By Emily Gee and Topher Spiro
Center for American Progress, April 8, 2019
Anyone interacting with the U.S. health care system is bound to encounter examples of unnecessary administrative complexity—from filling out duplicative intake forms to transferring medical records between providers to sorting out insurance bills. This administrative complexity, with its associated high costs, is often cited as one reason the United States spends double the amount per capita on health care compared with other high-income countries even though utilization rates are similar.
Components of administrative costs
The main components of administrative costs in the U.S. health care system include BIR costs and hospital or physician practice administration.
To date, few studies have estimated the systemwide cost of health care administration extending beyond BIR activities. In a 2003 article in The New England Journal of Medicine, researchers Steffie Woolhandler, Terry Campbell, and David Himmelstein concluded that overall administrative costs in 1999 amounted to 31 percent of total health care expenditures or $294 billion—roughly $569 billion today when adjusted for medical care inflation. A more recent paper by Woolhandler and Himmelstein, which looked at 2017 spending levels, placed the total cost of administration at $1.1 trillion.
Billing and insurance-related costs
Many studies of administrative costs limit their scope to BIR costs. The BIR component of administration is most relevant to systemwide reforms that seek to reduce the expenses related to claims processing, billing rates, or health insurance. The largest share of BIR costs is attributable to insurance companies’ profits and overhead and to providers where BIR costs include tasks such as record-keeping for claims submission and billing.
Applying the NAM’s (National Academy of Medicine) percentages of BIR costs to recent projections of national health expenditures from the Centers for Medicare and Medicaid Services (CMS), CAP estimates that BIR costs will amount to $496 billion for 2019. According to CAP’s calculations, this includes $158 billion in overhead for private insurance; $56 billion for administration of public insurance programs; and $282 billion for the BIR costs of hospitals, physicians, and other care providers.
Excess administrative costs
Most studies that have attempted to identify excess costs in the American health care system rely on comparisons between the United States and Canada. In their 2010 review of the literature on the difference between the two countries’ health expenditures, economists Alexis Pozen and David M. Cutler… (estimated) per capita administrative excess in the United States, when compared with Canada, translates into a gap of $340 billion (adjusted).
Woolhandler and Himmelstein estimate that the United States currently spends $1.1 trillion on health care administration, and of that amount, $504 billion is excess.
All estimates of administrative costs are inherently sensitive to what portion of health care spending one considers administrative. Such tasks, however, can fall into a gray area between administrative and clinical.
Administrative costs for payers
Within the U.S. system, the share of expenditures that are attributable to administrative costs varies greatly by payer. The BIR costs for traditional Medicare and Medicaid hover around 2 percent to 5 percent, while those for private insurance is about 17 percent. Organisation for Economic Co-operation and Development (OECD) data also show that other nations are able to achieve low levels of administrative costs while maintaining universal coverage across all ages of the population.
International health system data demonstrate that the United States is a clear outlier on administrative spending. Countries with single-payer systems are among those with the lowest administrative costs. OECD data also show that within a country, administrative costs are higher in private insurance than in government-run programs.
Countries that have multipayer systems with stricter rate regulation also achieve much lower administrative costs than the United States. If the United States could reduce administrative costs down to Canadian levels, it would save 68 percent of current administrative expenditures; reducing to German-level administrative costs would save 42 percent of current administrative expenditures. However, to assume that by simply adapting another country’s health care system—whether it is Canada’s single-payer Medicare, Germany’s sickness funds, or Switzerland’s heavily regulated private plans—the United States would automatically achieve the same level of administrative costs may ignore other fundamental differences between countries, including the market power of health care providers, political systems, and attitudes toward health care. Nevertheless, the experience of other multipayer systems such as those in Germany and Switzerland suggests that the United States could substantially reduce both administrative expenditures and overall health care spending by bringing down reimbursement rates and regulating insurance—even while continuing to allow multiple payers and private health care providers.
Administrative costs for health care providers
A study of administrative costs in California found that administrative costs represented about one-quarter of physician revenue and one-fifth of hospital revenue, and BIR costs accounted for roughly half of administrative expenditures for physician and hospital services covered by private insurance. In a separate study, Himmelstein and others reported that one-quarter of U.S. hospital spending went toward administration.
