The Truth about Medicare and Private Insurers


Today, fearmongers are trying to start
a generational war. Their goal is to persuade younger Americans that we cannot
afford Medicare
. I have always
been candid about the waste in our healthcare system. U.S.
medicine is inordinately and unnecessarily
expensive; we must put a brake on healthcare inflation. But conservatives such
as billionaire Wall Street baron Pete Peterson wildly exaggerate the numbers when
they suggest that spending on aging boomers will bankrupt the nation.


 Pete Peterson is, I am sorry
to say, simply a cranky old man in a pinstriped suit. In a word, he’s a crank
–i.e. “an unbalanced person who is overzealous in
the advocacy of a private cause.”


It’s Not a Medicare Problem—It’s a
Systemic Problem

Let’s ignore the rhetoric and
take at look at the bald facts.  Below, a
chart that shows the growth in how much Medicare spends
on health care each year (red line) and the growth in how much
private insurers pay out (blue line).  (Hat tip to reader Robert Feinman for sending
me a series of charts from the Wonk Room.)

For example, in 2000, reimbursements
from private insurers grew by about 11 percent;
this was the year when they stopped trying to
“manage care” and began saying “yes” to many procedures that they had refused
to cover in the past. But even after paying out so much more in
2000, the amount that private insurers spent on health care continued to rise,
by 9 percent to 10 percent a year
.  (These numbers come from the Congressional
Budget Office.) This explains why your insurance premiums have spiraled.




Over the same span, Medicare
also struggled to control spending. From 2000 to 2006, the amount
that it paid for healthcare grew by 6 percent to 9 percent each and every year.
This is why Medicare premiums, deductibles and co-pays have been rising.  
2000 and 2007 Medicare beneficiaries faced average annual increases in the Part
B premium of nearly 11 percent.”  And
this year, the
Part A hospital insurance deductible climbed by $44  to $1,068. That covers up to 60 days of
hospital care; after that Medicare beneficiaries who have not bought supplemental
(Medigap) insurance must pay daily coinsurance of $267 a day for days 61-90 and
$534 per day after 90 days. For outpatient care, beneficiaries are asked to cover
the first $135; after meeting that deductible they must pay 20 percent of the
Medicare-approved cost of outpatient services.

Some single-payer advocates
would lead you to believe that under Medicare, healthcare is free. This
just isn’t true.   Even if we had
single-payer system, the amount that you have to pay out-of-pocket would
continue to climb unless we learn to control health care inflation.

Why is the cost of
healthcare in the U.S. soaring both under Medicare and under private insurance? For two reasons: First, because we pay more for every pill and
—and secondly, each year we take more pills and undergo more tests and treatments .

As blogger Merrill Goozner has
pointed out, in our wasteful system, volume is as much a problem as price:  In 2007, “the Congressional Research Service has
published a sobering comparison of U.S. health care spending patterns to the other 29 nations in the Organization for Economic Cooperation and Development (OECD). Did you know that our physicians order 587 coronary artery bypass graft surgeries per 100,000 population compared to an OECD average of 352? Did you know that we have 32 CT scanning machines and 27 MRI machines per one million population compared to an OECD average of 18.8 and 8.8, respectively?”

Recently, I quoted
Harvard’s Dr. Atul Gawande on the explosion in surgeries: “In 1996,
Americans underwent some 60 million surgeries. In 2008, that number rose to
100 million
. Does that mean that Americans are healthier?” he asked. Or
does it simply mean that we are paying for more unnecessary surgeries?
“No one knows,” said Gawande, “because we never measure how well
our healthcare system is performing

 Administrative costs also are high,
both at the insurers’ end and at the provider’s end, in large part because our system
is so fragmented.
Eighty-percent of U.S. doctors practice in groups of four or less, and each of those offices is filling out paperwork to be reimbursed by dozens of different insurers. The insurers add
another fat layer of administrative costs, as do the employers who purchase policies. In countries where all physicians work, on salary, for the government, and hospitals are all owned by the government much ofthe paperwork is eliminated. But it is very unlikely that the we are going to nationalize our healthcare system; so we are always going to stuck with more paperwork than some other countries. Still, if our system were organized so that physicians worked in very large medical centers, and insurance benefits were standardized, we could reap significant savings.

