Reducing Administrative Costs in US Health Care: Assessing Single Payer and Its Alternatives

The following guest post is by David Scheinker, Barak Richman, Arnold Milstein, and Kevin Schulman.

Administrative costs in the US healthcare system are known to be higher than those in any other country, even than other countries with private health insurance systems. There also is widespread agreement the excessive US costs generate little, if any, value, and that they impose a tremendous burden on physicians. With administrative costs even for primary care services approaching $100,000 per year per physician, there is a growing recognition that reducing healthcare-related administrative costs is a policy priority.

Despite the longstanding concerns about these escalating costs, there is little understanding of what generates them and how we can reduce them. To the degree there has been any academic inquiry into administrative costs imposed on US providers, it has compared them to the much lower costs in other countries with nationalized systems. These comparisons are unflattering to the US system and are designed to encourage wholesale healthcare reform.

Our paper published in Health Services Research begins at the retail level, focusing on the specific administrative costs inflicted by our payment system on providers. We examine the complex contractual arrangements between insurers and physicians and measure the efforts that physicians must endure to get paid.  It then offers a simulation model to estimate how certain policy reforms would result in nationwide administrative savings.

Currently, each health plan and each physician or physician group (and each hospital) negotiates over a contract for services on a periodic basis. Our analysis examines three separate costs that result from this type of market structure: architectural costs (the enormous number of contracts that are generated annually to provide services to patients), contractual complexity (the difficulty of following all of the requirements of each agreement to receive payment), and compliance costs (the costs of not following the rules in submitting a bill).

Based on this framework, we ask two questions: First, what if physicians entered into simpler contracts with insurers? And second, what if physicians (who accept patients with many kinds of insurance) agreed to a single boilerplate contract with all insurers rather than individualized contracts with each insurer? Put more simply, what if contracts were simpler and standardized?

Our simulation predicts that simplifying contracts would reduce billing costs by nearly 50%, standardizing contracts would reduce those costs by about 30%, and both simplifying and standardizing contracts would reduce those costs by over 60% percent.

We then used the model to estimate administrative cost savings from a single payer “Medicare-for-All” model. Consistent with claims made by advocates for nationalized health insurance, we estimate that a Medicare-for-All plan would reduce administrative costs between 33-53%, largely by standardizing contracts. But these cost savings are less than those generated from standardizing and simplifying contracts within our current system of private health insurance because we modeled that a Medicare-For-All plan would retain Medicare’s complex payment models and have increased compliance costs compared to private payers.

We think this is good news. Though we find that a single-payer system will reduce certain administrative costs, we also find that reforms to our current multi-payer system could generate at least as great a reduction. There might be benefits to pursuing national health reform, but we can reduce burdensome administrative costs through much simple and less disruptive paths.  The even better news from this study is that we can now have a more precise understanding of where administrative costs arise in our health system, and we have the means to evaluate the effects of other kinds of reforms. Understanding is the prerequisite to reforming.

David Scheinker is Clinical Associate Professor of Pediatrics and Executive Director of Systems Design and Collaborative Research (SURF) at the Stanford Lucile Packard Children’s Hospital.

Barak Richman is the Bartlett Professor of Law and Business Administration at Duke University and a Visiting Scholar in the Department of Medicine at Stanford University.  @BarakRichman

Arnold Milstein is Professor of Medicine at Stanford and directs the University’s Clinical Excellence Research Center.

Kevin Schulman is Professor of Medicine at the School of Medicine and Professor of Business (by courtesy) at the Graduate School of Business at Stanford University.

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