• Facts on Medicare administrative costs

      11/23/2013
      Austin Frakt

    Holman Jenkins wrote in the Wall Street Journal last night,

    Many on the left tell us the solution is Medicare-for-All, because Medicare is so much more efficient than private insurers, spending a mere 2% on overhead compared to 20% or higher for private plans. […]

    This requires overlooking a lot. Even if overhead-to-medical spending were the right measure, much of Medicare’s overhead is hidden on the books of other agencies, including Health and Human Services, which provides management, and the IRS, which handles revenues.

    Sounds convincing, doesn’t it? But I am not convinced Jenkins has considered all the facts. They’re out there. For example,

    [A] portion of IRS costs are allocated to Medicare’s overhead by OACT [CMS’s Office of the Actuary]. […] [Also,] (1) the Social Security Administration, not the IRS, calculates and collects Part B premiums for the vast majority of Medicare enrollees, and the Railroad Retirement Board does so for former railroad workers; and (2) a portion of the SSA’s and the railroad board’s costs are allocated to Medicare’s overhead by OACT. […] OACT does include the cost of claims processing, which is done by what used to be called “carriers” and “intermediaries” and are now called “Medicare administrative contractors.” […]

    The federal agencies for which Treasury collects expenditure data, and which are therefore included in the trustees’ reports on Medicare administrative spending, include the Treasury Department, the IRS, the SSA, CMS, the Department of Health and Human Services, the Medicare Payment Advisory Commission, the Area Agency on Aging, the Department of Justice, the Federal Bureau of Investigation, and the Railroad Retirement Board (see the appendix). In addition, the appendix lists “quality improvement organizations,” which are private-sector organizations with which CMS contracts. The appendix also indicates that payments by CMS to insurance companies that process claims for Medicare’s original fee-for- service program are included in the trustees’ definition, as are the cost of buildings that house CMS staff and the cost of the numerous demonstration projects Congress requires CMS to conduct.

    This is not just buried in an academic journal article. You’ll find it freely available in my post. I’ve written more on this and other issues relevant to Jenkins’ piece. If you’re interested, read his (Google the title to get it ungated) and then these:

    @afrakt

     

     
      Health Policy
      administrative costs, Medicare
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  • Administrative costs

      04/24/2013
      Austin Frakt

    My post now up on the JAMA Forum is about Medicare and private insurance administrative costs. Enjoy!

    @afrakt

     
      Health Policy
      administrative costs, Medicare, private insurance
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  • Chart of the day: Medicare’s administrative costs, explained

      02/18/2013
      Austin Frakt

    In the Journal of Health Politics, Policy and Law, Kip Sullivan of the Minnesota chapter of Physicians for a National Health Program thinks almost everyone doesn’t understand Medicare’s administrative costs. He has problems of varying degree with the writing of Greg Mankiw, Paul Krugman, John Goodman, Thomas Saving, Dianne Archer, the Kaiser Family Foundation, and Ezra Klein, whom he quotes at length and then responds,

    If by “premium collection” Klein meant taxes, he was wrong; a portion of IRS costs are allocated to Medicare’s overhead by OACT [CMS’s Office of the Actuary]. If by “premium collection” Klein meant Part B premiums, he was wrong on two counts: (1) the Social Security Administration, not the IRS, calculates and collects Part B premiums for the vast majority of Medicare enrollees, and the Railroad Retirement Board does so for former railroad workers; and (2) a portion of the SSA’s and the railroad board’s costs are allocated to Medicare’s overhead by OACT. Klein’s statement that the cost of processing claims for the traditional Medicare program does not appear in Medicare’s administrative expenditures is also incorrect. OACT does include the cost of claims processing, which is done by what used to be called “carriers” and “intermediaries” and are now called “Medicare administrative contractors.” […]

    The federal agencies for which Treasury collects expenditure data, and which are therefore included in the trustees’ reports on Medicare administrative spending, include the Treasury Department, the IRS, the SSA, CMS, the Department of Health and Human Services, the Medicare Payment Advisory Commission, the Area Agency on Aging, the Department of Justice, the Federal Bureau of Investigation, and the Railroad Retirement Board (see the appendix). In addition, the appendix lists “quality improvement organizations,” which are private-sector organizations with which CMS contracts. The appendix also indicates that payments by CMS to insurance companies that process claims for Medicare’s original fee-for- service program are included in the trustees’ definition, as are the cost of buildings that house CMS staff and the cost of the numerous demonstration projects Congress requires CMS to conduct.

