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Stanford business professor discovers administrative sludge

February 24, 2021

Topics: Quote of the Day

A new study finds that dealing with health insurance administrators costs the U.S. economy billions in wasted work time and lost productivity.

By Edmund L. Andrews
Stanford Graduate School of Business, February 23, 2021

It’s no secret that health care in the United States is tangled in wasteful red tape. A study in 2019 estimated that administrative complexity was the single biggest source of waste in health care — bigger even than fraud or over-pricing — and imposes an annual cost of $265 billion.

The true extent of that waste, according to a new study led by Jeffrey Pfeffer at the Stanford Graduate School of Business, is even more shocking. Pfeffer and his colleagues found that administrative “sludge” in health care insurance costs employers and the economy billions of dollars in squandered work time, employee stress, absenteeism and reduced productivity.

Specifically, the researchers estimate, the economy loses $21.6 billion a year simply from the time employees spend on the phone with health insurance representatives. On top of that, the study estimates that companies lose $26 billion a year from extra absence on the part of employees who have to deal with health benefits administrators, and $95 billion from the reduced productivity that arises because people who spend time on the phone with health insurers are less satisfied with their jobs. All of those dead-weight losses to the economy could be diminished if employers held benefits administrators accountable for reducing administrative hassles in the system.

The Drain on Productivity

If that just sounds like grousing, it’s not. Pfeffer teamed up with researchers at Gallup, the polling company, to assess how much time employees spend on the phone with benefit administrators and how those encounters affect their work.

“Until now, most of the research on health care sludge has focused on the paperwork costs incurred by health care providers such as doctors and hospitals,” Pfeffer says. “Our new twist, which I can’t believe no one looked at before, is how much employee time is wasted and the measurable effect of that time on employee stress, burnout, increased absence, and diminished job satisfaction.”

The team began by polling people on how much time they had spent on the phone in the prior week with health insurance administrators. All told, the annual cost of lost work amounted to $21 billion — frittered away while talking on the phone with health insurance representatives.

The Impact on Worker Morale

The next step was to look at whether those encounters made people more dissatisfied and less engaged in their work.

Sure enough, the people who had talked with a benefits administrator were significantly less satisfied with their jobs and more likely to be absent from work.

Who’s Really to Blame?

Pfeffer says the fault lies less with insurance companies than with the companies that hire them and then fail to hold them accountable.

“CEOs are the ones who should care about this, but they’re only interested in how to reduce direct medical costs,” he says, “not realizing that the indirect costs of turnover, absenteeism, and diminished productivity are many times the direct costs of ill-health.

The upshot, Pfeffer continues, is that companies end up paying huge sums of money for employee health care benefits that don’t provide increased employee morale because of the burdens imposed by insurers.

“Companies say they offer health insurance to attract and retain talent, but they’re offering a benefit which is administered so that it often doesn’t feel like a benefit,” says Pfeffer. “If employers would select better-performing health insurers and get rid of those that are administratively inefficient, they would get more value for the money they are spending.”



By Don McCanne, M.D.

So finally someone has discovered that private insurance companies not only waste a tremendous amount of health care funds on administrative excesses, but they also place a tremendous administrative burden on others – the health care delivery system, the business community and the employees insured by these firms. Professor Pfeffer says that he can’t believe that no one looked at the employee burden before, but, of course, they have.

More astonishing is the fact that Pfeffer says that the fault lies less with the insurance companies and more with the companies that purchase the private insurance plans and then fail to hold the insurers accountable. Accountable? Accountable for what?

The insurance companies are private businesses rather than public service organizations. They strive for business success by erecting barriers to spending money on health care. They spend a large amount of funds on accomplishing this – not only on their own administrative services that are designed to cut back on health care spending, but also by creating administrative burdens for the health care delivery system, and businesses and their employees.

That’s just good business. If they want efficient public service organizations whose job it is to assist patients in getting the care they need, they should advocate for a single payer Medicare for All program and then dismiss the private insurers and their inefficiency at obtaining beneficial health services.

But then isn’t it characteristic of market-oriented business schools like Stanford to place the blame on the consumers? We should be assisting the consumers of health care, not blaming them.

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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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