Yuval Levin at National Review

[T]he notion that Medicare has “less bureaucracy” than private insurers is deeply confused. . . . That sort of argument is often based on the claim that Medicare’s ratio of administrative costs (the money it spends on things other than care) to health costs is lower than those of private insurance companies. But this misses some key facts.

To begin with, many of Medicare’s most significant administrative costs are just covered by other federal agencies, and so don’t appear on Medicare’s particular budget, but are still huge costs of the program. The IRS collects the taxes that fund the program; Social Security collects many of the premiums paid by beneficiaries; HHS pays for a great deal of what you would think of as basic overhead, but doesn’t put it on the Medicare program’s budget. Obviously private insurers have to pay for such things themselves. Medicare’s administration is also exempt from taxes, while insurers pay an excise tax on premiums (which is counted as overhead). And private insurers also spend a great deal of money fighting fraud, while Medicare doesn’t. That might reduce the program’s administrative costs, but it greatly increases its overall costs. Some administrative costs save money, after all: The GAO has estimated that a $1 investment in pre-payment review of claims, for instance, would save $21 in improper Medicare payments.

Moreover, because Medicare covers older (and therefore sicker) patients than most private insurers (who are locked out of that market), the ratio of its spending on coverage to its spending on overhead is very different from the one most private insurers have—if administrative costs for managing two patients are both $100 but one patient has $200 of health expenses in a year and the other has $2,000 of health expenses, the insurer that covers the first patient will have a far higher administrative-cost ratio, even though both have the same administrative costs. On a per-patient basis, Medicare’s administrative costs most years are actually higher than those of private insurers, even though the program has all the enormous advantages just described in averting such costs and keeping them off the books.