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Wednesday, 17th October 2007

Comparing Public and Private Health Insurance: Would a Single-Payer System Save Enough to Cover the Uninsured?

Comparing Public and Private Health Insurance: Would a Single-Payer System Save Enough to Cover the Uninsured?
Source: Manhattan Institute

The central objective of this study is a comparison of the administrative and other important non-benefit costs of private health-insurance plans with those of Medicare, which is used as a prototype for a large single-payer (that is, government-financed) insurance system. The central findings can be summarized as follows:

  • 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, yield a finding of 6 percent of Medicare outlays as the total reported administrative costs for Medicare. This more complete estimate is twice as high as a proportion of Medicare outlays as commonly asserted.
  • A shift to a single-payer system would yield net savings of about $99.6 billion (as of 2006) annually in reported administrative costs, or about $2100 in potential health-care benefits for each of the 47 million individuals currently uninsured.
  • Under a single-payer system, the increase (from about $2262) 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.
  • Accordingly, the argument that the administrative cost savings yielded by a shift to a single-payer system would be sufficient to cover the uninsured is highly problematic.
  • These estimates of the fiscal effect of covering those currently uninsured in a single-payer system are likely to be biased downward because not all the current health-care consumption by the uninsured is funded by the public sector; moreover, we ignore any increases in the prices of medical goods and services attendant upon an increase in demand engendered by a doubling of the population eligible for Medicare or a similar single-payer program.
  • In addition, the federal government must acquire revenues through a tax system that creates economic distortions, that is, that imposes economic costs upon the economy in addition to the revenues generated. The lowest plausible assumption about the magnitude of that “excess burden” of the tax system raises the true cost of delivering Medicare benefits to 24-25 percent of Medicare outlays, or about double the net cost of private health insurance.


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