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Landmark administrative waste study updated

January 7, 2020

Topics: Quote of the Day

By David U. Himmelstein, M.D.; Terry Campbell, M.H.A.; Steffie Woolhandler, M.D., M.P.H.
Annals of Internal Medicine, January 7, 2020

Abstract

Background: Before Canada’s single-payer reform, its payment system, health costs, and number of health administrative personnel per capita resembled those of the United States. By 1999, administration accounted for 31% of U.S. health expenditures versus 16.7% in Canada. No recent comprehensive analyses of those costs are available.

Objective: To quantify 2017 spending for administration by insurers and providers.

Design: Analyses of government reports, accounting data that providers file with regulators, surveys of physicians, and census-collected data on employment in health care.

Setting: United States and Canada.

Measurements: Insurance overhead; administrative expenditures of hospitals, physicians, nursing homes, home care agencies, and hospices.

Results: U.S. insurers and providers spent $812 billion on administration, amounting to $2497 per capita (34.2% of national health expenditures) versus $551 per capita (17.0%) in Canada: $844 versus $146 on insurers’ overhead; $933 versus $196 for hospital administration; $255 versus $123 for nursing home, home care, and hospice administration; and $465 versus $87 for physicians’ insurance-related costs. Of the 3.2–percentage point increase in administration’s share of U.S. health expenditures since 1999, 2.4 percentage points was due to growth in private insurers’ overhead, mostly because of high overhead in their Medicare and Medicaid managed-care plans.

Limitations: Estimates exclude dentists, pharmacies, and some other providers; accounting categories for the 2 countries differ somewhat; and methodological changes probably resulted in an underestimate of administrative cost growth since 1999.

Conclusion: The gap in health administrative spending between the United States and Canada is large and widening, and it apparently reflects the inefficiencies of the U.S. private insurance–based, multipayer system. The prices that U.S. medical providers charge incorporate a hidden surcharge to cover their costly administrative burden.

From the Results

Total Costs of Health Care Administration: Health care administrative costs in the United States in 2017 totaled $812.0 billion, $2497 per capita ($2696 per insured person), or 34.2% of total spending in the categories for which data are available. The comparable estimates for Canada are $551 per capita ($593, assuming U.S. wage rates in doctors’ offices), or 17.0% of expenditures. The difference amounts to over $1900 per capita (or over $2100 per insured person), equivalent to more than $600 billion in excess administrative spending in the United States.

From the Discussion

Administration accounts for one third of United States health care expenditures, twice the amount in Canada. The gap in dollars per capita is even larger: a greater than 4-fold disparity.

Five decades ago, when the 2 nations’ payment strategies first diverged, their health care systems deployed similar numbers of administrative personnel: 43.8 persons per 10 000 population in the United States versus 40.8 persons per 10 000 population in Canada. In the interim, virtually all billing has been computerized and EHRs have become commonplace, but the promised breakthrough in administrative efficiency has not materialized. In 1983, administration accounted for 22% of U.S. health spending (versus 13.8% in Canada), rising to 31.0% (versus 16.7%) in 1999 and, as we report, 34.2% (versus 17.0%) in 2017. Expressed in per capita 2017 dollars, U.S. administrative costs increased from $818 in 1983 to $2497 in 2017.

https://annals.org…


Health care paperwork cost U.S. $812 billion in 2017, four times more per capita than in Canada

Study in leading medical journal links rise in bureaucracy — now 34.2% of health spending — to surging overhead of private insurers

Physicians for a National Health Program, January 6, 2020

A study published today in the Annals of Internal Medicine finds that health care bureaucracy cost Americans $812 billion in 2017. This represented more than one-third (34.2%) of total expenditures for doctor visits, hospitals, long-term care and health insurance. The study estimated that cutting U.S. administrative costs to Canadian levels would have saved more than $600 billion in 2017.

Health administration costs were more than fourfold higher per capita in the U.S. than in Canada ($2,479 vs. $551 per person) which implemented a single-payer Medicare for All system in 1962. Americans spent $844 per person on insurers’ overhead while Canadians spent $146. Additionally, doctors, hospitals, and other health providers in the U.S. spent far more on administration due to the complexity entailed in billing multiple payers and dealing with the bureaucratic hurdles insurers impose. As a result, hospital administration cost Americans $933 per capita vs. $196 in Canada. The authors note that in Canada hospitals are financed through lump-sum “global budgets” rather than fee-for-service, much as fire departments are funded in the U.S. Physicians’ billing costs were also much higher in the U.S., $465 per capita vs. $87 per capita in Canada.

The analysis, the first comprehensive study of health administration costs since 1999, was carried out by researchers at Harvard Medical School, the City University of New York at Hunter College, and the University of Ottawa. The authors, who also performed the 1999 study, analyzed thousands of accounting reports that hospitals and other health care providers filed with regulators, as well as census data on employment and wages in the health sector. They obtained additional data from surveys of physicians and government reports.

