In his blog, New York Times columnist Paul Krugman launches an unsubstantiated attack on The Heritage Foundation for our June 25 report showing that Medicare administrative costs are higher than those private health plans, not lower, as Krugman has frequently claimed. We find it somewhat encouraging that his only “refutation” to our basic point consists of (a) an ad-hominem-like attack, and (b) an old quote that is doesn’t refute the point of our report — and is incorrect anyway.

The point of our paper is that expressing health administrative costs as a percentage of total program costs is silly, since the bulk of program costs are health care claims, and administrative costs are mostly unrelated to the level of health care claims. (Medicare claims processing is only about 4% of administrative costs; the other 96% is unrelated to the level of claims). This is clear from a moment’s thought — if you insure a healthy 25-year-old who never goes to the doctor (or at least, not enough to exceed the deductible), a health plan’s cost for that person is 100%, no matter how efficient the administration is. Private insurance has a lot more people like that than Medicare does.

The appropriate measure is administrative cost per person, and by that standard Medicare is more expensive than private health plans. This point stands unrefuted, even with the additional quote from Jacob Hacker.

Hacker refers to a GAO report that says administrative costs (including profit) for Medicare Advantage plans (privately-run managed care plans for Medicare beneficiaries) total 16.7% of total program costs. Hacker claims that “[t]his is a near perfect ‘apples to apples’ comparison of administrative costs, because the public Medicare plan and Medicare Advantage plans are operating under similar rules and treating the same population.”

This is simply not true. The Medicare Payment Advisory Commission (MedPAC) reports (page 62) that Medicare beneficiaries who report their health status as “excellent” or “very good” are twice as likely to enroll in Medicare Advantage as those who report their health status as “poor.” Any Medicare beneficiary can enroll in Medicare Advantage, but those who choose to do so are, on average, healthier than those who remain in the “traditional” Medicare program. In short, Medicare Advantage plans are not “treating the same population.” They are not “operating under similar rules” either; the Medicare Advantage plans have an entire set of regulations of their own, quite different from the rules of the traditional Medicare fee-for-service system.

Putting aside the factual errors and the fact that expressing administrative costs as a percentage of total costs is misleading, the GAO report doesn’t say what Hacker says it says. The administrative costs shown in the GAO report include major administrative functions not included in the figures, which are not comparable to those for reported by Hacker for traditional Medicare. Since the bulk of Medicare Advantage plans are HMO plans, the 16.7% figure includes both functions of operating a health plan and functions that occur in doctors’ offices and health plans. In traditional Medicare, the fees paid to physicians and hospitals include an amount attributable to their internal administrative costs. For physicians, that amount averages 17.3% of their fees — this is administrative costs in addition to costs incurred at the Medicare program level. Hacker says this comes up to 2%, but is actually 3% or 6%, depending on whether you count just the cost of the Medicare bureaucracy, or include with that cost the costs other government agencies incur in support of Medicare.

So even if we believe Hacker’s comparisons between Medicare Advantage and traditional Medicare, a true “apples-to-apples” comparison shows that traditional Medicare’s administrative cost are higher — even using a “percentage-of-costs” approach weighted in its favor.

In other words, Krugman’s criticism of out report consists of an ad hominem attack, and a quote that doesn’t refute our point based on a report that doesn’t say what he says it says.

Krugman’s resort to name-calling (he calls Heritage a “propaganda shop”) is welcome, in a way, since it demonstrates that he can’t refute our point based on the plain facts. Regardless, the facts stand, even if Krugman doesn’t like the employer of the person who brought them to light.