Comparing public and private health insurance

The Manhattan Institute has released a new report by senior fellow Benjamin Zycher, entitled "Comparing Public and Private Health Insurance: Would a Single-Payer System Save Enough to Cover the Uninsured?" In it, Zycher dispels a common misconception regarding single-payer health insurance.

Among the attractions of a government-provided health-care system has been the possibility that it might broaden coverage, while simultaneously reducing costs. As economist Paul Krugman has written: “Eliminating the excess administrative costs of private health insurers . . . would by itself more or less pay the cost of covering all the uninsured” (New York Times, 02-16-07).

Similarly, this week a Majority Report issued by the House Oversight and Government Reform Committee made the claim that “the administrative expenses, sales costs, and profits of the privatized [Medicare] Part D program are almost six times higher than the administrative expenses of traditional Medicare.”

In his new study, Zycher tests this proposition by comparing the costs of administering Medicare with the administrative costs of a private system. His data reveal that the costs of administering Medicare are twice as high as is commonly asserted. Furthermore, Zycher computes that a switch to a single-payer system would, in fact, not yield savings sufficient to cover the costs of the uninsured.

Specifically, Zycher finds that:

Administrative costs for private health insurance, defined broadly, are in the range of 11-14 percent of total premiums.

Administrative costs reported directly in the Medicare budget, combined with a proportional allocation of the costs of other federal government administrative functions, yields a finding of 6 percent of Medicare outlays – twice the proportion of Medicare outlays that is commonly asserted.

A shift to a single-payer system would yield net savings of about $2100 in potential health-care benefits for each of the 47 million individuals cur­rently uninsured.

Under a single-payer system, the increase in average health-care consumption by those currently uninsured would be in the range of about $1700 to $3400; this results in an annual impact on govern­ment costs, as measured, between a saving of about $19 billion to a funding shortfall of about $61 billion. The midpoint estimate thus is an approximate funding shortfall of $21 billion annually.

The author concludes that the total economic cost of delivering health insurance benefits under a single-payer system would be substantially greater than that under the current private system. Moreover, the administrative and other net costs of private health insurance programs are more likely to be efficient in terms of satisfying the preferences of consumers.

Benjamin Zycher writes extensively on economic and political effects of government regulation and taxation. His research interests include health care policy and the pharmaceutical sector. Benjamin Zycher is available to discuss this report and matters relating to economics and public expenditures.