McKinsey on insurance and administration costs

So far we've covered the first two large categories in the McKinsey analysis of our "excess" spending on health care. (You can find the report linked in the Health Care Links list at the right). First was outpatient care, at $436B excess, and next was drugs and nondurables, at $98B excess.

The third category is insurance and administration costs, at $91B, about the same as drugs. If you're an ardent advocate of single-payer, or just generally distrustful of large companies like the insurance firms, you may say "Aha! Our complex yet monopolistic system of multiple private payers is at fault. A single payer, especially if that payer is a non-profit such as a government plan, is just what we need!"

Well, maybe. But that's not quite what McKinsey found. It's true that insurance and administration is essentially tied for second place in terms of its contribution to our $638B in "excess" spending. But it's not necessary because of the complexity or expense of the private sector. Let's look at the details.

The US spent, in 2006, nearly twice as much per capita in this category as the next country in the list (France), and over four times the average in the selected peer group of countries. Private payment accounts for a much higher percentage of this cost than in any other compared country, about two-thirds of the total overage.

Given how much of the cost is related to private payers, it turns out we actually spend a bit less on private-sector administration than you'd expect from peer comparisons. So private insurance is much more prevalent in the US, but is in fact slightly more efficient than the private-payer systems elsewhere.

Still, there's no question that private insurance is more expensive. McKinsey found about $34B in excess administrative expenses in the private sector compared to our peers. But the interesting fact is, public insurance shows the same pattern. Another $28B in excess administrative expenses in the US is attributable to the public sector. So not only do we spend more per insured life on private insurance than do our peers, we pay more per insured life in public insurance administrative costs as well: SIX TIMES the average of the comparison group.

Overall, in 2006, spending on administration was growing about in line with overall expenditures (6.3%). But deeper in, there's a significant disparity: spending on administration in the private sector grew at a slower rate, 2.9%, from 2003-2006, while spending on public-sector administration grew at an eye-opening 13.1%! This in turn was essentially driven by Medicare spending, which increased at 32.7% annually in this period.

Several things go into increased Medicare administration costs:
1. The addition of benefits under Medicare part D
2. Significant increases in Medicare enrollment (about 25% growth in this period)

Overall, again, Medicare administration costs per enrollee increased at about 30% per year from 2003 to 2006.

I'm not yet sure what to make of this. Growth in Medicare spending is naturally going to be driven by enrollment increases, which in turn are driven by demographics. But why do we spend so much more per enrollee than other countries? Is it simply that our Medicare benefits are comparatively rich? (I'm not a Medicare recipient, so I have no idea based on my own experience). If that's the case, and the cost per enrollee can't be driven down much, then clearly the demographics-driven Medicare costs have the potential to be the immovable (yet growing) object in the midst of this debate.

No doubt this is why the Medicare Board of Trustees warns that the program faces insolvency in eight years.