Health insurance administrative cost

An argument advocates of Medicare for All often make is that administrative costs would be far lower than private insurance. They typically say Medicare's administrative cost is only 2-3% of its spending, compared to 12% of revenues for private insurer. Since Medicare's revenues aren't much different than its spending, the different italicized terms matters little. However, there are plenty of other things that make it an "apples and oranges" comparison.

This Mises Institute article gives several counter-arguments. It seems to mostly copy a Heritage Foundation article more than 10 years old. The following counter-arguments are from the articles and some of my own:

1. "Social Security administers the collection of Medicare premiums. The IRS collects the taxes. Health and Human Services pays for building and marketing costs, as well as accounting and related concerns. Attributing those costs correctly would roughly double Medicare’s administrative costs."

In the Medicare 2019 Trustees Report administrative cost was about 1.7% of expenditures in 2018. The breakdown includes amounts paid to other government departments, including IRS and HHS. I don't know how realistic they are. So this argument the articles make seems weak or false.

2. "Medicare patients are far older and less healthy — and more than twice as costly, on average, than younger people in private plans. But having less than half the health care costs per beneficiary more than doubles private insurance’s administrative cost as a percentage of total costs, than if the more accurate measure — administrative cost per beneficiary — was used." A different source I found with more detail said that Medicare's cost per beneficiary is about three times that of private health insurance.

This is a good argument. Expressing administrative costs as a percent of total cost instead of per beneficiary is biased.

3. Private insurers pay premium taxes to states that Medicare does not. The tax averages about 2%. Private insurers, at least for-profit ones, pay income taxes, which Medicare doesn't. How much is difficult to quantify, since there are both for-profits and non-profits, but let's assume it's about 2%.

4. Some private insurer revenues go towards profit and marketing. Private insurers need to advertise and pay salespeople to persuade customers to buy their product. Medicare doesn't. Its revenues are required by law and backed by force.

5. A significant part of a private insurer's administrative cost consists of complying with Medicare rules, regulation, and practices. Since they are ever-changing, simply keeping up-to-date adds to such cost. This is especially true for insurers that administer Medicare Advantage policies.

6.  The costs private insurers bear for administering Medicare Advantage policies is done on behalf of Medicare. Medicare dictates that the policies must cover at least what original Medicare does. Medicare pays these insurers a lot of money to do so. It was about $11,000 per person covered in 2018. So such costs can be regarded as Medicare "off the books" administrative costs.

7. Medicare imposes administrative costs on providers, which aren't included in Medicare's spending. Providers must submit the forms and procedure codes to, and demanded by, Medicare in order to be reimbursed. This story reports that doctors spend almost half their time on paperwork and electronic records.

I'm not convinced that Medicare's administrative costs are higher than private insurance, like the Mises Institute and Heritage Foundation claim. However, Medicare's administrative costs are understated when provider costs aren't included and should be lower given Medicare's much larger size than any single private insurer. Regardless, other things matter, too. Medicare operates by force; private insurers don't. This difference matters little or none to advocates of Medicare for All.

This article has more detail about administrative costs, especially of providers.

The Truth About Income Inequality

Many studies of inequality and claims about it consider only income and sometimes only taxable income. The Wall Street Journal has an article also including taxes and welfare benefits, which yields quite different statistical results. The article is behind a paywall, so I give a key quote. “In all, leaving out taxes and most transfers overstates inequality by more than 300%, as measured by the ratio of the top quintile’s income to the bottom quintile’s.” A graph neatly illustrates the difference.

I don't have the data to verify the numbers, but at least the authors were on the right track. One of the big problems with Thomas Piketty's Capital in the Twenty-First Century is that Piketty ignored taxes and transfer payments. My review of Piketty's popular book on Amazon is here.

Dirty secrets of capitalism??

The speaker in this video of a TED talk, Nick Hanauer, claims the “dirty little secret” of capitalism is neoliberal economic theory. He claims the assumptions of neoliberalism are wrong, especially “selfishness.” The “new” economics he supports holds cooperation and reciprocity as central. He doesn’t explain what “reciprocity” means. Is it trade, in which customers pay for products or services? Does it include employers paying its own employees?

