By Laura Tollen, Elizabeth Keating, Alan Weil
Health Affairs Blog, February 20, 2020
In 2018, Health Affairs launched the Council on Health Care Spending and Value, a nonpartisan, expert working group that will, over the course of three years, develop recommendations about how the US could take a more deliberate approach to moderating health care spending growth while maximizing value. Led by Senator William Frist, MD, (R-TN) and Margaret Hamburg, MD, this group of 22 experts has begun its work with fact finding, studying the literature to identify areas of health spending—and spending growth—that are “excessive” and may therefore be appropriate targets for policy intervention. This post, the first in a series, provides a view into the council’s discussions, starting with its inquiry into administrative spending.
In 2018 testimony before the US Senate Health, Education, Labor, and Pensions Committee, council member David Cutler of Harvard University cited a range of estimates that place administrative spending at 15 percent to 30 percent of total health spending—three times what the United States spends on cancer care every year.
In a 2003 paper, Steffie Woolhandler and colleagues analyzed published data—including NHEA, surveys of physicians, employment data, and cost reports—to develop estimates of the administrative costs of health insurers, employers’ health benefit programs, hospitals, practitioners’ offices, nursing homes, and home care agencies. Their work represents possibly the broadest, most inclusive definition of administrative spending in the literature. They estimated in 1999 that the US spent $294.3 billion on health care administration, or a little more than 24 percent of total health care expenditures that year, as reported in the NHEA. The most-often cited figure from that study, however, is that “after exclusions, administration accounted for 31.0 percent of health care expenditures.” The authors explain that they arrived at this figure by excluding “from both the numerator and the denominator expenditure categories for which data on administrative costs were unavailable: retail pharmacy sales, medical equipment and supplies, public health, construction, research, and ‘other.’” In 2017, by trending their findings forward, the same authors wrote that administration accounted for $1.05 trillion that year.
A 2018 article by David Cutler also supports the idea that while the administrative workforce in health care is relatively large, spending in this area has not grown disproportionately in recent years.
So, Is Administrative Spending A Problem?
Given that administrative spending is high but does not seem to be rising faster than the rest of health care spending, is this a fruitful area for intervention to moderate spending growth? Below, we summarize highlights of the council’s discussion on this matter. This post captures the flavor of the conversation but does not represent consensus, nor should specific opinions be attributed to any individual council member.
Administrative Spending Is Literally The Price We Pay For Choice
Reflecting on the fact that OECD countries with more centralized health care decision making tend to have lower administrative spending, several council members suggested our robust administrative workforce is a substitute, in our market-driven health system, for the greater degree of government control over health care found in many other nations. In other words, our spending on administrative workers is literally the price we pay for diffuse decision making or, more pointedly, for choice.
At a high level, our system’s defining characteristic is choice. Insurers choose markets, providers, and their own priorities for quality improvement. Employers choose insurers and levels of benefits, beyond required minimums. Providers choose where and how to practice, what care to provide, and often what to charge. Patients choose everything from insurance plans to providers to procedures, and whether to obtain insurance at all—with the important caveat that many have few choices in these matters.
Each of these choices comes with its own price tag in terms of the administrative complexity needed to support it, and each type is valued differently by different stakeholders. The key question is whether there are some types of choices that are both relatively costly and add little value. For example, much of the administrative noise in our health care system—although we don’t know exactly how much—would disappear if everyone had the same benefit plan, or a variation on a standard plan, similar to the A through J variants of Medicare Supplemental benefits. Would a critical mass of stakeholders—for example, large employers and the third-party administrators who manage their benefits—be willing to give up flexibility in benefit design (and the ability to determine their year-to-year premium increases) to save administrative costs? Perhaps.
To pick another example, administrative spending would be significantly reduced if everyone had access to the same providers and treatments at standardized prices using standardized quality reporting. Would stakeholders be willing to make that trade-off? It seems less likely.
Progress on determining if such exchanges of uniformity for lower cost would be palatable depends upon a better understanding of preferences, values, and the financial cost of choice than we currently have evidence to support. But failing to act because we don’t have that evidence means the default is a proliferation of choices—and their attendant costs—without adequate consideration of their value.
Finally, some council members suggested that, while our level of administrative spending is high, we should not be too quick to label it as excessive. Not only does this spending support the choices noted above, but in some cases it may serve as an investment that results in reduced spending elsewhere in the system. For example, care coordination and integration—generally seen as desirable—require a certain degree of investment in administration and data systems. A decrease in these investments could actually result in a net increase in total spending.
