Obamacare’s Big Overhead Costs to Top $270B

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. (Tweet this)

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, according to the authors of the online report on the Health Affairs blog.

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 Affairsblog report 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.

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