The Mises Institute responds to that part of the TED talk here. Excerpts:

- “But Hanauer can’t bring himself to praise that kind of cooperation and reciprocity because market exchange also involves self-interest and competition.”

- “Reciprocity and cooperation are indeed good things. But contrary to what Hanauer thinks, they are, in fact, the very basis of capitalism, a system of voluntary exchanges.”

Like many people do, Hanauer seems to regard selfishness and altruism as wholly mutually exclusive. Some actions are entirely one or the other, but not all are. Suppose a wife buys groceries for herself, her husband, and their children. Suppose one partner of a business acts for the benefit of the partnership that benefits the other partner(s) as well. Are such actions selfish or altruistic? Or both?

Hanauer claims that neoliberalism holds that the purpose of a corporation is only to enrich the shareholders. Not exactly, at least per the main advocate of a similar idea. Milton Friedman said it was the main purpose (link); “main” and “only” aren’t identical.

More than three years before this TED talk, Richard Epstein debated Hanauer about Hanauer’s idea of “middle out” economics (contra “top-down” or “trickle down”) and a minimum wage (link). 

In the wake of ITEP’s report

Per Newsweek and relying on ITEP’s report about corporate income taxes, Bernie Sanders took the opportunity to tweet:

Amazon   CenturyLink   Chevron   Deere   Delta Air Lines   Eli Lilly
FedEx   Gannett   General Motors   Goodyear   Honeywell   JetBlue
MGM Resorts   Netflix   Prudential Financial   Starbucks   Whirlpool

Total federal income tax paid by these companies last year: $0    [End]

Sanders carelessly trusted ITEP’s flawed report:
- He used “paid”, like ITEP often does, despite the fact that taxes shown in ITEP’s report are GAAP accounting provisions.
- The income tax provision of nine of the 17 companies Sanders names flips from negative to positive when the deferred part of income tax expense is included. ITEP excluded it.
- ITEP showed a tax for Starbucks of -$74.8 million. I don’t know where they got this number. Starbucks’ 10-K accessible here doesn’t show it. The 10-K shows positive U.S. federal income tax provisions – both “current” and “current + deferred” – for fiscal years ended 9/30/2018 and 9/30/2019.

The Cato Institute had this to say about ITEP’s report. Included: “The study relies on taxes reported on financial statements, but those are often quite different than actual IRS payments, which are private and undisclosed.”

Yahoo Finance had a story on December 4: Biden Unveils $3.2 Trillion Tax Plan Targeting Corporations Like Amazon. The date is before ITEP’s December 16 report, but ITEP published earlier articles about 2018 corporate income taxes of Amazon, Netflix, and many other companies. The main part of his plan is a minimum tax rate of 15% of net income before tax. For individual taxpayers, it would stop the “stepped-up basis” at death for taxing capital gains.

Update 1/12/2020: The Dallas Morning News here reported -- relying on ITEP's faulty report -- that American Airlines paid no U.S. federal income taxes for 2018. In fact, American Airlines' income tax provision was $424 million, $390 of it U.S. federal. ITEP ignored the $390 million because it was "deferred." It actually is only deferred from previous years and recognized in the current year.

12/19/2019 Biden vs Sanders re M4A

I didn’t watch the Democratic debate, but the Los Angeles Times has a story about a testy exchange between Joe Biden and Bernie Sanders regarding Medicare for All (M4A). This video shows Sanders touting his plan. This video shows Biden touting his plan, criticizing Sanders’ M4A, Sanders’ response, and then the testy part.

Biden’s criticisms of M4A were the cost and “ending private insurance could upend the lives of millions of Americans who have negotiated their healthcare costs with their employers” per the LA Times story. So regarding ending private insurance Biden states explicit concern only for unionized workers. He doesn’t mention non-unionized employees who have insurance via their employers. He doesn’t mention Medicare Advantage, which is private insurance that covers 20 million or so people. He doesn’t mention Medicare supplement (Medigap) policies, also private insurance, which 30 million or so people pay for to cover substantial medical costs that original Medicare doesn’t.

