Question

How is the cost of administrative medicine different in the U.S. than in Canada or any other country you chose? How much of the U.S. health care dollar is devoted to administrative medicine? What alternatives can you suggest to reign in the cost of administrative medicine

Answer 1

The researchers determined that the higher overall health care spending in the U.S. was due mainly to higher prices including higher drug prices, higher salaries for doctors and nurses, higher hospital administration costs, and higher prices for many medical services. Before Canada's single-payer reform, its payment system, health costs, and several 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.

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 a 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 were due to growth in private insurers' overhead, mostly because of high overhead in their Medicare and Medicaid managed-care plans.

U.S. health care costs currently exceed 17% of GDP and continue to rise. Other countries spend less of their GDP on health care but have the same increasing trend. Explanations are not hard to find. The aging of populations and the development of new treatments are behind some of the increase. Perverse incentives also contribute: Third-party payors (insurance companies and governments) reimburse for procedures performed rather than outcomes achieved, and patients bear little responsibility for the cost of the health care services they demand.

But few acknowledge a more fundamental source of escalating costs: the system by which those costs are measured. To put it bluntly, there is an almost complete lack of understanding of how much it costs to deliver patient care, much less how those costs compare with the outcomes achieved. Instead of focusing on the costs of treating individual patients with specific medical conditions over their full cycle of care, providers aggregate and analyze costs at the specialty or service department level.

Making matters worse, participants in the health care system do not even agree on what they mean by costs. When politicians and policymakers talk about cost reduction and “bending the cost curve,” they are typically referring to how much the government or insurers pay to providers, not to the costs incurred by providers to deliver health care services. Cutting payor reimbursement does reduce the bill paid by insurers and lowers providers’ revenues, but it does nothing to reduce the actual costs of delivering care. Providers share in this confusion. They often allocate their costs to procedures, departments, and services based not on the actual resources used to deliver care but on how much they are reimbursed. But reimbursement itself is based on arbitrary and inaccurate assumptions about the intensity of care.

Administrative expenses are those expenses that are not directly associated with providing goods and services to people in need of care. There is no account kept on the amount of administrative expense of the United States healthcare system, but there are estimates of the overall magnitude. Cutler HELP Testimony 2 July 31, 2018, These estimates suggest that administrative expenses range from 15 to 30 percent of medical spending.1,2 To put this amount in perspective, even the smaller estimates suggest that administrative costs account for twice what the United States spends on cardiovascular disease care every year and three times what the United States spends on cancer care. 3 Beyond the amount of money spent on administrative costs are the hassles associated with administration. The average U.S. physician spends 43 minutes per day interacting with health plans about payment, dealing with formularies, and obtaining authorizations for procedures. 4 The time and frustration associated with administrative expenses leads to physician burnout and pushes some physicians to leave the practice.5 The level of administrative expense in the United States is far higher than in other countries, even those committed to pluralistic systems of insurance and private provision of medical care. For example, administrative costs account for 39 percent of the difference in spending between the United States and Canada, greater than the additional spending accounted for by higher payments to pharmaceutical companies and more frequent use of services such as imaging and additional procedures. 6 The bulk of administrative expenses are for ‘billing and insurance-related’ (BIR) services. When people think of the administrative expenses, they often jump to activities in insurance companies. This is a part of the total, but only a part. Two-thirds of administrative expenses occur in offices of physicians, hospitals, and other care providers.