Medicare Administrative Costs and Paul Krugman’s “Propaganda Shop”

Robert Book / July 06, 2009

In his blog, New York Times columnist Paul Krugman launches an unsubstantiated attack on The Heritage Foundation for our June 25 report showing that Medicare administrative costs are higher than those private health plans, not lower, as Krugman has frequently claimed. We find it somewhat encouraging that his only “refutation” to our basic point consists of (a) an ad-hominem-like attack, and (b) an old quote that is doesn’t refute the point of our report — and is incorrect anyway.

The point of our paper is that expressing health administrative costs as a percentage of total program costs is silly, since the bulk of program costs are health care claims, and administrative costs are mostly unrelated to the level of health care claims. (Medicare claims processing is only about 4% of administrative costs; the other 96% is unrelated to the level of claims). This is clear from a moment’s thought — if you insure a healthy 25-year-old who never goes to the doctor (or at least, not enough to exceed the deductible), a health plan’s cost for that person is 100%, no matter how efficient the administration is. Private insurance has a lot more people like that than Medicare does. (more…)