Obamacare's big overhead costs to top $270B

By Dan Mangan
CNBC, May 27, 2015

That sure is a lot of paper clips.

Obamacare is set to add more than a quarter-of-a-trillion—that's trillion—dollars in extra insurance administrative costs to the U.S. health-care system, according to a new report out Wednesday.

The $273.6 billion in additional insurance overhead represents an average of of $1,375 per newly insured person, per year, from 2012 through 2022.

The overhead cost equals a whopping 22.5 percent of the total estimated $2.76 trillion in all federal government spending for the Affordable Care Act programs during that time, the authors of the report in the journal Health Affairs noted.

In contrast, the federal government's traditional Medicare program has overhead of just 2 percent, according to the report.

"Insuring 25 million additional Americans, as the [Congressional Budget Office] projects the ACA will do, is surely worthwhile," the authors of the Health Affairs blog post write. "But the administrative cost of doing so seems awfully steep, particularly when much cheaper alternatives are available."

The eye-popping Obamacare overhead tally cited by the Health Affairs comes from calculations based on data posted online in July 2014 by the federal Centers for Medicare and Medicaid Services' Office of the Actuary.

Dr. Steffie Woolhandler told CNBC that she and her blog co-author Dr. David Himmelstein only became aware of the projected spending data earlier this year. Their blog said this data allowed "calculation of the incremental insurance overhead costs directly attributable the reform."

But subsequent postings of National Health Expenditure Projections by CMS no longer include separate tables projecting costs with and without the ACA, the blog post noted.

"I am pretty sure we're the first we're bringing it to light," said Woolhandler, who like Himmelstein is a City University of New York School of Public Health professor as well as a lecturer in medicine at Harvard Medical School. "This is the first time there's been a number, and it's a pretty shocking number."

"We're seeing 22 percent of federal spending on the program is actually going to be eaten up by bureaucracy," she said.

A CMS spokesman had no comment when CNBC asked about the blog post.

The large amount of spending devoted to administrative costs both in dollar terms and as a percentage of total ACA spending is a reflection of Obamacare's "use of private health insurance for most of the coverage expansion," said Woolhandler. Private insurance, she said, is "associated with high overhead costs."

"The national average is about 13 percent," Woolhandler said.

Her blog post noted that $172.2 billion, nearly two-thirds of total new ACA overhead spending, "will go for increased private insurance overhead," in the form of insurers' administrative costs and profits.

The remaining administrative overhead is due mainly to government programs, primarily from the cost of expanding Medicaid benefit coverage to previously ineligible poor adults, the blog post said.

"But even the added dollars to administer Medicaid will flow mostly to private Medicaid HMOs [health maintenance organizations]," the blog said.

"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," the blog said. "Indeed, dropping the overhead figure from 22.5 percent to traditional Medicare's 2 percent would save $249.3 billion by 2022."

Obamacare is designed to expand health coverage in three primary ways: the sale of private insurance plans on government-run marketplaces, with federal financial assistance available to most customers; allowing more poor adults to qualify for Medicaid than before; and allowing people under age 26 to stay on their parents'private insurance plans.

Woolhandler, like Himmelstein, is a proponent of a single-payer health system that would have the federal government insure all Americans. Both are co-founders of a leading advocacy group for that goal, Physicians for a National Health Program.

A single-payer system was not seriously debated in Congress before the implementation of the ACA. But advocates for such a scheme had argued that it would give "a bigger bang for your buck" than expanding coverage primarily through the use of private insurance, Woolhandler noted.

But until the CMS data came to light, she said, advocates could not point to official estimates of how much Obamacare would actually cost in terms of administrative overhead. If such an estimate had been available, it might have helped sway Congress to save the so-called public option for the ACA, she said.

The public option would have involved the government offering its own insurance coverage as one of the options for customers of government-run Obamacare exchanges, which currently offer only private insurance plans. The public option ended up being removed from the final ACA bill voted upon by Congress. 

Woolhandler said she expects the public option, like Medicare, would have had much lower overhead costs than private insurance.

She also said that the massive amount of money that will be spent on administrative overhead in Obamacare hobbles the law's stated goal of providing expanded, affordable coverage to uninsured Americans.

"You're getting less of it if you're covering 22 percent in overhead," she said.

If the program had much lower administrative overhead costs, then people insured under the ACA could have lower co-payment and deductibles as part of their insurance, she said.

Those costs, which a customer must personally pay out of their pocket before their plan covers a medical service, can lead people to avoid seeking health care because of financial concerns, Woolhandler said.


Obamacare to add billions in insurance overhead costs, study says

Single-payer system would save on administrative costs

By Russ Britt
Marketwatch, May 27, 2015

Obamacare will cost insurers more than a quarter of a trillion dollars in additional administrative costs by 2022, a new study released Wednesday says.

The findings published in Health Affairs magazine call for a universal single-payer system because it would reduce, rather than add, to administrative costs.

The report says that over the eight years through 2022, the Affordable Care Act will tack on $273.6 billion in overhead. Some of that will be added to Medicare and Medicaid programs, but the bulk of it — $172.2 billion — will be borne by private insurance. That total increase, in both government and private insurance programs, amounts to $1,375 for each newly insured person a year, or roughly 22.5% of total government expenditures.

“Insuring 25 million additional Americans, as the [Congressional Budget Office] projects the ACA will do, is surely worthwhile. But the administrative cost of doing so seems awfully steep, particularly when much cheaper alternatives are available,” the report says.

It goes on to say: “Traditional Medicare runs for 2% 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.”

The report is written by Drs. David Himmelstein and Steffie Woolhandler, both professors at the City University of New York School of Public Health and lecturers at Harvard Medical School. They say bloated administrative costs present in Medicare Advantage plans added 13.7% in overhead in 2011, or $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 Republican’s initial budget proposal would have voucherized Medicare, eventually diverting almost the entire Medicare budget to private insurers,” the report says.

A universal single-payer system for the entire health-care system would have reduced overhead by $375 billion in 2012, according to one recent estimate.


For more coverage, see the following:
"Obamacare’s $273 Billion Bonanza for Paper Pushers," The Fiscal Times, May 28
"What’s Going on With Spending on Health Insurance Overhead?" The Wall Street Journal, Washington Wire blog, May 28.
"Overhead, administrative costs for health plans explode under the PPACA," Becker's Hospital Review, May 28
"Blog: Single-payer advocates tally ACA's administrative burden," Modern Healthcare, May 28