    According to Sullivan, the Treasury’s calculation of administrative costs does not include those incurred by Medicare Advantage and private, Part D (drug) plans. Those are, however, included in the administrative costs calculated for the National Health Expenditure Accounts (NHEA). Examining the two flavors of administrative costs is instructive. I’ve graphed the figures Sullivan includes in his Table 1, below.

    Mcare admin

    The trustees’ and NHEA measures were fairly close until the 1980s. Then they diverged as enrollment grew in Medicare Advantage and its predecessor programs. In 2006, Part D drug plans became available and the two types of administrative costs diverged further still. As traditional Medicare’s administrative costs went down, those of private plans grew.

    Sullivan writes,

    This enormous disparity between two measures that used to be almost identical should long ago have triggered inquiries within Congress and the US health policy community as to whether the higher administrative costs associated with the growing privatization of Medicare are justified.

    @afrakt

     
      Health Policy
      administrative costs, Medicare, Medicare Advantage, Part D
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  • Cost control by administrative headache

      11/26/2012
      Austin Frakt

    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.

    @afrakt

     
      Health Policy
      administrative costs, Fall 2012, HLSA 601, Mortensen, TIE-U, UMD
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  • Public vs. private insurance administrative costs

      09/04/2012
      Austin Frakt

    If you’re looking for more reading on the subject of public vs. private insurance administrative costs, see pages 45-47 of Administrative Solutions in Health Reform, an RWJF-sponsored report by the National Academy of Public Administration and the National Academy of Social Insurance (2009). Because I don’t care to engage in a debate on the issues it raises (though feel free to discuss among yourselves in the comments), I’m not quoting it. It’s ungated, and you can read and judge it for yourself. (Direct link to the PDF here.)

    Also, I want to second Aaron’s promotion of “What Dilemma? Moral Evaluation Shapes Factual Belief“ (also ungated). It’s worth reading. I just did.

    @afrakt

     
      Health Policy
      administrative costs, evidence, faith, government
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  • ICD-10

      08/11/2011
      Kevin Outterson

    In October 2013, the US health care system will undergo a dramatic coding change as we transition from ICD-9 to ICD-10. If you are a manager of HIT, this is old news; indeed, you’ve probably had an implementation team running for a couple years.

    First, the bad news:  hospital inpatient procedural codes will grow from 3,800 to 72,000; physician diagnostic codes from 14,000 to 69,000. Implementation costs for a three physician practice may average $83,000, with the per-doctor implementation cost dropping to $28,500 in a ten doctor practice. (see Harris Meyer’s reporting in May 2011 Health Affairs). No one reimburses providers for these transition costs.

    After implementation, this coding system will be more expensive to operate. Medical practices already spend around $80,000 – $85,000 per physician in administrative interactions with health plans (2006 data), about 10 – 12% of net patient revenue.  This is approximately four times what is spent on this process in Canada.*

    Round up the usual suspects?  Not this time – ICD-10 conversion was not a PPACA project, but was approved under President Bush in 2008. Nor should this contribute to uniquely high US administrative costs, since the US is among the last OECD countries to make the conversion.  Canada converted beginning in 2001 and completed the process in 2006. The dysfunction in the US system runs much deeper than ICD-10. I’m still trying to find the code.

    —————————————-

    *Some good sources on administrative costs in US physician practices:

    Morra D, Nicholson S, Levinson W, Gans GN, Hammons T, Casalino LP.  US physician practices versus Canadians:  spending nearly four times as much money interacting with payers.  Health Aff. 2011 Aug;30(8):xxx (US costs were $82,975 in 2006 compared to $22,205 in Ontario).

    Woolhandler S, Campbell T, Himmelstein DU. Costs of health care administration in the United States and Canada.  N Engl J Med. 2003 Aug 21:349(8):768-75 (total US administrative costs $294.3 billion in 1999; US per capita costs were $1059 compared to $307 in Canada).

