Wednesday, May 27, 2015
Health Affairs Blog
May 27, 2015
The Post-Launch Problem: The Affordable Care Act's Persistently High
By David Himmelstein and Steffie Woolhandler
Last year we, and many others, drew attention to the chaotic and costly
roll out of the Affordable Care Act's (ACA) exchanges. The chaos is
mostly over (unless King prevails over Burwell), but the costs will
linger on. The roughly $6 billion in exchange start-up costs pale in
comparison to the ongoing insurance overhead that the ACA has added to
our health care system — more than a quarter of a trillion dollars
Bloated Administrative Costs
Between 2014 and 2022, CMS projects $2.757 trillion in spending for
private insurance overhead and administering government health programs
(mostly Medicare and Medicaid), including $273.6 billion in new
administrative costs attributable to the ACA. Nearly two-thirds of this
new overhead — $172.2 billion — will go for increased private insurance
Most of this soaring private insurance overhead is attributable to
rising enrollment in private plans which carry high costs for
administration and profits. The rest reflects the costs of running the
exchanges, which serve as brokers for the new private coverage and will
be funded (after initial startup costs) by surcharges on exchange plans'
Government programs — primarily Medicaid — account for the remaining
$101.4 billion increase in overhead. But even the added dollars to
administer Medicaid will flow mostly to private Medicaid HMOs, which
will account for 59 percent of total Medicaid administrative costs in
2022. (The subcontracting of Medicaid coverage to private HMOs has
nearly doubled Medicaid's administrative overhead, which has risen from
5.1 percent of total Medicaid expenditure in 1980 to 9.2 percent this year).
The $273.6 billion in added insurance overhead under the ACA averages
out to $1,375 per newly insured person per year, or 22.5 percent of the
total federal government expenditures for the program.
Insuring 25 million additional Americans, as the CBO projects the ACA
will do, is surely worthwhile. But the administrative cost of doing so
seem awfully steep, particularly when much cheaper alternatives are
Traditional Medicare runs for 2 percent overhead, somewhat higher than
insurance overhead in universal single payer systems like Taiwan's or
Canada's. Yet traditional Medicare is a bargain compared to the ACA
strategy of filtering most of the new dollars through private insurers
and private HMOs that subcontract for much of the new Medicaid coverage.
Indeed, dropping the overhead figure from 22.5 percent to traditional
Medicare's 2 percent would save $249.3 billion by 2022.
The ACA isn't the first time we've seen bloated administrative costs
from a federal program that subcontracts for coverage through private
insurers. Medicare Advantage plans' overhead averaged 13.7 percent in
2011, about $1,355 per enrollee. But rather than learn from that
mistake, both Democrats and Republicans seem intent on tossing more
federal dollars to private insurers. Indeed, the House Republicans'
initial budget would have voucherized Medicare, eventually diverting
almost the entire Medicare budget to private insurers (the measure
passed by the House on April 30 dropped the "premium support" voucher
In contrast, a universal single payer system would pare down both
insurers' and providers' overhead, yielding huge administrative
savings — $375 billion in 2012 according to one recent estimate.
In health care, public insurance gives much more bang for each buck.
Comment by Don McCanne
Although there are innumerable major problems with having used the
Affordable Care Act to reform health care, one of the more significant
deficiencies that we pointed out well in advance was that the design
would add significantly to the excessive administrative burden that
already characterized the U.S. health care system. This study quantifies
that additional burden.
These additional administrative costs amount to $1,375 per newly insured
person per year, an astonishing 22.5 percent of the total federal
government expenditures for the program. Between 2014 and 2022, $273.6
billion in new administrative costs will be attributable to ACA.
The two primary goals of those involved in reforming health care were to
expand coverage to everyone (well, almost everyone) and to control
health care spending. Because of design defects, tens of millions will
be left uninsured, and tens of millions more will be have inadequate
coverage, leaving them vulnerable to health care costs — certainly
falling short of what should have been our goals in expanding coverage.
Regarding controlling spending, the experimental innovations to date
have had little impact in reducing wasteful spending but rather seem to
have slowed health care costs by erecting financial barriers to
beneficial health care services. Not only did the designers fail to use
this opportunity to reduce the profound administrative waste unique to
the U.S. health care financing system, they added significantly to this
waste, as this study demonstrates.
Single payer would fix these problems. Administrative waste would be
dramatically reduced and the savings would be used to expand coverage to
absolutely everyone while eliminating financial barriers to care. We
simply need the political resolve to do it.
at 11:17 AM