Elsa Pearson is a Policy Analyst with Boston University’s School of Public Health. She tweets at @epearsonbusph. Research for this piece was supported by the Laura and John Arnold Foundation.
The United States spends much more on health care each year than wealthy equals around the globe. That’s not just true for spending on direct patient care, but also for spending on health care administration. Many scholars recognize the cost containment potential in curbing administrative costs. Determining just how much the US spends on health care administration and in what ways are critical first steps.
How much of US health care spending is on administration?
Health care administration includes all activities related to coordinating health and medical services, such as scheduling, billing, and claims processing. Administrative costs’ contribution to overall health care spending is large and growing.
System-level estimates for health care administrative costs are limited and often dated. One highly cited estimate suggests that administrative costs accounted for about 30% of total health care expenditures in 1999. In 2006-2007, administrative costs outpaced growth in other health care categories, such as professional services, and matched growth rates in typically costly categories, such as prescription drug spending.
Though we may not be able to pin down a current estimate of total administrative costs, we do know it’s substantial and continues to increase. Other research focuses on administrative costs in three, large subcategories: billing and insurance-related (BIR) costs, hospital administration, and physician practice administration.
BIR Administrative Costs
BIR costs are often an easily quantifiable subcategory of administrative costs. The National Academy of Medicine calculated the US spent about $361 billion on BIR costs alone in 2009, or 14.4% of total health expenditures. That number only seems to multiply; another study suggests the same costs totaled $471 billion in 2012, or 16.8% of total health expenditures (with 80% directly related to the US’ multi-payer system).
A case study of an academic health care system by Tseng, et al. showed that BIR costs accounted for 14.5% of professional revenue collected during primary care visits (as well as 25.2% during discharged ED visits and 13.4% during ambulatory surgical visits). The authors estimated the monetary impact of this administrative burden on primary care providers equated to almost $100,000/year/provider.
Hospital Administrative Costs
Research by Himmelstein, et al. found that US hospitals spend about 25% of total hospital expenditures on administration. For-profit hospitals tend to have the highest administrative costs. (This does not equate to better care, however, as for-profit hospitals often have higher death rates as well.)
Blanchfield, et al. conducted a case study of a large teaching hospital’s physician organization to determine the impact of administrative costs on the organization’s bottom line. While understood it was already a “high performance billing organization” and, thus, already ahead of the curve in reducing wasteful spending, the study found that excessive administrative costs accounted for about 12% of the organization’s revenue in 2006, or about $45 million. Processing and billing of claims alone accounted for 12.5% of those administrative costs, or $5.6 million.
Physician Practice Administrative Costs
Sakowski, et al. found administrative costs to consume 10% of revenue in a multispecialty medical group. In order to successfully maintain administrative procedures, the organization employed two administrative staff for every three clinical providers.
Research by Casalino, et al. concluded that medical practices spend about $68,000/year/physician interacting with health insurance plans. Primary care physicians, especially those in private practice, feel the most impact. Over three quarters of participants indicated that the costs associated with health plan interactions had increased within a two year period. Similarly, Papanicolas, et al. found that over half of surveyed physicians found insurance-related administrative tasks to be a significant burden.
Worth noting, high administrative costs are not just associated with misuse of resources but rather also accrue in efficient health care systems. Tseng, et al. found no glaring inefficiencies in billing practice, such as task duplication or poor resource management, during their analysis. Blanchfield, et al. studied a physician organization with streamlined billing practices as well.
How does US health care administration spending compare to other countries?
When compared to 11 other wealthy countries, the US leads the pack in health care administration spending.
Himmelstein, et al.’s 2010-2011 estimate of about 25% of total hospital expenditures devoted to administration exceeds the Netherlands’, the next highest spender, by about 5.5 percentage points. US hospital administrative spending exceeds Canada’s and Scotland’s, the lowest spenders, by about 13 percentage points. In fact, US administrative costs have risen over the past decade while Canada’s costs have decreased.
Similar comparisons exist at the physician level as well. Morra, et al. compared the resources spent in 2006 on provider-payer interactions by small physician practices in both the US and Canada (specifically, Ontario). Canadian practices spent only 27% of the financial resources on provider-payer interaction that US practices did. Canadian support staff—nurses and administrative staff—spent one tenth of the time on these interactions compared to US support staff. The authors estimate the US could save $27.6 billion/year on administrative costs by adopting Canadian administrative practices.