    Keehan SP, Sisko AM, Truffer CJ, Poisal JA, Cuckler GA, Madison AJ, Lizonitz JM, Smith SD.  National health spending projections through 2020:  economic recovery and reform drive faster spending growth. Health Aff. 2011 Aug;30(8):1594-605 (projecting “net cost of health insurance” [net premiums less benefits paid] in 2020 at $800 per capita and “government administration” costs in 2020 at $211 per capita.  These figures do not include administrative costs by providers and patients).

    Casalina LP, Nicholson S, Gans DN, Hammons T, Morra D, Karrison T, Levinson W.  What does it cost physician practices to interact with health insurance plans? Health Aff. 2009;28(4):w533-w543 (July/Aug 2009) (National sample & MGMA  2006 data used to estimate the “national time cost to practices of interactions with plans is at least $23 billion to $31 billion per year.”)

    Sakowski JA, Kahn JG, Kronick RG, Newman JM, Luft HS.  Peering into the black box:  billing and insurance activities in a medical group. Health Aff. 2008;28(4):w544-w554 (July/Aug 2009) (using 2006 data from a large CA practice, they estimate billing and insurance-related functions to cost “at least $85,276 per FTE physician (10 percent of revenue).”)

    Blanchfield BB, Heffernan JL, Osgood B, Sheehan RR, Meyer GS.  Saving billions of dollars – and physician’ time – by streamlining billing practices. Health Aff. 2010;29(6):1248-1254 (using 2006 data from a large urban academic PHO, they estimate that “physicians end up using nearly 12% of their net patient service revenue to cover the costs of excessive administrative complexity.”  A single set of payment rules would save $7 billion per year, about four hours of physician time and five hours of office support time per week)

     
      Health Policy, Law
      administrative costs, ICD-10, ICD-9
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  • Administrative burden just isn’t on the insurance end

      08/08/2011
      Aaron Carroll

    I got my usual slew of email after I suggested that the super committee could at least talk about a single-payer health care system. Emails range from those castigating me from the right for suggesting that the government just kill us already to those castigating me from the left for even suggesting that a single-payer system has any trade-offs at all.

    Some days I despair.

    But then I regroup. The reason I think that it’s worth talking about other health care systems is so that we explicitly realize that there are tradeoffs. We say we like “choice” and that we like “savings”, but then refuse to acknowledge that giving up one makes the other more likely. Florida is seeing that right now. With respect to a single-payer system, some may not like the tradeoffs, but it is a way that other countries save a lot of money.

    One of the ways they do this is through a lower administrative burden. Without underwriting, advertising, CEO-salaries, and profits, more money can go into actual health care. Some will argue that the ways we compare administrative spending in Medicare and private insurance isn’t totally fair, and sometimes they have a point in terms of magnitude of differences, but these arguments ignore the very real administrative burden differences on the provider side.

    There’s a nice new study in Heath Affairs which gets at exactly that:

    Physician practices, especially the small practices with just one or two physicians that are common in the United States, incur substantial costs in time and labor interacting with multiple insurance plans about claims, coverage, and billing for patient care and prescription drugs. We surveyed physicians and administrators in the province of Ontario, Canada, about time spent interacting with payers and compared the results with a national companion survey in the United States…

    Physician practices in the United States must interact with many health plans in the US multipayer system. Moreover, interactions increase with plans’ attempts to “manage care,” such as requiring prior authorizations for many specialist, imaging, and hospital services. Each health plan offers many different insurance products to consumers, and each may have its own formulary (or list of approved drugs); prior authorization requirements; and rules for billing, submitting claims, and adjudication. In contrast, Canadian physicians generally interact with a single payer that offers a single product, and they are subject to fewer managed care requirements.

    By estimating the cost to Canadian practices of interacting with the Canadian single payer, then comparing this to the cost to US practices of interacting with health plans, it is possible to provide an estimate of the “extra” costs to US physicians of the nation’s multipayer, managed care system of health insurance. We conducted a survey of physician practice interactions with the single payer in Ontario, Canada, that paralleled our survey of practices in the United States. Ontario includes approximately one-third of the Canadian population; its single-payer model is generally representative of the Canadian system.

    Because providers in the US have to deal with so many different insurance companies and systems, they waste a lot of time and manpower. How much? Well, they found that practices in the US spent about $83,000 per physician per year interacting with insurance companies, while doctors in Canada spent about $22,000. This isn’t about outcomes or medicines or care. This is just how much money had to be spent per doctor to deal with payers.

