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Medicare for all would save $600 billion a year in administrative costs

Written by Diane Archer

A new paper by Steffie Woolhandler et al. in the Annals of Medicine exposes our health care system’s grave inefficiencies. It finds that the US currently spends more than $800 billion a year on administrative costs. Medicare for All would eliminate almost three-quarters of these costs and save more than $600 billion a year.

The vast majority of Medicare for All’s savings would come from doing away with almost all provider-rate negotiations and bureaucratic headaches that come with having commercial health insurance. Today, literally thousands of health insurers must establish their own payment rates and their own set of rules for covering particular services. On top of that, the overwhelming majority of health insurers make a significant profit.

In 2017, the US spent about one in three health care dollars (34.2 percent) on health care administration, $812 billion. In dollar terms, administrative costs added more than $2,497 to health care spending per person. Compared to Canada, which spent $551 per person on health care administration, the US spent almost five times more. Administrative functions represented just 17 percent of Canada’s health care spending.

Administrative expenses in the US break down as follows: Insurers’ overhead accounts for $844 of per capita spending as compared to $146 in Canada. Hospital administration accounts for $933 of per capita spending as compared to $196 in Canada. Administrative costs for physicians adds still more to costs in the US.

The cost of US health care administration has risen by 3.2 percentage points over an 18-year period. Administration had been 31 percent of health care spending in 1999. Three-quarters of the increase in administrative costs stems from high overhead in commercial Medicare and Medicaid managed-care plans.

Commercial Medicare and Medicaid health insurance plans have far higher administrative costs than the public traditional Medicare program. Medicare Advantage plans, for example, spend about 12% of their premiums on health care administration, easily $1,155 per person more than traditional Medicare. Traditional Medicare spends under two percent on overhead.

Medicare for All would drive down US administrative costs dramatically. If per person administrative costs in the US were at Canada’s level, $551 a person rather than $2,497, the US would save more than $600 billion a year.

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