Who is most efficient in health care? Surprise, it’s the VA

January 25, 2024

Administration’s Share of Personnel in Veterans Health Administration and Private Sector Care
JAMA Network Open
January 18, 2024
by Steffie Woolhandler, Andrew Toporek, Jian Gao, Eileen Moran, Andrew Wilper, and David U. Himmelstein

“Nearly 4 million people were employed in health care administration in the private sector (excluding long-term care) in 2019, a number that would have decreased by nearly 900 000 individuals had staffing patterns followed those of the VHA. . . .

The VHA’s leaner administrative staffing likely reflects the agency’s simpler financing scheme. … [Private sector] health care institutions bill for individual patients and services and interact with insurers that have varying fee schedules, deductibles, prior-approval requirements, formularies, and referral networks. . . . Even capitation payment schemes generally entail risk-adjustment calculations requiring detailed tracking of each patient’s service use, diagnoses, and costs. In this context, investments in administration may make financial sense, for example, increasing revenue by documenting more diagnoses. Financial success is key to private sector institution growth and even survival, and executive compensation is often linked to financial metrics. This could incentivize efforts to improve efficiency but could also encourage revenue-enhancing administrative activities that add little clinical value (eg, marketing and upcoding).

In contrast, VHA hospitals and clinics are funded mostly through lump-sum budgets. The VHA does not bill Medicare or Medicaid and collects only 2.7% of its revenues from private insurers and 0.3% from patients, minimizing the need to attribute costs and charges to individual patients. In the VHA, all facilities are in network, 1 formulary applies to all patients, and few services require prior authorization. While managers must adhere to budgetary constraints and provide a volume of clinical services commensurate with their budgets, incentives based on financial metrics are minimal for hospital leaders and their institutions. 

The difference in administration’s share of personnel in the VHA vs the US private sector that we found (6.8 percentage points) appears smaller than administrative cost differences between the US and single-payer nations; for example, there was a 13.2 percentage point disparity in hospital administrative costs and a 17.4 percentage point difference in system-wide administrative costs between the US and Canada. Several factors may account for the VHA’s less streamlined administration; unlike in Canada, where all residents are automatically and equally eligible for care, the VHA must determine eligibility based on veteran disability level, veteran income, and other factors. Additionally, the VHA serves as an insurer for some non-VHA care, spending approximately 20% of its budget purchasing private sector care.”

Comment by: David Himmelstein and Steffie Woolhandler

In this study we and our colleagues analyzed data on employment and occupation from a Census Bureau survey of 3.2 million Americans, including 122,315 who worked in private sector and VA hospitals, clinics and medical offices. We grouped all health care occupations into 18 categories, three of them administrative, and applied the same classification criteria to VA and private sector health care workers. We gleaned additional data on health insurance employees from the Bureau of Labor Statistics, and data on employees in the VA Central Office from VA employment records.

Doctors and hospitals waste hundreds of billions each year on useless paperwork. Most of that is inflicted by profit-seeking insurers, who try to avoid paying for care by imposing complex coverage rules and documentation requirements. And our profit-oriented system also rewards providers for devoting more resources to gaming the payment system.

Some VA colleagues complain that the system has rigid rules and too much bureaucracy. But its simplified payment scheme saves so much time and effort that it’s still far more efficient than private sector care. Comparisons with other nations indicate that even greater efficiency is possible under a universal, single payer system.

Previous studies have shown that VA care is as good or better than care in the private sector. We now know that the VA is also more administratively efficient, because patient care – not money – is at the center of its mission.