But high administrative costs are only a part
of the problem. Under Medicare, administrative costs are much lower—yet, as you can see, government spending on healthcare continues to levitate as the cost of
drugs, devices, tests and treatments soars. So a single-payer system (or
Medicare for all) would not solve healthcare inflation.  
With costs rising by 7% a year, your
health care bill would double in a little over 10 years.

Even though many doctors’
fees have remained relatively flat in recent years, doctors are doing more-performing more surgeries, prescribing more tests and  more treatments. As a result, the total amount that we as a nation has spent o n physicians’ services  has continued to rise—up  6.2 percent in 2000, up 8.3 percent in 2003,
up 7.3 percent in 2004, up 7.4 percent in 2005, and gaining another 5.9 percent
in 2006.  Meanwhile, some doctors remain underpaid.


 Going all the way back to 1970, you can see
that healthcare inflation has remained high, with the amount that both private
insurers and Medicare pay out growing far faster than the average worker’s
wages. (According to the Congressional Budget Office, even if you add in the
value of the health care benefits that employees receive from their employers,
America’s statistical middle class –the 20 percent clinging to the third rung
of a 5-rung income ladder—has seen its income rise only 15 percent over the
past 25 year—or less than 1 percent a year. )

This is why healthcare has
become unaffordable for so many Americans.

Sometimes Medicare has done a
better job of keeping a lid on inflation; sometimes private insurers have been
more successful. For instance, in 1994, Medicare spending grew by only about 3
percent. In 1998, reimbursements from private insurers rose by just 4

But by and large, both
Medicare and private insurers failed to contain health care inflation. As the
“Wonk Room” points out the problem is systemic.  Medicare’s costs are rising, not because greedy geezers are gaming the system, but because, in a for-profit health care system where everyone is selling something—and selling hard—we are buying care that we don’t need in the form of ineffective, often unproven,  sometimes unwanted and generally overpriced products and treatments. As I have discussed in earlier posts, more than two decades of work done by medical researchers at Dartmouth shows one out
of three of our health care dollars is squandered on care that provides no
benefit to the patient.  But the problem is not unsurmountable.

We Just Need to Trim 4%-6% from Medicare Spending

As the chart above demonstrates,
in recent years, Medicare spending has been growing by 6% to 8% a year. If we
trimmed spending by just 4% to 6%– bringing health care inflation back to 2% a
year, the cost of health care would be growing at about the same rate as the
(assuming relatively slow economic growth in coming years.)  This is doable.

We could continue to spend
the $2.6 trillion that we are now spending—plus 2 percent a year—and
U.S. healthcare would be affordable.

What about covering the 47
million Americans who are underinsured, and the millions who are underinsured?  By redistributing how we spend that $2.6
—spending more on preventive care, public health and chronic
disease management—and less on inordinately expensive aggressive that provides
little or no benefit to the patient, we could cover everyone.

 Admittedly, as I have said
in the past, we will need “seed money” to restructure the system and make it more
 There are various ways to raise that money: eliminating
the windfall bonus that we are now paying Medicare Advantage insurers; letting
Medicare negotiate with drug-makers for discounts on the drugs that Medicare
and Medicaid buy; raising inheritance taxes on assets over a certain amount;  erasing President Bush’s capital gain tax cut;
raising income taxes on the wealthiest 15 percent. . . .

 These are just a few
examples of ways to fund the comparative effectiveness research, electronic
medical records and important changes in the way we deliver care that could give
us much better value for our health care dollars.  Keep in mind that restructuring the
system  would be a one-time expense
(stretched out over a period of years). In the long run, the savings would more
than cover the initial outlays.

Yes, our population is
aging, but that does not mean that health care costs must soar. Sweden has the oldest population in the EU, yet over the last 15 years, while the population has been graying, health care spending has stayed level at about
9 percent of GDP.

