The Cost Of Health Insurance Administration In California: Estimates For Insurers, Physicians, And Hospitals
By James G. Kahn, Richard Kronick, Mary Kreger and David N. Gans
Health Affairs
November/December 2005
Estimates of administrative costs in the U.S. health care system have been the subject of considerable controversy during the past decade. Single-payer analysts Steffie Woolhandler, David Himmelstein, and their colleagues have argued that moving to a Canadian-style system would reduce U.S. administrative costs by 10-15 percent of total health spending.
The hypothesis suggested by Woolhandler and colleagues, and supported by common sense, is that the complexities of a highly fragmented, multiple-payer system account for the “excess” administration.
To inform discussions of reform-related cost savings, it is valuable to document the portion of administrative costs attributable to the U.S. system of paying providers.
Administrative costs account for 25 percent of health care spending, but little is known about the portion attributable to billing and insurance-related (BIR) functions. We estimated BIR for hospital and physician care in California. Data for physician practices came from a mail survey and interviews; for hospitals, from regulatory reporting; and for private insurers, from a consulting company. Private insurers spend 9.9 percent of revenue on administration and 8 percent on BIR. Physician offices spend 27 percent and 14 percent, and hospitals, 21 percent and 7-11 percent, respectively. Overall, BIR represents 20-22 percent of privately insured spending in California acute care settings.
In comparison to the health care systems of other advanced economies, it is difficult to argue that the United States has an efficient health care system: Its high level of clinical health care spending does not seem to be matched by superior outcomes.
To the extent that competition does not foster cost control and quality improvement, and to the extent that a simpler system with fewer insurers would allow a reduction in BIR, then reductions in BIR are an attractive target for reform initiatives.
http://content.healthaffairs.org/cgi/content/abstract/24/6/1629
Comment: This landmark study supports prior evidence that the United States wastes a tremendous amount of resources on health care administration. What is particularly noteworthy in this study is that it breaks out the administrative costs that are specifically due to billing and insurance related functions for health care covered by private insurance plans in California, a microcosm of health spending in the United states.
Let’s state that again. Billing and insurance related functions represent over one-fifth of privately insured spending.
Is that clear? The billing and insurance administration functions of private insurers combined with the resultant billing and administrative burden placed on physicians and hospitals constitute over one-fifth of privately insured spending.
How many times have you heard that, even if the administrative waste is real, the U.S. health care system is so complex that you could never recover those costs with a single payer system? Do not ever again let such a statement go unchallenged. Under a single payer system, much of the billing and insurance related functions would disappear. This study confirms the enormity of the savings that would ensue.