Fun With Statistics, Overhead Edition

In this edition of Fun With Statistics we tackle the quandary of published overhead or administrative costs.  We commonly use administrative overhead statistics as a measure of organizational efficiency.  For example, when investing in a mutual fund we’ll often take a look at the expense costs to determine how much bang the investment gets for the management expense required.  In that case it’s a pretty clear-cut calculation… total return versus the expense.  But that’s not always the case.

One common argument for nationalized health care is that current government health care programs such as Medicare have very low administrative costs compared to private plans.  That may be true, but is it the whole story?  Let’s take a look at a recent article from The Washington Post which was also discussed here, which follows a similar blog post referencing a New York Times article from last December.  The sub-head from the WaPo article basically gives you the answer:

Medicare pays most claims without review.

That phrase is probably creating a gleam in the eye of some nefarious people, hopefully not our readers.

A critical aspect of the problem is that Medicare, the health program
for the elderly and the disabled, automatically pays the vast majority
of the bills it receives from companies that possess federally issued
supplier numbers. Computer and audit systems now in place to detect
problems generally focus on overbilling and unorthodox medical
treatment rather than fraud, scholars say.

No focus on fraud.  Ok… how about an example of how big this problem is.

All it took to bilk the federal government out of $105 million was a laptop computer.

From her Mediterranean-style townhouse, a high school dropout named
Rita Campos Ramirez orchestrated what prosecutors call the largest
health-care fraud by one person. Over nearly four years, she
electronically submitted more than 140,000 Medicare claims for unnecessary equipment and services. She used the proceeds to
finance big-ticket purchases, including two condominiums and a Mercedez-Benz…

Law enforcement authorities estimate that health-care fraud costs taxpayers more than $60 billion each year.

So administrative costs are low, but fraud costs over $60 b-b-billion.  Cato puts it more eloquently:

So Medicare’s approach to paying claims is not unlike, say, shoveling money out the door?

Officials who oversee the Medicare program say they are
vigilant despite time pressure and limited resources. Employees review
fewer than 5 percent of the nearly 1 billion claims filed each
year…This year, CMS is working to finalize a rule that would prevent
convicted felons from obtaining Medicare billing numbers.

But the important thing here is that Medicare is keeping administrative costs down, and passing the savings on to you, the taxpayer.

Tongue-in-cheek, presumably.  Or perhaps more appropriately the taxpayer is getting some other appliance in some other orifice. 

So next time you hear some statistic lauding low administrative cost, be it in government or the private sector, make sure you also look at the other side of the story.  Where is the value to the customer?