By David M. Cutler
Health Affairs Blog, October 2, 2020
This post explores the possibility of saving money by reducing the administrative costs of health care.
Reducing administrative costs is attractive for several reasons. Administrative costs are high, perhaps a quarter of health spending, so reductions in administrative costs could yield a good deal of savings. Further, the goal of medical care is clinical care, so reducing administrative staff likely has a smaller effect on quantity and quality of care than would reductions in clinical staff. Finally, excess administrative hassles adversely affect peoples’ ability to receive care, so reducing administrative hassles could improve the timeliness of care received.
Employment data show the magnitude of administrative expense in health care. Clinical occupations account for two-thirds of health care employment; administrative occupations account for 22 percent; the remainder is a small amount of other occupations, including cooks and security guards. There are nearly four administrative workers for every physician and dentist. Even the 22 percent estimate is an understatement of the administrative burden, as physicians and nurses spend part of their time doing administrative work. The vast bulk of people employed in insurance companies are administrative workers.
Most of the administrative costs in health care are in billing and insurance related services (BIR). Every time a patient wants to see a provider, the patient’s insurance eligibility needs to be checked, the appropriate co-pay or co-insurance needs to be determined, and prior authorizations need to be adjudicated. After the visit, the service needs to be correctly coded, the coding must be reviewed by both the provider and the payer, and payment must be made. All this requires people. Other areas requiring significant administrative time include regulatory compliance and measuring and reporting quality metrics. In Medicare alone, there are over 2,000 quality metrics.
What Could Be Saved?
The natural question is how much could be saved by undertaking administrative restructuring. An exact answer is hard to determine, but some outlines can be estimated. Single-payer systems involve the least administrative expense, perhaps two-thirds below the US level. Many single-payer systems involve very little documentation. Of course, single payer involves many other tradeoffs that may not be appealing.
There seems to be a very good economic case for a significant and sustained campaign to reduce the administrative cost of US health care, and it is an especially fruitful and timely pursuit during the COVID-19 pandemic.
Health Affairs Comment:
By Don McCanne, M.D.
“Of course, single payer involves many other tradeoffs that may not be appealing.”
Single payer trades the uninsured for universal coverage.
Single payer trades underinsurance through excessive cost sharing for elimination of financial barriers to care.
Single payer trades inequitable premiums and cost sharing for equitable progressive taxation that makes health care affordable for each of us.
Single payer trades inefficient, costly, excessive administration caused primarily by a fragmented financing system heavily dependent on private insurers for a highly efficient, single publicly-administered system.
Single payer trades market-based infrastructure expansion based on enhancing the medical-industrial complex (business model) for central planning of infrastructure expansion based on regional health care needs (patient service model).
Single payer trades unsustainable growth in global costs due to dependence on markets for single payer economic tools of cost containment that bend the cost curve to sustainable levels.
Where are the tradeoffs that are so unappealing that they largely offset these clear single payer advantages?
By Don McCanne, M.D.
Many highly respected members of the academic health policy community, such as Harvard’s David Cutler, seem to acknowledge the efficiency of the single payer model of health care financing in that it would greatly reduce the profoundly wasteful administrative excesses uniquely characteristic of the U.S. health care financing system. But then the model is usually dismissed, often with unintentionally glib comments such as “single payer involves many other tradeoffs that may not be appealing.” The standard policy approach today is to reflexly dismiss single payer Medicare for All as soon as it is mentioned.
Cutler rightly explains that the “paper tiger” in health care needs to be tamed. But what are the tradeoffs that he seems to feel are so lacking in appeal that the single payer model can be dismissed outright? In my response to his Health Affairs article I list several tradeoffs, but they should be exceptionally appealing since they make the health care system work well for all of us as patients. I really can’t think of other tradeoffs that are so unappealing that they would even begin to offset the positive tradeoffs listed.
We need to work on the policy community to get them to reject the knee-jerk reaction of dismissing single payer Medicare for All at its mere mention. It is their rejection that we need to reject so that we can all have an honest dialogue on the clear advantages of Medicare for All.
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