Is What I Hear True?

I heard that...

...government-run healthcare programs are inefficient. Is that true?

This is not true. Medicare and the Veterans Health Administration, both government-run insurance programs, are more efficient than private health insurance plans.

The U.S. government operates a number of healthcare programs and plans. Medicare is the largest federal health program with 45 million beneficiaries. (Medicaid, with 61 million recipients is a federal-state program (Health Affairs/Robert Wood Johnson, 2009).) Medicare is more efficient than private health insurance by a wide margin. Efficiency is measured in a number of ways, but it generally refers to administrative costs, or how much it costs to deliver the services the program is meant to deliver.

A more efficient program spends less on administrative costs so it can spend more on actual services. Medicare’s administrative costs were 1.4% of total program costs in 2008. The Medicare Advantage plans--private plans that some Medicare beneficiaries choose--had administrative costs of 9% plus 4% profit (Health Affairs/Robert Wood Johnson, 2009).

Another way of calculating administrative costs puts them at 3.6% of premiums for Medicare and 11.7% for private health insurance plans (Holahan and Blumberg, 2009). A calculation for government health programs generally finds administrative costs of about 5% compared with much higher numbers for private plans, 30% for individual insurance policies, 23% for small group policies and 12.5% for large group policies (Holahan and Blumberg, 2009). At the same time, only 8% of Medicare beneficiaries rated their coverage as “fair or poor,” but that number was 18% for employer-based plans (Health Affairs/Robert Wood Johnson, 2009).

Two other government health programs are veterans’ healthcare under the Veterans Health Administration (VHA) and health insurance for federal employees, known as the Federal Employee Health Benefit Plan (FEHBP). Recent developments in the VHA have made it one of the lowest-cost/highest-quality, and therefore most efficient, health systems in the country. The veterans’ health system receives higher scores on many quality indicators, and its customer satisfaction levels have been higher than those of the private sector since 2000. At the same time, VHA per patient costs have increased less than private plans’ (Stires, 2006).

The FEHBP operates like an insurance exchange, where federal employees can choose, based on benefits and price, among a large number of private health plans. This program has been in operation for more than fifty years and its premium increases have been less than or similar to increases in private insurance premiums (Bovbjerg, 2009).

Government health programs and plans are not always as efficient as they might be (Duhigg, 2007). Sometimes there are political pressures to spend more than is necessary, and large programs have to be well managed to succeed. On the other hand, the market for private health insurance is not, in most places, a competitive one (Holahan and Blumberg, 2009), so for-profit insurance companies are not motivated to be efficient, and some percentage of what they earn has to be paid out to shareholders rather than spent on services. The numbers indicate that at least in our current healthcare system, public healthcare programs and plans are at least as efficient as private ones and for the most part much more efficient.

Sources

Health Affairs/Robert Wood Johnson. 2009. Health Policy Brief: A Public Health Insurance Plan. June, 19. www.rwjf.org/files/research/61809healthaffairs3.pdf.

Holahan, John and Linda J. Blumberg. 2009. Can a Public Insurance Plan Increase Competition and Lower the Costs of Health Reform? www.urban.org/url.cfm?ID=411762.

Stires, David. 2006. Technology Has Transformed the VA. Fortune, May 11. http://money.cnn.com/magazines/fortune/fortune_archive/2006/05/15/8376846/index.htm.

Bovbjerg, Randall R. 2009. Lessons for Health Reform from the Federal Employees Health Benefit Plan. August. www.rwjf.org/files/research/47148fehbp.pdf.

Duhigg, Charles. 2007. Oxygen Suppliers Fight to Keep a Medicare Boon. New York Times, November 30. www.nytimes.com/2007/11/30/business/30golden.html.

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