How has Sweden managed the buck the trend?
For one, 95 percent of the country’s hospitals and doctors use electronic
medical records which guarantee many fewer errors, and much greater efficiency.
Moreover, in Sweden preventive care is free. So no one is
tempted to skip a needed Pap Smear. Diabetics go for their eye check-ups. If
the Swedish can learn how to get good value for their healthcare dollars, we
can too. 

beware of anyone who tries to use scare tactics to persuade you we,
unlike every other developed country in the world
, simply cannot afford
to provide high quality healthcare for all. Those who must use fear as a weapon
do so because they don’t have facts.

14 thoughts on “The Truth about Medicare and Private Insurers

  1. Let me play devil’s advocate for once.
    Suppose we, as a matter of public policy, decide that we don’t mind an inefficient health care system. The “waste” is to be considered as a form of Keynesian economic stimulation. It is keeping about one million people employed as fifth wheels.
    We have no trouble making this argument when it comes to military spending. The two new nuclear subs just ordered were fought for explicitly to keep the shipyard open in New London, and getting this through is one of the principle reason Lieberman was reelected.
    Similarly there is a push for additional F22’s, currently being cast as part of the stimulus package, even though there is a several year backlog of planes in the pipeline. The justification – jobs.
    So people are used to hearing the “creates jobs” argument for all sorts of specialized sectors.
    If we want to keep an inefficient health sector because we don’t know what else to do with all these people, that’s a choice we can make.
    We just spend less on something else that we disfavor, like public pre-K education.
    So the problem isn’t the amount of spending, it is that it is not fulfilling two important mandates.
    1. Coverage for all
    2. Effective treatment
    We can solve these two issues, if we wish, by means of appropriate legislation and oversight while still keeping the make-work bureaucracies in place.
    The problem is that the two goals are not being explicitly stated and there is no discussion on meeting both of them.
    If we are going to become an essentially post-industrial society, we need to adapt to the idea that many people will perform marginally useful service functions. What else would they do?

  2. Robert–
    The problem is that ineffective, wasteful care is hurting people.
    An average-risk young woman has a MRI scan for breast cancer which discovers a tiny lesion.
    She has a lumpectomy or maybe even a mastectomy.
    IF she had never had the MRI, the lesion would have disappeared.
    Unnecessary tests,unnecessary surgeries, hospitalizations, and drugs all carry risks and lead to side effects.
    So,no, we don’t want ineffective medicine just to keep people employed.
    What could those people making MRI units do instead?
    We have huge needs in our society for daycare workers, nurses, teachers,
    teachers’ aides, drug counselors, people involved in public works proejcts, creating art, restoring parks, making our public spaces beautiful . . .
    Rather than making things we don’t need, we should be helping each other–

  3. Notice that I did say I was playing devil’s advocate…
    And my point 2 was to achieve effective treatment which covers your objection.
    What I’m saying is that we could have a comprehensive, effective health system and it could still be expensive. This is because we keep it economically inefficient just to keep people employed. The two things are independent. Japan subsidizes small plot rice farmers by restricting lower priced imported rice. Everyone pays more, but they feel there is a social good in keeping these people on their land.
    Having an economically inefficient, but effective health care system would still step on the toes of the powerful as the useless procedures were weeded out, but those offering the better ones would be the winners so the health suppliers in general would still be making out OK.
    Of course, my real point is that we can easily pay for even expensive health care if we are willing to reset our priorities.
    Militarism still dwarfs social spending. Here’s one of my favorite charts which illustrates this clearly.
    We still prefer bombs to health care (or education, or infrastructure). I see no way to fix this in the present climate, Obama is pushing for an 8% increase in military spending.

  4. Another way to raise the money Maggie is something then CBO Director Peter Orszag said to Congress two years ago. The previous administration had the nation on an unstable fiscal path with its desire for a Korea-like, enduring occupation of Iraq. The higher debt and interest costs was going to cause severe economic dislocation, which was being exacerbated by war costs. President Obama plans to save money mostly by scaling back Iraq war spending (as well as raising taxes on the wealthiest and stremlining government).

