startup costs) by surcharges on exchange plans’ premiums.
Government programs — primarily Medicaid — account for the remaining $101.4 billion increase in overhead. But even the added dollars to administer Medicaid will flow mostly to private Medicaid HMOs, which will account for 59 percent of total Medicaid administrative costs in 2022. (The subcontracting of Medicaid coverage to private HMOs has nearly doubled Medicaid’s administrative overhead, which has risen from 5.1 percent of total Medicaid expenditure in 1980 to 9.2 percent this year).
The $273.6 billion in added insurance overhead under the ACA averages out to $1,375 per newly insured person per year, or 22.5 percent of the total federal government expenditures for the program.
Better Options
Insuring 25 million additional Americans, as the CBO projects the ACA will do, is surely worthwhile. But the administrative cost of doing so seem awfully steep, particularly when much cheaper alternatives are available.
Traditional Medicare runs for 2 percent overhead, somewhat higher than insurance overhead in universal single payer systems like Taiwan’s or Canada’s. Yet traditional Medicare is a bargain compared to the ACA strategy of filtering most of the new dollars through private insurers and private HMOs that subcontract for much of the new Medicaid coverage. Indeed, dropping the overhead figure from 22.5 percent to traditional Medicare’s 2 percent would save $249.3 billion by 2022.
The ACA isn’t the first time we’ve seen bloated administrative costs from a federal program that subcontracts for coverage through private insurers. Medicare Advantage plans’ overhead averaged 13.7 percent in 2011, about $1,355 per enrollee. But rather than learn from that mistake, both Democrats and Republicans seem intent on tossing more federal dollars to private insurers. Indeed, the House Republicans’ initial budget would have voucherized Medicare, eventually diverting almost the entire Medicare budget to private insurers (the measure passed by the House on April 30 dropped the “premium support” voucher scheme).
In contrast, a universal single payer system would pare down both insurers’ and providers’ overhead, yielding huge administrative savings — $375 billion in 2012 according to one recent estimate.
In health care, public insurance gives much more bang for each buck.
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