Myth: Medicare Costs are far Greater than Those of Private Insurance

Medicare's administrative overhead — the share of spending that goes to running the program rather than paying for medical care — sits at roughly 1.4% to 2% of total expenditures, according to data from the Centers for Medicare and Medicaid Services (CMS). Private health insurers, by contrast, spend between 12% and 18% of premiums on administrative functions: claims processing, utilization review, marketing, broker commissions, executive compensation, and shareholder profit. This gap is not marginal — it means that for every dollar a private insurer collects, as much as 18 cents never reaches a doctor, hospital, or pharmacist. Medicare's lower overhead is a structural advantage of its scale and single-payer design, not an accident.

Longitudinal cost data compiled by CMS and analyzed in studies published in the New England Journal of Medicine — including landmark work by Drs. Steffie Woolhandler and David Himmelstein — show that Medicare spending per beneficiary has grown more slowly than private insurance spending over multiple decades. The Milliman Medical Index, an annual benchmark of employer-sponsored health costs, consistently documents rapid cost escalation in the commercial market. Medicare's ability to set standardized payment rates across a large pool of enrollees gives it inherent leverage that fragmented private insurers lack. The myth of private-sector efficiency in health insurance is largely contradicted by the historical cost trend data.

Drug pricing illustrates the limits of the current Medicare system and the potential of direct government negotiation. The Veterans Affairs (VA) system, which negotiates drug prices directly with manufacturers, routinely secures discounts of 40–58% below the prices paid by Medicare Part D plans, according to government audits and CBO analyses. Until the Inflation Reduction Act of 2022, Medicare was legally prohibited from negotiating drug prices at all — a restriction inserted at the behest of the pharmaceutical industry during the 2003 Medicare Modernization Act. The IRA granted Medicare limited negotiation authority for the first time, beginning with ten high-cost drugs for 2026, a modest but meaningful step toward closing the gap with the VA's purchasing power.

International comparisons expose the true cost of America's reliance on private insurance. Research by the Commonwealth Fund consistently finds that the United States spends approximately twice as much per capita on healthcare as other wealthy nations — including countries with universal, government-administered systems — while achieving worse outcomes on life expectancy, infant mortality, chronic disease management, and access to care. Administrative complexity is a major driver of that excess spending: a 2019 NEJM study estimated that billing and insurance-related costs accounted for roughly $812 billion per year in the U.S. healthcare system, or about 34.2% of total health expenditures. No other high-income country bears administrative costs at anything close to that level.

The Congressional Budget Office, in analyses of Medicare for All proposals, estimated that a universal single-payer system could save more than $400 billion annually in administrative costs by eliminating the duplicative overhead of thousands of private insurance plans. These savings would come from consolidating billing systems, eliminating insurer profit margins and marketing costs, and reducing the massive administrative burden currently placed on hospitals and physician practices that must navigate hundreds of different payer rules, prior authorization requirements, and billing codes. The CBO's estimates are conservative and do not fully account for the downstream savings from expanded preventive care coverage. The core finding — that administrative simplification under a single-payer framework produces large, quantifiable savings — is not seriously disputed by mainstream health economists.