Stanford Business Professor Jeffrey Pfeffer on Administrative Waste

By Jeffrey Pfeffer
Bloomberg Businessweek, April 10, 2013

As Congressional budget battles heat up—or roll along, depending on your time perspective—the cost of health care in America receives a lot of attention. Unfortunately most of the discussion is largely off the mark about where the preventable, unnecessary costs really are.

The thing that few people talk about, and that no serious policy proposal attempts to fix—the arrangement that accounts for much of the difference between health spending in the U.S. and other places—is the enormous administrative overhead costs that come from lodging health-care reimbursement in the hands of insurance companies that have no incentive to perform their role efficiently as payment intermediaries.

More than 20 years ago, two Harvard professors published an article in the prestigious New England Journal of Medicine showing that health-care administration cost somewhere between 19 percent and 24 percent of total spending on health care and that this administrative burden helped explain why health care costs so much in the U.S. compared, for instance, with Canada or the United Kingdom. An update of that analysis more than a decade later, after the diffusion of managed care and the widespread adoption of computerization, found that administration constituted some 30 percent of U.S. health-care costs and that the share of the health-care labor force comprising administrative (as opposed to care delivery) workers had grown 50 percent to constitute more than one of every four health-sector employees.

What remains missing even in the discussion of the enormous administrative burden is not just how large, both in absolute dollars and as a percentage of health costs, it is, but also how few incentives there are for insurance companies to stop wasting their and everyone else’s time.

Unless and until we as a society pay attention to the enormous costs and the time wasted by the current administrative arrangements, we will continue to pay much too much for health care.

(Jeffrey Pfeffer is the Thomas D. Dee II Professor of Organizational Behavior at Stanford University’s Graduate School of Business.)

http://www.businessweek.com/articles/2013-04-10/the-reason-health-care-is-so-expensive-insurance-companies

Comment:

By Don McCanne, M.D.

Individuals who understand the single payer model will find nothing new here from a policy perspective. What is important about this article is that it is a precise statement about administrative waste, coming from a professor at Stanford University’s Graduate School of Business, and published in Bloomberg Businessweek.

There is hope that others may finally understand how we can control spending while improving value in health care, and then join together to act on it. The Harvard/CUNY professors cited by Pfeffer – PNHP’s David Himmelstein and Steffie Woolhandler – stand ready to provide guidance on the reform that we so desperately need.