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Is Medicare Cost Effective?

Crossroads Archive

I recently spent a half-day in a meeting discussing a number of issues regarding Medicare. Most of us on the provider side of the street view Medicare as this multiheaded bureaucracy with more pages of regulations than the Internal Revenue Service's tax code. However, I came away from the meeting with some (to me at least) shocking revelations:

  • Medicare beneficiaries are overwhelmingly satisfied with their Medicare coverage, except for the absence of prescription drug benefits;
    The administrative costs of Medicare are lower than any other large health plan.

In fact, Medicare is very efficient by any objective means:

According to the Urban Institute's Marilyn Moon, who testified before the Senate Committee on Aging, Medicare expenditures between 1970 and 2000 grew more slowly than those of the private sector. Initially, from 1965 through the 1980s, Medicare and private insurance costs doubled in tandem. Then Medicare tightened up, and per capita expenditures grew more slowly than private insurance, creating a significant gap. In the 1990s, private insurers got more serious about controlling their costs, and the gap narrowed. But by 2000, Medicare per capita expenditures remained significantly lower than the private sector.

  • The average income of Medicare beneficiaries is closer to the poverty line than many of us working folks would like to believe: According to government statistics Moon cites, more than 90 percent of retirees covered by Medicare earn less than $32,000 per year for individuals or $40,000 for couples. In 2003, Medicare beneficiaries will spend an average of 23 percent of their income on health care!

Moon argues somewhat convincingly that Medicare has been a success. While not necessarily denying that certain reforms might be needed, she stresses the importance of preserving three essential tenets of the program:

1. Its universal coverage nature creates the ability to redistribute benefits to those who are neediest.


2. It pools risk in order to share the burdens of health care among the healthy and the sick.

3. Through Medicare, the government protects the rights of all beneficiaries to essential health care.

It has been argued that, in part, Medicare's cost effectiveness arises from the fact that it does not need to expend funds on marketing and sales-functions that are obligatory for the success of competitive, private-sector health plans. Moreover, some argue that the competitive model for health insurance has not been successful. In a market-driven economy, the healthy can and will change health plans for savings of only a few dollars a month, while the sick must remain in their existing plan in order to retain their physicians. Such behaviors lead to asymmetric risk pools and cost inequities.

This was all sobering news to a market-driven entrepreneur such as yours truly. However, given the perverse incentives that frequently drive behavior in health care, my take-home lesson is that there are examples in the success of Medicare we can apply to other sectors of our population. Dr. Bill Brody, President, Johns Hopkins University

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