Building A Better Medicare Program: Lessons from the Private Sector

For years, it has been conventional wisdom in health-policy circles that government-run, Fee-for-Service Medicare is more efficient than private insurance. It is said that Medicare, America's single-payer health-insurance system for the elderly, has lower administrative costs than private insurers do. Single-payer advocates argue, therefore, that the United States would have a more cost-effective and affordable health-care system if Medicare were expanded to encompass all Americans.

However, recent studies have shown that private insurers are more efficient, with lower administrative costs, than Medicare is. As a result, private insurance–based reforms of the Medicare program, such as those proposed by Senator Ron Wyden and Representative Paul Ryan, have gained renewed interest among policymakers. While the Wyden-Ryan proposal and similar ones contemplate giving future retirees the choice between private insurance and the traditional Medicare "public option," there are also opportunities to make government-run, Fee-for-Service Medicare more efficient.

Among large corporations that self-insure their workers—directly paying health-related claims without using external insurance—a model that has gained favor is that of administrative services organizations, or ASOs. ASOs, which are often run by traditional insurers, allow large companies to continue to directly pay for workers' health claims, while outsourcing to an ASO the management of those claims, such as negotiating reimbursement rates to hospitals, doctors, and pharmacies.

In this paper, we explore how the use of ASOs in the traditional Medicare program might make that program more cost-efficient, so that traditional Medicare becomes a more fiscally sustainable option for seniors who prefer it to private insurance.

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