The researchers found that administration’s share of overall U.S. health spending rose by 3.2 percentage points between 1999 and 2017, from 31.0 % to 34.2%. Of the 3.2 percentage point increase, most (2.4 percentage points) was due to the expanding role that private insurers have assumed in tax-funded programs such as Medicaid and Medicare. Private managed care plans now enroll more than one-third of Medicare recipients and a majority of those on Medicaid; Medicare and Medicaid now account for 52% of private insurers’ revenues. Private insurers’ increasing involvement has pushed up overhead in those public programs; private Medicare Advantage plans take 12% or more of premiums for their overhead, while traditional Medicare’s overhead is just 2%, a difference of at least $1,155 per enrollee (per year).

The authors cautioned that their estimates probably understate administrative costs, and particularly the growth since 1999. Their 1999 study included administrative spending for some items such as dental care for which no 2017 data were available. Additionally, private insurance overhead has increased since the study’s completion, rising by 13.2% between 2017 and 2018 according to official health spending figures released in December.

“Medicare for All could save more than $600 billion each year on bureaucracy, and repurpose that money to cover America’s 30 million uninsured and eliminate copayments and deductibles for everyone,” said study senior author Dr. Steffie Woolhandler, a distinguished professor at the City University of New York (CUNY) at Hunter College and lecturer in Medicine at Harvard Medical School, where she previously served as a professor. “Reforms like a public option that leave private insurers in place can’t deliver big administrative savings,” Dr. Woolhandler added. “As a result, public option reform would cost much more and cover much less than Medicare for All.”

According to Dr. David Himmelstein, the study’s lead author who is an internist in the South Bronx, a distinguished professor at CUNY’s Hunter College and lecturer in Medicine at Harvard, “Americans spend twice as much per person as Canadians on health care. But instead of buying better care, that extra spending buys us sky-high profits and useless paperwork. Before their single-payer reform, Canadians died younger than Americans, and their infant mortality rate was higher than ours. Now Canadians live three years longer and their infant mortality rate is 22% lower than ours. Under Medicare for All, Americans could cut out the red tape and afford a Rolls Royce version of Canada’s system.”


“Health Care Administrative Costs in the United States and Canada, 2017.” David U. Himmelstein, M.D.; Terry Campbell, M.H.A.; and Steffie Woolhandler, M.D., M.P.H. Annals of Internal Medicine, published online ahead of print January 6, 2020. doi:10.7326/M19-2818

The Annals of Internal Medicine is the official journal of the American College of Physicians, the largest U.S. medical specialty society with 159,000 members.

In addition to their academic positions, Drs. Woolhandler and Himmelstein founded Physicians for a National Health Program, a 23,000 member organization that advocates for Canadian-style national health insurance in the U.S. Co-author Terry Campbell is Executive Director, Research Operations and Strategies at the University of Ottawa in Canada.

https://pnhp.org…


Comment:

By Don McCanne, M.D.

This meticulous study is an update of the landmark 2003 study by these same authors on comparing the costs of health care administration between the United States and Canada in 1999. That study showed that, though administrative burden in both countries was about the same before Canada implemented its single payer Medicare program, the administrative spending sharply diverged with the United States paying much more per capita than did Canada with its streamlined single payer system. This update shows that, of the further 3.2 percentage point increase in the administrative portion of U.S. health expenditures since 1999, 2.4 percentage points were due to growth in private insurers’ overhead.

The important conclusion is that, if the United States had the same administrative efficiency as does Canada, we could recover more than $600 billion per year by reducing our administrative bureaucracy. That is enough to extend coverage to the uninsured and underinsured while removing the financial barriers of deductibles and other cost sharing for everyone.

It is important to understand that these excess administrative costs are hidden in the prices we pay. Reform proposals that attempt to chisel away at prices while leaving in place this outrageous administrative waste has not and will not effectively address our excessive health care costs. Opponents of single payer reform tend to ignore much of this recoverable waste when they do their analyses that show that single payer reform is “too expensive.” Merely adding a public option – a Medicare for Some – also largely leaves in place these administrative excesses, only adding one more item onto the heap. This is why it is imperative that we implement the single payer model of an improved Medicare for All to reform our health care financing system.

Year after year discussion of such an efficient and equitable model of reform is shelved, often with comments that we need to build incrementally on what we have and eventually we can reach a program of Medicare for All – but we never get there. The incremental measures fail to correct the financing infrastructure defects that result in the profound administrative waste demonstrated in today’s report.

Many of us have been shouting our message from the rooftops for the past 30 years and more, and still the response is that we should tinker with what we have. In today’s dollars that $600 billion per year over the last 30 years amounts to double digit trillions of dollars we have wasted than can never be recovered. Worse, the care that was forgone by the underinsured and uninsured took a massive toll in financial hardship, human suffering and even death, which can never be reversed.

We’ve got $600 billion in recoverable waste to work with. Are we just going to keep dumping it down the administrative sewer?

Stay informed! Visit www.pnhp.org/qotd to sign up for daily email updates.

About the Commentator, Don McCanne

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Don McCanne is a retired family practitioner who dedicated the 2nd phase of his career to speaking and writing extensively on single payer and related issues. He served as Physicians for a National Health Program president in 2002 and 2003, then as Senior Health Policy Fellow. For two decades, Don wrote "Quote of the Day", a daily health policy update which inspired HJM.

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