  5. Maggie and others:
    At issue in terms of health of the nation and unaffordable health insurance premiums is:
    We Can Do Better — Improving the Health of the American People
    The key to improving health care in America is focusing on individual health habits (smoking, obesity, lack of exercise) which is especially prevalent in the poor and environmental problems such as air and water pollution, violence in neighborhoods, lead paint, which is also prevalent in lower socioeconomic classes.
    This requires passing legislation much like that done by New York Mayor Mike Bloomberg which has helped to lower the teen smoking rate to 8.5% from 21% and helped 200,000 (20% of smokers) adult smokers to quit smoking by 1) banning smoking in public places 2) raising the cost of cigarettes through taxes to $10/pack, 3) rigorous enforcement of the law prohibit sale of cigarettes to minors with a 93% compliance rate, 4) rigorous anti-smoking legislation, 5) periodic free nicotine replacement patches.
    The revenues from increasing the taxes on cigarettes can go into helping to pay for health care for the uninsured.
    “Americans are also more likely to be obese, leading to heart disease and other medical problems. Among Americans, 31 percent of men and 33 percent of women have a body mass index of at least 30, a definition of obesity, versus 17 percent of men and 19 percent of women in Canada. Japan, which has the longest life expectancy among major nations, has obesity rates of about 3 percent.”
    Economic costs of obesity and inactivity. (1995 study)
    CONCLUSION: Overall, the direct costs of inactivity and obesity account for some 9.4% of the national health care expenditures in the United States.
    NOTE: Obesity in America has increased over the past 13 years so it is bound to be higher than 9.4% of $2.6 trillion health care budget or about $245 billion which over the next decade with increasing health care costs and increasing obesity will come to over $3 trillion.
    “RESULTS: In 1993, the estimated proportion of total medical expenditures attributable to smoking for the U.S. as a whole was 11.8%….”
    $2.6 trillion health care budget of which 11.8% is caused by smoking is about $307 billion this year and more next year. In the next decade that would be well over $3 trillion.
    In summary, the biggest issue with health care costs is that people (and polluters) who voluntarily use additional health resources through smoking, drinking sugar cokes, eating Big Macs, polluting the environment, etc. who are not paying their full way and asking others who choose to live healthier lifestyles to subsidize their habits. What Mayor Bloomberg did with smoking in New York City needs to be replicated throughout the nation starting with liberal states such as Massachusetts and California.

  6. David MD., Gregory and Robert– Thanks for your comments.
    David M.D.– I totally agree about smoking. Bloomberg provides a good model.
    And we really can help smokers. Free nicotine patches could do a lot.
    On obesity, unfortunately, doctors have not found a way to help truly obese patients take weight off and keep it off (except for surgery that is both expensive and dangerous.)
    See this HealthBeat post–part 1 here
    and part 2 here
    In the future, we may find well find ways to help obese people. And I certainly favor putting money into research on the subject.
    In the meantime, I think we should spend money on public health projects that could help children who are at risk of becoming obese: nutritous (which means more epensive) school lunches; safe playgrounds in ghetto neighborhoods and playgrounds outsidepublic schools in poor neighborhoods, gyms (and gym teachers) in those schools . . .
    We know that there is a very high correlation between poverty and obestiy becausse more nutrtious less fattening foods are more exepenive; ghetto grocery store don’t carry a lot of fresh fish and vegetables–and if they do, prices are very high (due to low turnover) and in poor neighborhoods there are very few safe places to excercise.
    Gregory– Yes, Bush dug a very very deep financial hole by going into Iraq.
    Getting out of Iraq– and not going into Afghanistan–could help with our fiscal problems.
    As I said, we don’t want people in healtcare doing “make-work” jobs that lead to more unncessary, potentially harmful care.
    And there is plenty of very useful work to be done in this country–caring for children, the elderly, improving public spaces, ceating art.
    This is not “make work”in the sense of pointless work. It would add to the wealth and health of the nation.