    That means if we had a system similar to Canada’s, doctors might save about $60,000 each. That’s a lot of money. In fact, it would result in more than $27 billion a year in savings to doctors a year in the US. Moreover, it’s not just money; they spent so much more time. Staff in physician offices spend more than 20 hours per week per doctor on administrative tasks compared to 2.5 hours spend by Canadian office staff.

    As we dismiss single-payer, it’s worth thinking about this. There’s no good good reason for all this time and money spent by doctors and their offices on non-medical tasks. It costs an enormous amount, and it makes everyone miserable. If we refuse a different health care system, it’s worth acknowledging again what we sacrifice.

    If we demand this system, the least we could do is set up some standards to reduce this insane waste. Maybe if doctors could save tens of thousands of dollars per physician per year in administrative costs, they’d be more open to payment reforms.

     
      Health Policy
      administrative costs, canada, physicians, RWJF, single payer
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  • Kaiser’s Medicare Primer

      02/16/2011
      Aaron Carroll

    A reader pointed me to the Kaiser Family Foundation’s 2011 Medicare Primer:

    This primer provides an overview of Medicare spending trends, how the program is financed, and factors contributing to the growth in Medicare spending.  Medicare now covers 47 million seniors and younger people with disabilities, with total expenditures of $524 billion in fiscal year 2010, representing 15 percent of federal outlays.

    It also describes the expected effects of provisions in the 2010 health reform law on future Medicare spending.  The primer reviews the financial obligations and out-of-pocket spending for people covered by Medicare, outlines several ways to assess Medicare’s long-term fiscal outlook, and discusses future financing challenges facing the program.

    I found a few points worth highlighting. The first involves the section discussing what accounts for the rising cost of Medicare. One complaint I always hear is how the inefficiencies and waste of government are responsible. Not so (emphasis mine):

    The costs of administering the Medicare program have remained low over the years – less than 2 percent of program expenditures. As such, program administration is not a contributing factor to Medicare’s expenditure growth.  Administrative costs include all expenses by government agencies in administering the program (HHS, Treasury, the Social Security Administration, and the Medicare Payment Advisory Commission).  Also included are the cost of claims contractors and other costs incurred in the payment of benefits, collection of Medicare taxes, fraud and abuse control activities, various demonstration projects, and building costs associated with program administration.

    Compare this to Austin’s post on the administrative costs of private insurance.

    There’s also a nice chart on the PPACA’s expected effect on Medicare spending over the next decade, compared to other legislation:

    With the exception of the Balanced Budget Act, the PPACA is most comprehensive Medicare cost control passed in the last few decades. Much of that comes from reduced payments to providers and Medicare Advantage Plans, the Medicare Independent Advisory Board, increases in beneficiary premiums, delivery system reforms, and new taxes. They aren’t all popular, but they were all enacted to make Medicare more affordable to the government.

    I’ve seen a lot of people hammering the President over the weak deficit controls of his recent budget, especially with respect to entitlement programs. It’s worth remembering that he did sign a law less than a year ago to reduce spending on Medicare by over $400 billion over the next decade.*

    The whole thing is worth a read.

    *Yes, they will use that money to pay for the rest of PPACA. I’m not double counting it. I’m one of those crazy people that thinks it’s OK for good things to cost money, so I’ve never had a problem saying that the PPACA will cost $938 billion over a decade. Here, I’m pointing out that Medicare is not the untouchable program many claim it to be. And yes, these projections require Congress not to change them. All laws do. That’s how the system works.

     
      Health Policy
      administrative costs, costs, Medicare
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  • What makes the US health care system so expensive – Administration and Insurance

      09/24/2010
      Aaron Carroll

    If you haven’t read the introduction, go back and read it now.  That introductory post also includes links to all the posts in this series on what makes our health care system so expensive.  Each of these pieces is going to discuss one of the components of unexpected spending that accounts for why our system is so expensive.

    Remember, these posts are going to follow a common theme.  I am going to highlight how the United States is spending more than you’d expect given our wealth.  Much of this comes from the McKinsey & Company study, Accounting for the cost of health care in the United States.

