• Cost control by administrative headache

    This is a TIE-U post associated with Karoline Mortensen’s Introduction to Health Systems (UMD’s  HLSA 601, Fall 2012). For other posts in this series, see the course intro.

    Also, this will be my last TIE-U post this semester. Moreover, I am not planning to run TIE-U again, though it is always possible I’ll restart it someday.

    In The (Paper)Work of Medicine: Understanding International Medical Costs, David Cutler and Dan Ly make a good point. In comparing U.S. health care spending and its growth to that of other wealthy nations, even if one concludes it’s the prices, stupid, it’s valuable to push the analysis a bit further. One wants to know

    whether factors earn different returns across countries and whether more clinical or administrative personnel are required to deliver the same care in different countries.

    As we know from prior posts, the wages of health care workers are not going up at anything like the rate of growth of health care spending. In fact, they’re not even keeping up with inflation. That leads one to suspect that more clinical or administrative personnel are at the heart of price growth. Indeed, according to Cutler’s own work, and that of others, productivity growth is negative in health care, which itself implies it is taking more inputs, like labor, to produce the same output.

    Culter’s work also suggests that administrative costs growth is a substantial contributor to rising health care spending.

    A good deal, but not the entirety, of the paper by Cutler and Ly is about U.S. health care administrative costs as compared to those of Canada. You can probably guess their conclusion: U.S. administrative expenses are much higher. The authors advise,

    Because the federal government is involved in so much of health care, it would be natural for the federal government to take the lead in addressing administrative issues. For example, the government could require physicians’ offices, hospitals, and insurers that participate in Medicare, Medicaid, or the soon-to-be-created insurance exchanges to use common credentialing forms, to expand the range of electronic interchange they accept, and to standardize billing, enrollment, and renewal information.

    (For more along these lines, see also the recent NEJM piece by Cutler, Wikler, and Basch.)

    The private sector has failed to bring about the type of cost-reducing reforms Cutler and Ly suggest. Why? As the authors point out, it’s an obvious collective action problem. Any one insurer cannot move the entire system, and even if one invests in streamlining operations for itself, it may not capture a sufficient return to justify the investment. Cutler and Ly offer another hypothesis.

    A second potential reason for the persistence of high administrative costs in health care is that complexity might be valuable to insurance payers if it lowers what they ultimately pay for health care. For example, denying claims saves an insurance company money if a service is never reimbursed or if the present value of payments for services that are eventually reimbursed is reduced. Delay may also discourage physicians from providing some services entirely.

    If Cutler and Ly are right, then reducing administrative hurdles might actually increase health care spending. In fact, there is precedent for that. To the extent that it does so in ways that don’t promote health, that’s just waste of another sort. Yet, it’s hard to get excited about hassles as cost control. The engineer in me hopes Cutler and Ly are wrong, but that doesn’t mean they are.


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    • Hmm. I understand how “denying claims saves an insurance company money”, obviously. But I don’t understand how “complexity” contributes to denying claims. The stated problem isn’t really complexity, but rather simply on the part of the insurance companies resulting in both after the fact (denial of claims) and before the fact (refusal to provide service since it might not get paid for) reduction in amount of services paid for.

      I asume, however, that ACA will be reducing the number of rejected claims, thus incurring this increase in use of reimbursed services, regardless of complexity reform. Right?

      *: This avoids me calling the insurance companies sleazy and getting the post justifiably rejected. I’m not calling the insurance companies anything other than problematic. Really. This isn’t a flame.

      • I’d say that certain types of complexity make it less likely for people to get care.

        Take me for example. I’m in an HMO plan, which restricts me to using in-network providers, and which requires me to get referrals from my PCP in order to access specialty services. My PCP is supposed to monitor and coordinate my care.

        In this HMO, like most current US HMOs, the HMO doesn’t directly employ the physicians and other providers. So, this is just a regular physician in a small practice. I have allergic rhinitis – basically the acute version of asthma, and it’s exacerbated by intense exercise. I get shots about monthly. My PCP needs to document to the HMO periodically what my progress is. He needs to sit down with me and inventory my symptoms and what the shots are doing, and he needs to authorize the services (usually for a year at a time).

        I have to make a trip to my PCP’s office every year or so, and I have to pay the copay. This makes me less likely to get shots – lots of people would just not bother. And sometimes you forget that your referral has run out, and you have to have a gap in therapy while you find time to get down to your PCP and renew it. Very annoying. The fact that I have to shop for a PCP who’s pliable enough to approve me for allergy shots is also a hassle factor that probably makes people less likely to seek care as well. I know that’s a bit bluntly phrased, and no disrespect to physicians, but we all know that you can generally find some physician willing to authorize various treatments – both for better and for worse.

        I submit that this is an example of cost control via administrative hassle. This adds burden to providers, to patients, and to the insurance company. It also reduces net insurance company expenditures. At work, I can choose the HMO plan or the less restrictive PPO plan, which allows self-referral, and the PPO is a couple hundred dollars per month more out of pocket.

        I’d submit that cost control mainly by administrative hassle is not the best way to go about things. If I were still insured through Kaiser Permanente, I’d still have to use my PCP as a gatekeeper. However, my PCP would have all my records on electronic file. My PCP would be monitoring my progress with the allergist: I’d be seeing an allergist in-house and they’re on the same record system, and furthermore KP can structure physicians’ work hours such that they have time to review cases like this. Referrals would be automatic. It’s true that there are fewer convenient KP locations where I am, in downtown DC, though, and this sort of very tight network is not the best for everyone (e.g. you have a rare disease and KP has NO physicians with knowledge of it).

        I’d also submit that cost control by administrative hassle is likely to have deleterious effects on people with multiple and/or complex chronic conditions who use a large number of services and/or who use a lot of services. They will fall through some sort of administrative gap, like forgetting to have a referral renewed, letting a prescription lapse and the pharmacy is closed, having the doctor’s office confuse the medical billing with billing for psych services through the behavioral health carve out, etc. For young healthy adults like me, it’s bearable. And yes, I think we should be using PCPs as gatekeepers to specialty care (but I can still be annoyed at the hassle with my insurer, which I loathe).

    • Because the federal government is involved in so much of health care, it would be natural for the federal government to take the lead in addressing administrative issues.

      Yes but since the states constrict supply, shouldn’t they take teh lead on addressing costs?