  7. They can’t scare me. I can’t afford health insurance to begin with.
    “The problem is that ineffective, wasteful care is hurting people” I’d agree with this and add the adjectives “wreckless” and “careless.”
    I smoke like a freight train, our extensive experience with health care would not have been one iota different if I hadn’t been out in the pavilion puffing away on my Newports.

  8. The clear way to bring health care costs under control is to practice good scientifically based medicine and to eliminate costly, ineffective, and sometimes even dangerous procedures and treatments, and adoption of quality standards that eliminate costly avoidable errors and complications. That is where the dollars are buried. Savings of from $400 billion to $600 billion a year are possible with this approach.
    Unfortunately, the notion that good health habits can save significant amounts of money in the long run turns out not to be true. Despite piles of articles from the US based on back of the envelope calculations, the only hard data studies on the cost impact of smoking, obesity, and lack of exercise were performed in Holland in the late 80’s and early 90’s, when the national health service reviewed its actual experience with patients who had good health habits compared with bad health habits. What they found was that over the full lifetime of patients, smokers, the obese, and the sedentary actually cost the system less, not more. This seemingly counter-intuitive result becomes understandable when you realize that while people with good health habits cost less when they are younger, their significantly longer life spans result in increased spending in the long run, partly because eventually they do finally become sick and undergo high cost management leading up to their eventual deaths, and partly because their longer life exposes them to more expense for management of all sorts of aging related health conditions such as cataracts, joint problems, spine problems, neurological conditions, and age related cancers.
    This does not mean that we should not encourage people to have good health habits since that will help them to lead longer, better, more satisfactory lives. It does mean, however, that we cannot expect that adopting better health habits will result in overall savings for the health care system. Savings for the health care system need to be realized through adoption of sound scientific practice standards, with smaller savings available from potential reductions in cost of drugs and devices and in lowered administrative expenses.

  9. Hi Maggie,
    Thank you for your comments to my comments. Regarding Obesity, I consult with a world expert in obesity and former President of NASSO (Now The Obesity Society) Louis Aronne, MD. While it is true that some people are outliers on a bell shaped curve (some being thin regardless of eating habits and some having excess fat [as opposed to muscle tissue] regardless of eating and exercise habits, most of the people who are obese are so because they do not eat healthy foods and because they do not excercise enough. For instance, despite the fact that Diet soft drinks are available, people still consume sugar soft drinks. A 20 oz vending bottle of sugar Coke consumed daily is the equivalent of about 20 lbs of fat per year. (220 cals/20 oz) times 365 divided by (454 grams per pound times 9 cal per gram of fat). The same goes for people consuming fruit juices when diet fruit drinks are also available or when they could be consuming fruits and not high caloric density fruit juices. Fast food restaurants are everywhere because people use them yet it is known that fast food makes people obese — a Big Mac sandwhich is 540 cals of which 1/2 are fat. People could purchase a treadmill and lightly jog on it for 20 minutes a day while watching TV.
    Just look at the sales of junk foods in stores such as potatoe chips, candy bars, etc. The calories are consumed somewhere and the rest of us are paying for it in higher health care costs as we subsidize the junk food, fast food, sugar coke eaters/drinkers.
    NY State has proposed an 18% “Obesity Tax” on sugar (but not diet) Coke. This is a start. Higher costs for junk/fast foods through taxes that are funneled into our health care system is one way to reduce costs for those who eat a healthy diet.
    Also, NY Mayor Bloomberg has a special fruit and vegetable cart vendors initiative allowing 1,500 vendors to sell on streets in (typically poorer) neighborhoods.
    I would like to see the food stamp allowance raised and while there is a $2 billion per year subsidy of corn by the fed govt. which results in lower cost high fructose corn syrup and meat (derived from corn feed) there should be a similar subsidy of fruits and vegetables to make them more affordable.
    Our health care system is simply unsustainable as long as those people who voluntarily follow lifestyle habits do not pay for the additional health care resources consumed by those habit since that means that people who chose to lead a healthy lifestyle subsidize those who do not.