But Not All Administrative Spending Adds Value
Having duly noted and discussed the tradeoffs that would be inherent in drastically reducing administrative spending, council members nevertheless agreed that there are some areas of redundancy that truly serve no purpose. One such example is costs associated with non-standardized protocols for exchange of money and patient data. Council members drew an analogy to the banking industry, where these functions are highly standardized, yet consumers still maintain a great deal of choice. Some noted that the health care industry is unlikely to pursue such standardization voluntarily, as many stakeholders have a financial interest in keeping patient data siloed.
Another example of low-value administrative spending is the costs associated with redundant quality and pay-for-performance systems. Many have noted that the sheer number of quality measures to which providers are subjected is potentially counter-productive to quality. Council members generally agreed that some standardization and aggregation in this area would likely lead to a non-harmful reduction in administrative spending.
Finally, many council members noted—as have others before them—that the piecework, fee-for-service nature of health care drives an enormous amount of administrative spending in the form of documentation, coding, billing, and re-billing. Capitation and other forms of outcomes-based payment would reduce the need for these types of activities, but only once the system has reached a point where fee-for-service represents just a negligible sliver of the overall payment landscape. Until then, it will be necessary for providers to keep the administrative infrastructures to support fee-for-service, even as alternative payment models expand.
The council will continue to track which of these themes recur across its investigation. The next blog post in this series will focus on the council’s discussion of research on the role of prices and market consolidation in driving spending growth.
Disclaimer: This post is intended to provide insight into the council’s deliberations but does not represent consensus of the group, nor should specific opinions be attributed to any individual council member.
Council on Health Care Spending and Value:
Members of the Council:
By Don McCanne, M.D.
In the lead up to the Affordable Care Act, Celinda Lake conducted focus groups which she claimed showed that Americans valued “choice” very highly which she interpreted to mean choice of private health plans rather than being limited to a single government program. She even named the concept “Guaranteed Affordable Choice.” Dismissed were polls that showed strong support for “a universal health insurance program in which everyone is covered under a program like Medicare that is run by the government and financed by taxpayers.” Totally ignored was the fact that the choice patients really want is that of their physicians and hospitals – choices private plans take away. The last decade has shown us that this diversion into choice has left virtually all of the deficiencies of our health care financing system in place.
The current campaign for the Democratic nomination for president is perpetuating this false concept that the preference for choice should dominate health reform. The single payer model of Medicare for All has proven to be popular which has caused the candidates opposed to single payer to claim that Americans want to protect their choice of private health plans instead. The media has bought into this, often stating that the candidate supporting single payer will lose to President Trump because Americans do not want to have their private plans they are enrolled in through work taken away from them (though many employees do not have employer-sponsored plans and 60 million leave their employment each year – hardly a stable source of insurance). In reality, the choices any individual has are quite limited based on factors such as income, employment, age, government service, and so on.
Though we have long needed comprehensive reform, our very high health care costs and the unacceptable failures of our health care financing system have made comprehensive reform an even greater imperative. Health Affairs – the leading health policy journal – has launched the Council on Health Care Spending and Value. In their initial deliberations they have considered the role of administration in the contribution to our high health care costs – a very appropriate starting point considering our egregiously high administrative costs when compared to other nations.
The committee found that administrative costs are high, but they did not conclude that they are excessive. Why? They suggest that this is the price we pay for having greater “choice” in our market-driven system as a replacement for more centralized health care decision making relied upon by other OECD nations. What? We are receiving greater value for this profound administrative waste?
It should be noted that a disclaimer has been issued that this view does not represent a consensus of the group nor should this view be attributed to any individual council member. They are now moving on to considering prices and market consolidation.
Wait. $600 billion in administrative waste could be recoverable with a well designed system (single payer), and they are not issuing any statement that they would endorse, but are providing this release that gives the concept of “choice” enough credibility to consider accepting these outrageous costs as a tradeoff in order to be able to perpetuate the market-driven dynamics of our system? It is worth that much money to be able to rank ideological views of political economy over sound health policy science?
We have to fix our system ASAP. The advantage of this preliminary report is that we know that we do not have to wait around until this committee completes its deliberations and issues a final report. Not offering any other proposals than one of tolerating administrative waste in order to perpetuate the market role in health care disqualifies this committee from being considered a productive resource. We need to exercise our choice to move on immediately with advocacy for the enactment and implementation of single payer Medicare for All. That’s the choice that really matters.
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