Why doesn’t Biden (and other politicians and the media) question Sanders about eliminating Medicare Advantage, and Medigap policies, and Medicare prescription drugs insurance like I wrote about here? Also, note that Sanders does not mention them in the first video above. Why doesn’t Biden (and other politicians and the media) question Sanders about job-related health insurance for government employees like I wrote about here? Until he answers these questions in some detail, his proposed Medicare for All is a floating abstraction, based on little more than comparing other countries’ healthcare spending as a percent of GDP to the U.S.’s. On second thought, there is also his moral outrage. His moral code is coercive altruism, with government looting and edicts as permissible means.

ITEP and income taxes for 3 banks

The Institution on Taxation and Economic Policy (ITEP) published yet another report about corporate income taxes allegedly paid for the year 2018. The Washington Post, YahooFinance, CNBC, CBS News, FoxBusiness, and Axios all helped publicize ITEP’s report. Probably more have or will.

A key part of the report is: “Just five companies—Bank of America, J.P. Morgan Chase, Wells Fargo, Amazon, and Verizon—collectively enjoyed more than $16 billion in tax breaks in 2018.”

Let’s compare ITEP’s reporting to the three banks’ 10-K or annual report. If a viewer clicks on “Appendices” in ITEP's report and “Alphabetical” on the next page, then the resulting table shows 379 major companies along with their alleged taxes paid in dollars and percent of profit. Only three show a profit more than $25 billion – the three banks named above.

Bank of America

ITEP shows a profit of $30,527 million and a tax of $816 million, making an “effective” tax rate of 2.7%. Bank of America’s 10-K page 148 shows "current" U.S. federal income tax expense of $816 million, but also $2,579 million deferred U.S. federal income tax. ITEP ignored the deferred part. ($816 + $2579)/$30, 537 = 11.1%, more than 4 times ITEP’s 2.7%!

J.P. Morgan Chase

ITEP shows a profit of $ 31,414 million and tax of $2,854 million, making an “effective” tax rate of 9.1%. JP Morgan’s 10-K page 265 shows "current" U.S. federal income tax expense of $2,854 million, but also $1,359 million deferred U.S. federal income tax expense. ITEP ignored the deferred part. ($2854+$1359)/$31,414 = 13.4% is about 1.5 times ITEP’s 9.1%.

Wells Fargo

ITEP shows a profit of $26,718 million and tax of $2,382 million, making an “effective” tax rate of 8.9%. Wells Fargo’s 2018 annual-report page 265 shows "current" U.S. federal income tax expense of $2,382 million, but also $1,706 million deferred U.S. federal income tax expense. ITEP ignored the deferred part. ($2,382 + $1,706)/$26,718 = 15.3%, about 1.7 times ITEP’s 8.9%.

General Comments

In Appendix 2 the author tries to defend using only GAAP “current” federal income tax expense, while ignoring the deferred part. Others have criticized it; I side with the critics. He says what corporations disclose in their annual reports are the best (and only) measure of what corporations really pay (or don’t pay) in federal income tax. There is a paucity of data about taxes paid in 10-Ks and company annual reports. (Bank of America’s and JP Morgan's showed only numbers with U.S. federal, state, and foreign combined. Wells Fargo showed nothing about taxes paid.) However, it’s misleading to portray only GAAP “current” federal income tax expense like it is taxes paid. He says: “The 'deferred' portion of the tax provision is tax based on the current year income but not due yet because of the differences between calculating income for financial statement purposes and for tax purposes. When those timing differences turn around —if they ever do —the related taxes will be reflected in the current tax expense.”

