Medicare cannot protect against overuse or fraud---the US loses $60 billion to fraud each year.

The argument for universal Medicare basically comes down to three key claims: (1) Medicare gets lower prices; (2) Medicare’s administrative costs are lower; and (3) greater spending does not mean better health. Each of these deserves closer attention.

Prices. Consider first the argument that Medicare has lower prices. This happens because the government, as the largest purchaser of health care, can demand lower payments for services compared to private insurers. In fact, because Medicare is the only payer for people aged 65 and older, it can quote take-it-or-leave-it prices, and choosing to leave it means providers can’t treat 40 million of the sickest Americans. That is a lot of market power; indeed, economists have a word for it: monopsony.

The classic problem of monopsony buying power, however, is underprovision of services. The medical market is no exception. This problem manifested in Medicaid years ago – as states started to clamp down on payments, providers exited the market, leaving us with the patchwork system we have today. Could the same happen to Medicare? We are already hearing reports of doctors who do not take Medicare patients. In a 2010 survey of 9,000 physicians, the American Medical Association reported that 17 percent of doctors restricted the number of Medicare patients; among primary care physicians, a whopping 31 percent did. With universal Medicare, is the population really going to accept, and would Congress really allow, the continued reductions in prices?

Administrative costs. Proponents of universal Medicare often point to the much higher administrative costs in private plans. But are such higher administrative costs necessarily bad? For one, the large variation in Medicare costs suggests inefficiencies that might be corrected through more administrative spending. Over the last 40 years, the Dartmouth group has documented extensive geographic variation in Medicare spending that is unexplained by demographics, income, or disease severity. Areas with 30 percent higher spending seem to have no better outcomes.

Ironically, Medicare's low administrative costs – about 3 percent compared with 17 percent in the private sector – may be to blame for the high spending. The private sector uses these funds to do a better job controlling excessive use. Tomas Philipson and colleagues have shown that the variation in Medicare hospital use is four times larger than the private sector when it comes to heart disease. Because it can rely on its monopsony power to control overall spending, Medicare has a weaker incentive to limit overuse. Meanwhile private insurers have become more efficient, employing tools such as utilization review and case management (which count as administrative costs) to assess patient needs and then either restrict services or steer patients towards more cost-effective care. In a world without private insurance, we would likely see more money wasted on care that produces no benefit for patients.

In addition, administrative spending protects against fraud. By some estimates, the Medicare program loses a staggering $60 billion to fraud each year. This amounts to 11 percent of the Medicare budget and would be enough to double Federal spending on primary and secondary education. No private company would ever tolerate this abuse. Imagine the fraud if Medicare covered 300 million Americans.

International comparisons and spending. Finally, it’s time we made sense of international comparisons, since they are often used to assail the current health care system. Despite spending more than any other nation per capita on health care, American life expectancy at birth ranks 34th worldwide. Several countries ranked ahead of the U.S., including Canada and England – have single payer health systems, raising the question of whether replacing private insurance with universal Medicare would make us healthier.