    Some of you have been eagerly waiting for this one.  Our health care system is a bloated, bureaucratic mess.  You won’t get an argument from me.  All together, administration and insurance totaled $145 billion in 2006, accounting for 7% of all health care spending.  We spent $486 per person, which is almost twice what the next country spent.  As most of you expect, the majority of that spending is above what you would expect, given our wealth:

    In fact, $91 billion dollars were spent in 2006 above what you would expect.

    Now this total includes both public and private administration. On the public side, there is the cost of administering Medicare, Medicaid, the VA, and other programs.  On the private side, this includes profits, taxes, and various administrative expenses.  Private insurance accounts for about two-thirds of this, though, at $63 billion in “extra” spending.  Some of that is profit, of course, but not as much as you’d think.  More than half of the “extra” spending done by the private insurance industry is for selling, general, and administrative expenses.  About one third of that money is for sales and marketing alone.

    We’re not giving a pass to the government, though.  $28 billion more is spent than you’d expect for public spending on administration and insurance.  There’s room for improvement there as well.  However, it is important to note that Medicare Part D, which is, you’ll remember, public payouts to a privately administered insurance system, was responsible for an increase of $8 billion in 2006 alone.  So even in the public sphere, private administration results in a lot of “extra” spending.

    Based upon an objective look at systems around the world, there is no doubt that an increasing amount of private administration of insurance is more expensive.  However, given the amount of private insurance as a share of spending, you’d actually expect to see more spending than we do, perhaps up to $19 billion more.  Therefore, an argument can be made that some private competition in the US may be bringing down costs.  The question is whether this benefit is overshadowed by the much larger inefficiencies we see in overall private administrative spending.

    This is especially concerning because, unlike in other categories, it’s hard to rationalize how spending more in this category is doing us any good.  I can understand arguments for more money for drugs or doctors or actual care.  But for administration?  For bureaucracy?  I’d love to hear why this spending is cost-effective.

    I will say this at the end of every one of these pieces.  None of this proves that this money is wasted or fraudently taken.  Nor am I saying that we shouldn’t spend more money than other countries.   But this is money that goes above what you’d expect us to spend based on our greater wealth.  We should at least be able to account for and explain this increased spending in some way.

     
      Health Policy
      administrative costs, health care costs
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  • Health Care Admin. Costs: What’s Worth Debating?

      03/13/2010
      Austin Frakt

    M.S. read some of the papers on health care administrative costs recommended by readers of this blog and put up a new post at The Economist. Like me, M.S. “was hoping for someone who simply addressed the issue of how to calculate administrative costs in the American system.” But it seems much of the literature (or at least that which M.S. read) focuses on comparing U.S. administrative costs to those of Canada or what they might be under a single payer regime.

    Since single payer isn’t on the table I don’t find that a very useful exercise. That is, I’m not convinced it is worth debating the relative size of administrative costs in U.S. vs. Canada. M.S. pulls a quote from Henry Aaron’s paper that would seem to be consistent with this notion.

    The most important question is what these differences should tell policy makers. I believe the answer is, “Not much.”…The U.S. health care administration, weird though it may be, exists for fundamental reasons, including a pervasive popular distrust of centralized authority, a federalist governmental structure, insistence on individual choice (even when, as it appears to me, choice sometimes yields no demonstrable benefit), the continuing and unabated power of large economic interests, and the virtual impossibility (during normal times in a democracy whose Constitution potentiates the power of dissenting minorities) of radically restructuring the nation’s largest industry — an industry as big as the entire economy of France.

    I agree with Aaron here, though M.S. finds it a “strange thing to say” particularly in light of the fact that a significant transformation of the health care system has nearly come to fruition (and may do so next week). But let’s be clear, the reforms that may pass next week are peculiarly American. They are not a step toward a Canada-style single payer system and are the product of (and will reinforce) some of the forces Aaron cites. Substantial though it will be, health reform will not be a radical “restructuring of the nation’s largest industry.”

    More generally, this is a perfect example of why I’m usually skeptical of cross-country comparisons or extrapolation of the results of a study on one set of countries in service of predictions about another outside the sample. There are often far too many uncontrolled differences for such comparisons to be meaningful. Perhaps there are some narrow instances where a strong case can be made that such international comparisons and extrapolations are sensible, but I don’t think health care is one of them. The U.S. is quite a different animal.

     
      Economics
      administrative costs, health care
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