As with BIR costs, provider administrative costs in the United States are higher than those in other comparable countries. Hospital administrative costs in the United States far exceed those of other nations. In their comparison of hospital administrative costs among eight Western nations, Himmelstein and co-authors found that the United States had the highest levels, at 25.3 percent of total hospital expenditures. They conclude that in nations where hospital administrators have minimal responsibilities for procuring financing and where the hospital reimbursement system is least complex, administrative costs can be reduced to 12 percent of expenditures. These findings suggest that reforms that introduce global budgeting or limit the need to bargain with multiple payers could potentially bring down excess hospital administrative costs in the United States.
Lower administrative costs in single-payer and multipayer systems
Although administrative costs contribute to the high expenditures in the United States, they are not the primary reason for the health care spending gap. As economist Uwe Reinhardt and others candidly put it, “It’s the prices, stupid.”
Comparative evidence from U.S. states also suggests that America’s multipayer system explains some, but by no means all, of the discrepancy between the United States and other developed nations. Harvard University researchers Joseph P. Newhouse and Anna Sinaiko observe that “there is considerable variation across the states in spending levels, with the lowest quintile of states spending approximately the same percentage as the higher spending OECD countries other than the U.S. This implies that the [United States’] pluralistic financing system may not be an important cause of the large percentage of GDP that the U.S. devotes to health care.”
Systemwide reforms to lower administrative costs
Health care financing experts believe that changes to how Americans pay for coverage could dramatically reduce administrative costs. Researchers simulating the effects of single-payer programs have assumed that administrative costs would be brought down substantially.
Exactly how such lower costs could be achieved is another question. Reducing BIR costs requires simplifying the billing and payment process, which could be accomplished in a number of ways. Two avenues for reducing administrative costs as well as overall health costs are global budgeting and uniform rate-setting. These two concepts are central to health systems around the world and are also responsible for keeping administrative costs lower, whether a country has a multipayer or single-payer system. Another paperwork-reducing option would be a centralized claims clearinghouse to allow providers to submit all claims to a single entity, as they do in Germany and Japan.
All-payer rates and global budgeting
Setting all-payer reimbursement rates would eliminate the need for providers to negotiate rates with individual private insurers, while also giving policymakers better leverage for controlling overall health care cost growth. In the current U.S. system, providers charge different rates to different payers, and the billing process is complicated and opaque. Setting all-payer rates would simplify billing and improve transparency by establishing a single set of rates for each provider, while also giving regulators a tool to protect consumers from exorbitant rates.
Global budgeting—the practice of paying providers revenue based on their expected costs—also holds promise for both lowering administrative spending and overall costs. As opposed to traditional fee-for-service payments, which reward providers for doing more, global budgeting incentivizes providers to deliver care more efficiently. Global budgeting is a feature of many countries with much lower health care administrative costs, including Scotland, Wales, and Germany. As Woolhandler, Campbell, and Himmelstein point out in their 2003 article, “The existence of global budgets in Canada has eliminated most billing and minimized internal cost accounting, since charges do not need to be attributed to individual patients and insurers.” As Germany shows, both single-payer and multipayer systems can use global budgets.
A system combining all-payer rates and global budgeting is already partially in place in the state of Maryland, where each hospital has a single set of rates it bills to Medicare, Medicaid, commercial insurers, and other payers. Maryland’s system is keeping overall cost growth lower than the national trend. According to RAND analysis of hospital costs, Maryland hospitals have administrative costs that are 9 percent lower than the national average.
In their analysis of three universal health care options for Vermont, including single payer, researchers William C. Hsiao, Steven Kappel, and Jonathan Gruber estimated substantial savings from administrative simplicity from each option. The two single-payer options they examined would result in even greater administrative savings of between 7.3 percent and 7.8 percent, depending on the rate-setting mechanism. The group estimated that a third scenario, which would establish a centralized claims clearinghouse while allowing multiple payers, could generate savings equal to 3.6 percent of total expenditures. This suggests that about half of the total administrative savings from a single-payer system could be obtained within a regulated multipayer system.
Policy proposals directed at administrative costs
While major changes to the U.S. health care system have the greatest potential to bring down costs, more incremental changes could reduce administrative waste. A recent bill proposed by Sens. Bill Cassidy (R-LA) and Tina Smith (D-MN) would direct the HHS secretary to set goals to cut “unnecessary costs and administrative burdens” throughout the health care system by 50 percent over the next 10 years. It would also provide grant money for state-based efforts to bring down administrative costs. Some possible avenues for achieving those kinds of reductions include changes to payment rules, improvements to facilitate electronic record-keeping and information exchange, and simplification of public insurance programs.