I contend that the last sentence is false. The deferred part is "due" -- meaning be booked in the current accounting period -- rather than "not due yet." Deferred taxes "not due yet" goes on a balance sheet, not an income statement (link). The deferred part often contains depreciation for capital spending in earlier years for which accelerated depreciation was used for income taxes.  Also, the deferred part of the current year’s provision for income tax is not combined with the “current” part. Both Bank of America’s 10-K and Wells Fargo’s annual report attest to this.

Bank of America’s 10-K page 98: “Current income tax expense reflects taxes to be paid or refunded for the current period. Deferred income tax expense results from changes in deferred tax assets and liabilities between periods.”

Wells Fargo’s annual report page 115: “Current income tax expense represents our estimated taxes to be paid or refunded for the current period and includes income tax expense related to our uncertain tax positions. Deferred income tax expense results from changes in deferred tax assets and liabilities between periods.”

Deferred tax assets and deferred tax liabilities are firstly balance sheet numbers. Like the two banks explain, it is only how much the balance changes between the start and end of the reporting period that affects the statement of income and expenses for the reporting period. If the “deferred” part of the expense was combined with the “current” part, there would be no reason to show the deferred expense part separately. “Current + deferred” better corresponds and coheres with reality. 😊 The deferred expense part should not be ignored, but ITEP does it anyway.

Three more questions nobody asks Bernie Sanders about M4A

This video shows some young people's opinions about Medicare for All. When they first hear about it from the likes of Bernie Sanders -- political sound bites and propaganda -- their response is favorable. "Great. Free stuff." After they learn a little more about it -- what it would cost them, how some people would lose their jobs, and how it would eliminate health insurance that about half the population now has through and largely paid for by their employers -- they are shocked and many no longer favor it.

I am not surprised by how little young people know about health insurance. It's way down the list of their concerns and they don't question the pied pipers of Medicare for All. Health insurance is largely a concern of older people. Here I asked some questions that nobody asks Bernie Sanders about M4A that affect mostly people who have health insurance via employers.

I searched for the terms {Bernie Sanders eliminate private insurance advantage supplement} using Google and DuckDuckGo. Sanders proposes to "eliminate private insurance" but I am not aware that he has specifically proposed eliminating Medicare Advantage, Medicare supplement (Medigap) policies, and Medicare Part D prescription drug policies. His own press release in April doesn't mention them. The links on the page don't either. All are products of private insurers. Looking at a few of the results from my search, I saw none that mentioned eliminating these three kinds of coverage. Sanders' primary target is employer-based health insurance coverage, at least private sector employers (link). His wanting "no copays or deductibles" at least suggests eliminating Medicare supplement (Medigap) policies.

Thus the three additional questions are: Do you propose to eliminate Medicare Advantage? Do you propose to eliminate Medicare supplement (Medigap) policies? Do you propose to eliminate Medicare Part D prescription drug policies?

Replacing them with Medicare would either eliminate what they cover beyond current Medicare or require a large expansion of Medicare benefits. Most likely Bernie proposes the latter. He surely does when he talks about no copays or deductibles and small maximum costs to patients for prescription drugs.

Medicare Advantage is a substitute for original Medicare. The federal government, more specifically the Center for Medicare Services, heavily controls Medicare Advantage. The policies must cover at least what original Medicare does. The insurers receive most of their funding from Medicare. How much is pretty complicated (link). The national average was about $10,000 per person enrolled in 2018. Those enrolled -- about 20.4 million people now -- also pay copays, deductibles, and some pay premiums (link). Medicare also subsidizes Part D prescription drug insurers.

A Wall Street Journal article (paywalled) reports that Sanders wants his young supporters to help him win over their parents. If they try, they better not mention health insurance! Sanders wants to eliminate their parents and grandparents private health insurance.

The Atlantic reports: "Bernie Sanders, by contrast, leads all candidates among voters under 30 and polls just 5 percent among voters over 65. In a national Quinnipiac poll asking voters which candidate has the best ideas, Sanders crushes Biden 27 percent to 4 percent among those under 35 and receives an equal and opposite crushing at the hands of Biden among voters over 65: 28 percent to 4 percent."