I’ve been observing various discussions about how to reduce the size of government.
One cutter, Elon Musk, wants to reduce the number of federal employees. In many cases this makes sense.
But there is one area where reducing the number of employees is likely to increase government spending. That’s Medicare.
Many supporters of Medicare say one reason it’s better is that it has lower administrative costs than typical private health insurance companies. Management costs are lower. But that doesn’t mean Medicare is more efficient. There is almost certainly a decrease in efficiency and the reason is fraud. With fewer administrators, many frauds go unnoticed or unaddressed. If the number of administrators is further reduced, fraud will almost certainly increase.
By some estimates, fraud in Medicare and Medicaid exceeds $100 billion annually.
In practice, I think it’s credible that every 100 additional Medicare employees reduces fraud by $1 billion. So if you spend $200,000 per year per employee, including pensions, adding 100 employees will cost you $20 million. Let’s say I’m wrong and it takes 500 more employees to reduce fraud by $1 billion. Then, to save $1 billion, you would need to spend $100 million. Of course, fraud is easier to spot at current margins than at higher margins. But I am confident that the government could spend less than $1 billion on employees to reduce fraud by $10 billion.