In their 2009 article in The New England Journal of Medicine, David Cutler, Elizabeth Wikler, and Peter Basch proposed one such package of reforms. The authors estimated that providers could save $17.9 billion to $23 billion annually with several, more incremental changes to the system, including greater adoption of EHR systems; integrated administrative and clinical systems; national and standardized reporting requirements and credentialing of providers; streamlined enrollment in public insurance programs; and greater automation. In a separate report, the same authors proposed additional reforms that they estimated could reduce excess administrative costs by $40 billion, or 25 percent of total health care expenditures.
In a 2010 study published in Health Affairs, Bonnie B. Blanchfield and other Massachusetts researchers concluded that the administrative burden on physician organizations could be reduced by a “single transparent set of payment rules for a system with multiple payers.” The authors recommended that the United States adopt “a standard set of payment requirements, increased payment-rule transparency, standardized forms, and a standard set of data exchange requirements.” Doing so could save $7 billion in billing costs for physician and other clinical services, according to the authors’ estimates.
Although estimates vary, a large body of evidence shows that the United States is spending about twice as much as needed on the administration of health care. Other nations enjoy world-class health care systems while spending a fraction of what the United States does on governance, billing, and insurance.
A structural overhaul of how health care is financed and priced that includes key features of other countries’ systems—whether one payer or many—would go a long way toward eliminating excess administrative costs. Simplifying the payment system should be an essential part of future health reform and would make the U.S. system work better for taxpayers and patients alike.
Emily Gee is the health economist of Health Policy at the Center for American Progress. Topher Spiro is the vice president for Health Policy and a senior fellow for Economic Policy at the Center.
This publication was made possible in part by a grant from the Peter G. Peterson Foundation.
15 page PDF:
By Don McCanne, M.D.
The president and CEO of the Center for American Progress (CAP) is Clintonite Neera Tanden. She played a very active role in keeping Bernie Sanders’ single payer Medicare for All out of the Democratic Party platform to help protect her candidate, Hillary Clinton. Although her candidate lost the presidential election, Tanden has continued to oppose the single payer model of reform.
With the growing popularity of the Medicare for All concept, CAP developed the Medicare Extra for All counterproposal – a proposal that would include a Medicare public option. The promotion of this proposal suggested that it would be better than a single payer model because it would preserve the choice of private insurance options, including employer-sponsored plans and private Medicare Advantage (renamed Medicare Choice). They suggested that administrative savings would help fund the program, but they did not present a compelling case for that.
This current report from CAP is important because it does acknowledge the profound administrative waste in our system, citing many of the important studies confirming this (plus some of the lousy ones). They then suggest that we do not have to change to a single government payer to implement the tools that result in the single payer administrative savings, that these savings can be achieved, “whether one payer or many.”
Although most of the report above is composed primarily of excerpts, the section, “Policy proposals directed at administrative costs,” is duplicated in its entirety. They suggest that implementing these policies could save perhaps tens of billions of dollars. Yet earlier in the article they report, “Woolhandler and Himmelstein estimate that the United States currently spends $1.1 trillion on health care administration, and of that amount, $504 billion is excess.” It appears that they have not made the case that it does not make much of a difference by shifting to single payer when administrative savings of a multiplayer system would be in the tens of billions whereas single payer system savings would be in the neighborhood of half a trillion dollars.
Another problem is that they do not explicitly acknowledge the differences between private insurers in other nations and private insurers in the United States. They are very different creatures. In other nations they function more as social insurance models serving the public good. In the United States they are crafted as business models driven by profits (or “margins” in the nonprofits). If we were to have a multipayer system that produced European efficiencies, then we would have to disband current insurers and replace them with European-style insurers. (American insurers walk out of markets for far more trivial reasons.) Obviously it would be far easier and much more efficient to replace them with an improved and expanded version of Medicare.
The media has already been reporting that Americans want to have a choice of private plans, especially employer-sponsored plans, saying that support for single payer Medicare for All declines if individuals are deprived of private options. This CAP report was designed to support that reasoning. Already today, Sarah Kliff (VoxCare) quotes co-author Topher Spiro as saying, “Uniform rate setting is a key feature of a system that would have lower administrative costs. That could be in the context of a single-payer system or a regulated, multi-payer system.”
This report will be used to say that we can leave the private insurers in place. My immediate response is, “Bull!” See if you can come up with a short, emphatic response that addresses the flawed policy instead – a response that would improve our messaging.
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