  10. Lisa, Pat S., Jack and David MD
    Pat S. & Jack & Lisa—
    Pat S. & Jack are right;
    people who are obese or smoke die sooner and actually cost us less than others.
    David M.D.-
    The studies who quote on the cost of obesity and smoking doing not take into account the fact that these people die sooner and so we don’t spend money on their long-term care– they don’t live long enough to develop Alzheimer’s and many other chronic diseases.
    Also, great deal of research pblished in peer-reviewed medical journals shows that true obesity is not about people eating too much and exercising too little.
    People become “fat” by eating and not exercising. But “obseity,” clinically definied, is a disease, and a very complicated disease at that.
    This is why studies who that when compliant patients try to lose weight–and keep it off–under medical supervision, only 5 percent succeed.
    I’ve written a couple of posts about this. Go to the front page of HeathBeat, scroll down to “Google” and search “obesity.”
    Blaming the obese is like blaming people who have breast cancer.
    And while I agree that we shouldn’t be subsidizing the ingredients for junk food, it is worth remembering that in the last depressoin (in the 1930s) a great many Americans starved to death for lack of food– babies, children, elderly people.
    That won’t happen this time around because there is so much cheap junk food around that doesn’t give you the protein and vitamins you need, but does provide energy (high carb food) and will keep you alive.
    Americans still suffer from malnutrition, but poor people don’t starve to death in this country anymore–ironically, thanks to the junk food industry.
    But I’m with you: I’d rather raise food stamp allowances and subsidize fruit and vegetable sales in poor neighbohoods.

  11. Yay I’m glad to have some friends here. Not only do I crusade for healthcare reform, but I take one for the team every time I light up. See there, I’m dedicated to the cause.
    I’ve always known I’m going to die young, and it won’t have anything to do with my disgusting habit. No, I’m not sick and have been blessed with good health my entire life. I’m gonna go quick and young. Don’t ask me how I know this but I’ve known it since I was a teenager. I can’t believe I’m just putting that out here on the internet but it’s true. That’s why I’m always in such a darn hurry to get things done, there’s things I want to accomplish or experience while I’m still here. Fix healthcare, road trip to Alaska. Glad we’re all busy on the healthcare front.

  12. Maggie wrote:
    “People become “fat” by eating and not exercising. But “obseity,” clinically definied, is a disease, and a very complicated disease at that.” [snip] “Blaming the obese is like blaming people who have breast cancer.”
    Obesity is defines as having a BMI > 30, that is what I am talking about. As I said in my earlier post I consult with “super experts” like Louis Aronne, MD (former President of NASSO now called The Obesity Society — ). I (and more importantly) the experts completely disagree that blaming the obese is like blaming someone who has breast cancer.
    Most people get obese from drinking sugar cokes, fruit juices and eating junk food and eating at fast food restaurants. One can eat lots of healthy food that is not so expensive — pasta and meat sauce as opposed to big burgers from Mac’s, diet soft drinks and diet juices (Ocean Spray produces diet juices which I drink and recommend.)
    We have to change the incentives to consume food in the food supply by having the “Obesity tax” as in New York State’s plan 18% tax on sugar but not diet soft drinks. It is simply unreasonable to expect people that eat healthy foods to subsidize the additional health care costs incurred by obese people.
    In addition, helping people to change their eating habits will make them less likely to be obese (BMI > 30) and have a better quality of life. As for people dieing more quickly because of smoking and obesity and saving the system money, I don’t even want to go there….it makes me sick to have discussions like that…
    But that said, not everyone gets Alzheimer’s. I stand by the cost estimates provided by experts in estimating costs of smoking and obesity and lack of exercise. I am not an expert in these areas but the people doing the cost estimates are.
    All of those fast food restaurants and sugar coke companies and junk food companies are making a profit by imposing a tremendous cost on our health care system. The cost of goods sold should include the additional health care costs incurred by using those goods. Otherwise health care costs will always be unmanageable.