• How High Are Providers’ Admin. Costs?

    A post by M.S. on The Economist’s website makes some of the same points I’ve made about the fact that we shouldn’t expect to save a lot of money by squeezing health insurers or increasing competition in that market. But M.S. devotes considerable attention to the profit and administrative costs associated with providers, which is not something I’ve explicitly addressed.

    If M.S. is reading the literature correctly (and if that literature is itself correct), then provider profit and administrative costs are higher than those of the insurance industry. M.S. quotes the Physicians for a National Health Program (PNHP),

    The estimate that total administrative costs consume 31% of U.S. health spending is from research by Drs. David Himmelstein and Steffie Woolhandler and published in the New England Journal of Medicine in 2003. The figure would undoubtedly be higher today. Insurance overhead accounts for a minority of the overhead. Much more occurs in physicians’ offices, hospitals, and nursing homes—driven by our current fragmented payment system.

    Sensibly, M.S. is looking for confirmation of PNHP’s assessment of administrative costs in the health care system and its allocation to insurers and providers. He hasn’t been able to find anything, and he isn’t sure he buys the 31% figure or the notion that most of it can be attributed to providers.

    And there are a lot of grounds on which you might argue that the Himmelstein-Woolhandler figure of 31% administrative costs is exaggerated. You might critique their decision to allocate one-third of doctors’ office rent as an administrative cost. Are American doctors’ offices commensurately larger than Canadian ones? Are physicians’ self-reports of time spent on administrative tasks accurate? But the curious thing is, I’ve hunted around for critiques of the Himmelstein-Woolhandler numbers, and I can’t seem to find any. I also can’t seem to find any alternative studies that also tried to measure all of the administration costs incurred by providers, to get a sense of how much the fractured private insurance system really costs.

    Note there are two issues here. One is the size of U.S. providers’ administrative costs. The other is that size relative to that of a single payer or national health care system (e.g. Canada’s). At the moment I’m more interested in the former than the latter. We’re not going to a Canada-style system anytime soon. But perhaps other more politically feasible reforms could reduce provider overhead. How big is that overhead and what are its components?

    In fact M.S. contacted me before publishing his/her post looking for some other evidence, papers, or reports on this topic. I’m not aware of any. But maybe you are. If so, please let me know.

    Later: A reader suggests that the 1992 Health Affairs paper by Danzon serves as a response to Himmelstein and Woolhandler. Clearly it isn’t a direct response to their 2003 paper. But it does cite earlier work by Himmelstein and Woolhandler that may be similar or use similar methodology and assumptions (I’m speculating). I gave the Danzon paper a quick skim (so take the following is my initial impression and not necessarily my final opinion). It seems to me that it suggests that U.S. provider overhead is greater than insurer overhead. So, while it may differ from Himmelstein and Woolhandler on some points, it might also corroborate what M.S. was seeking to confirm.

    And later still: Another reader suggests taking a look at the response article by Henry Aaron in the same NEJM issue as the Himmelstein and Woolhandler paper cited above.

    Comments closed
    • Excellent piece. Physician throwaways often cite numbers for administrative costs, but when I have attempted to follow these up, there is a lack of good data.

      Perhaps I can offer my own numbers. As president of a largish anesthesia group, we pay our billing company a 5% collection fee. That is a pure billing expenditure. We also have an employee who devotes time to preparing these bills, negotiating fees and doing follow-up. This takes another 1%-2% of our collections (I am including legal fees here also.) Anesthesia billing is one of the simplest and cleanest of all medical billing. There is a universally agreed upon RVU system for the billing. Physician time spent preparing these bills is minimal. We rarely need to do pre-certs. Our bills are rarely challenged. Competition in the billing market means that the rates are similar for most groups. Ours is probably a best case scenario.

      The picture is different for primary care docs. They typically employ in house staff for billing. They claim that they spend much more on admin costs. I would love to see a couple of good large scale studies quantifying this and comparing it with something like the French smart card system.

      BTW, M.S. needs to travel more. Physician offices and facilities (been to any of those orthopedic surgicenters lately?) are generally bigger and much better appointed that what you see in Europe of Canada.


    • Link to the Cutler interview citing Duke have 900 hospital beds and 1300 billing clerks. I read Cutler a bit but dont remember him publishing a paper on this.



    • There is actually a very good paper by Benjamin Zycher (formerly of the Manhattan Institute and currently at Pacific, I believe) on this very topic. In fact, he addresses not only the issue of administrative costs in the US (which he claims are overstated considerably), but also the cost of transitioning to a single-payer system and any potential savings from that. His conclusion is that the increased utilization of “free” services would more than offset the administrative savings that do exist in a single-payer system. He also briefly discusses the under-reported administrative costs of Medicare.


    • HC-I read that over and it does not appear to address provider side costs at all. Did I miss something? When I teach my medical students I advocate knowing the literature and applying the lessons learned from large scale studies. I also advocate that they take a bottom up approach. Does the study they read comport with the reality of their practice as they gain more experience.

      Thus, as someone who has had to deal with billing issues for years, i can definitively say that for my practice, and others in our area, it is private insurance billing that creates the headaches that we do have. Indeed, one of the most important reasons for using a billing service, rather than in house billing, is having an expert agency able to keep up with billing rules propagated by the private insurers. In spite of these efforts, every few years we have a minor catastrophe due to some unrecognized change made by a private insurer. The most recent of these cost my group about $200,000.

      (Just as I was about to hit the submit button, my wife handed me an AMA advertisement for overhead insurance.)