Why are administrative costs so high in the US?
Though studies provide various hypotheses on why US health care administration is so expensive, the big picture is always the same: it’s structural.
The United States utilizes a largely private, multi-payer system. The complex payment scheme may cause systemic fragmentation, leading to additional, unnecessary administrative costs. Private insurers contribute the largest share of billing and insurance-related costs in the US ($198 billion in 2012) and, because the US health care system relies on them so heavily, their significant financial footprint may contribute to high overall administrative costs.
(A new Health Affairs article from Gottlieb, et al. explores billing complexity across insurance types—both public and private—in the US. They found, in general, that higher billing complexity led to higher administrative costs. The article provides fresh insight into US administrative costs and we will unpack the details in a future TIE post.)
The Netherlands, the nation with the second highest administrative expenditures, also has a multi-payer system, and one that is moving towards a market-based approach. Canada, on the other hand, has a single payer system and—coincidently?—has the lowest national hospital expenditures.
What should we do about high administrative costs in the US?
It’s worth acknowledging that administration costs are not automatically bad. Morra, et al. suggest “administrative tasks are wasteful [only] if their costs exceed the benefits they generate or if the same benefits could be achieve at a lower cost.” Policies to reduce administrative costs should aim to reduce waste while preserving worthwhile administrative activities.
A single payer health care system is often considered the “gold standard” for reducing administrative costs. However, most would agree that adopting a single payer system in the United States is a political nonstarter, though it certainly is gaining momentum in public opinion.
There are ways reap many of the administrative benefits of single-payer without moving to it. This would rely on standardization, simplification, and automation.
Standardization & Simplification
Every US payer operates within its own unique system—unique forms, processes, and rules. A “single-payer approach,” with one set of rules and operations for all payers, could reduce administrative costs. All individual payers would utilize the same claims forms, submission methods, etc., under a universal operating framework.
The current health care financial system is complex and often burdensome to providers and administrative staff and a simplified financial system may have significant cost-savings potential, or at the very least, reduce waste. Streamlining other administrative activities, such as credentialing, quality measurements, or benefit eligibility, could also contribute cost savings in the long-term.
Minimizing waste in the current system could lead to substantial savings. Berwick, et al. emphasize reducing administrative complexity (such as, inefficient rules and procedures) and reducing fraud/waste (both actual scams and the procedural regulations put in place because of them). The authors estimate that poor performance in these two categories accounted for $189-661 billion of wasteful spending in 2011.
Health information technology (HIT) and electronic health records (EHR) were developed, in part, with the intent of streamlining administrative tasks and patient care, resulting in long term cost savings.
Effectively conducting correspondence, payments, and insurance-related activities electronically may reduce administrative costs. Lee, et al. argue that the current rush towards EHR implementation lends itself as a natural opportunity for improvement. The Health Information Technology for Economic and Clinical Health Act (HITECH Act) was created to provide financial motivation for EHR implementation. A 2015 CDC report suggests the HITECH Act may have successfully incentivized providers to adopt some sort of EHR system.
Cutler, et al. propose the HITECH Act lays the foundation for comprehensive electronic correspondence. Expanding HITECH legislation to include electronic transmittance of other pertinent administrative data, such as claims data, may be a logical way to create system-wide reductions in administrative costs. The authors speculate an annual savings of $2 billion through this proposal.
However, the current use of HIT and EHR doesn’t seem to reduce administrative costs in the US as anticipated. Tseng, et al. conducted their analysis within a health care system with a complete EHR system and a centralized billing organization. The authors report administrative costs still had a significant financial impact even in light of these technological advances.
Reducing health care administration costs in the United States could have both direct and indirect impacts on the health care system as a whole. Most obvious would be the potential monetary savings by curtailing wasteful spending accrued through superfluous administrative activities. Providers could also see a positive impact on their relationships with patients, reclaiming the three hours/week spent on administrative duties for clinical care and increasing physician productivity.
US health care prices are the highest in the world. Some of that is due to ever growing administrative costs. So far, we haven’t found ways to keep those costs from rising. Overhauling the US health care system in its entirety seems unlikely. Some restructuring of health care administration could be a plausible first step towards reducing costs without harming patient care.