• What makes the US health care system so expensive – Administration and Insurance

    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.

    • I liked the David Cutler interview linked below. In it he noted that Duke has 1300 billing clerks and 900 hospital beds. One presumes they are also billing for their docs, but it illustrates the issue from the provider side. Billing and coding take up lots of time and staff. Insurance companies use different forms. They frequently change rules. If you miss a rule change, it can be costly. About three years ago our billing company missed one with Blue Cross. We accidentally overcharged. We had to repay those charges, but it also involved some significant lawyer fees. On the other side, our old billing company missed charges that we should have received. We were never able to get some of those back as some of the bills were too old to collect.

      Compare our system with Taiwan and its 2% admin costs. In France, a doc just runs the patient’s smart card through a reader. No billing staff.


    • @steve – I agree with you (and David Cutler). It’s a real expense and you can see it on the chart. But even it we dropped to Taiwan’s level, it doesn’t bend the curve. It’s one of the things we need to address – and even one that would likely not lessen quality. But it’s not the only thing we need to address.

    • The only reason to justify higher admin costs would be if the additional fees went to programs to better manage care for such things as chronic conditions (e.g., diabetes) that in the long run reduce health care costs.

    • In my previous health plan my provider covered 100% of most expenses up to an annual limit, then covered 90% of the cost for the rest of the year. This included regular expenses like drugs and blood tests. The bills I received for the remaining 10% were usually in the $6 to $20 range, and required the following paperwork:

      1. Provider submits claim to insurer
      2. Insurer pays 90% to provider, generates Explanation of Benefit paperwork
      3. Provider processes payment, generates bill and mails paperwork to me.
      4. I process bill by mailing back stub with Medical Savings Account CC#.
      5. Provider processes CC payment.
      6. MSA processes CC payment, generates paperwork requesting receipt for bill from me.
      7. I process MSA request by faxing Provider bill back to MSA
      8. MSA processes bill.

      There is NO WAY this costs less than $20 for everyone involved, even if you discount my time in managing the paperwork on my end which typically required 1-2 months for many claims. It would be much more efficient and less expensive if my insurance company just paid the whole bill, and either charged me a higher premium or billed me directly for the 10% with an autopay option to use the MSA, and pre-arrangement to approve anything coming from the insurer.

    • I managed Accounts Receivable for medical reference laboratories for ten years in the ’70’s and ’80’s. The tail-chasing involved in this industry is amazing. The lab does not have direct access to the patient and often receives incomplete/erroneous information from the referring doctor or clinic. Then come the rejections of claims (we’re not the primary; coverage lapsed; out of network; etc.), followed by repeated attempts to get correct billing information.

      A systemic problem involved Medicare and Medi-Cal (medicaid in California). Medi-Cal assumes that everyone over 65 has Medicare as primary; however, immigrants are not eligible for Medicare buy-in until unless they have lived in the US five years. (Yes, I know – why are they on MY tax dollar? If they are here and become seriously ill, well, what exactly does one do?) So, in our “paperless” billing systems, we bill Medicare, wait for the rejection, copy it and attach a copy of a form letter from Medicare to the patient giving the future date of Medicare eligibility. (Try getting that from really sick, really old non-native speakers.) Then we send the manually-generated claim form off, with attachments, and in a few months, receive a few dollars. Often, we just wrote off charges for these patients. The system may have changed, but I doubt that it’s more efficient.

      The bottom line: with so many entities (military, railroad retirement, multiple government entities, secondaries, different insurers for spouses), each insurer would like for someone else to be the primary payer.

      Thanks for your thoughtful series pointing out that solutions don’t come in 20 second sound-bites.

    • @steve A billing “smart card” doesn’t eliminate billing staff. It just moves them to a different office. I’m not saying this is ultimately better or worse, but saying that it reduces the work required to zero is simply not true.

    • When doctors bill health insurance companies, the insurance company sends a check for a percentage of that bill. For instance, if a doctor sends a bill for $1000, the insurance company sends a check for $200. The doctor can hire a lawyer to fight this, or can accept the $200 and be done with it. Or they can just charge $5000 next year.

      What’s easier?

    • The 7% figure in this posting is commonly used but I want to make sure readers know that it only includes the administrative costs of insurance companies and government insurers. It does not include the administrative/billing costs of providers, (physicians/hospitals). Many of the comments correctly refer to the crazy hoops that providers and their billing staff go through and that these things don’t exist in other countries. I believe the only justification for these costs are that they provide employment. There are studies in Health Affairs which have tried to quantify these costs and one by Woolhandler et al say that something like 30% of health care costs, (if you include provider administrative costs) are related to this billing process.

    • The customer of the insurance company is not the individual worker. It’s the HR department who decides to stay or switch carriers every year. This provides very perverse incentives.

      Align customer and provider better so their interests match and you’ll have cheaper insurance.

      Overall, private provision of anything is going to be more expensive than public provision at any given point in time. The problem is that the public provision has no incentives to further reduce provision costs going forward and the private producer does. That’s a great deal of the built in extra expense, tempting workers, managers, and shareholders to change procedures and take risks to make everybody pay less. Over a lifetime, the difference in rates of improvement between the private system and the public one makes a private provision system much better overall.

      Because the pricing system in the US is broken due to copyright issues, these incentives are much weaker than normal in the health insurance market.

    • What does GDP mean?