Below is an excerpt from a new Demography Unplugged research note written by Hedgeye Demography analyst Neil Howe. Click here to learn more and subscribe.
| According to a new study, more than a third of U.S. health care expenditures go to administrative costs, adding up to $812 billion or nearly $2,500 per person. That’s more than four times the per-capita administrative costs in Canada; if costs in the U.S. were comparable, it would save an estimated $628 billion. (Annals of Internal Medicine) |
NH: I'm sure you've already noticed this. You go into a typical hospital or a doctor's clinic, and you see that roughly two out of three workers there are engaged in administrative activities--filling out, copying, and filing forms (either paper or electronic); figuring out how to "code" a procedure; making sure every pill and cup is entered into accounting; arguing on the phone with other providers or insurers; haggling over accounts due or payable.
Many of these procedures may have been farmed out to other entities (billing, for example), so you don't even see all of the iceberg beneath the waterline. And then you've got major insurance firms, whose whole business is to shuffle reimbursement records. Needless to say, none of these work hours have anything to do with actually treating patients.
Here is the latest study quantifying this phenomenon. Publishing in the prestigious journal Annals of Internal Medicine, Dr. David Himmelstein et al. (a team of three doctors and professors) find that 34.2% of U.S. national health expenditures in 2017 go to administrative costs.
Their parallel study of Canada in 2017 finds that the comparable Canadian figure in 2017 is 16.7%. That's a difference of 17.5%, which--multiplied times total U.S. health spending (18% of GDP)--is a staggering number (3.1% of GDP). It's roughly what the United States spends on national defense. See first chart below.
The authors have a long expertise in this area. In the New England Journal of Medicine, back in 2003, they published a similar comparison and found that, in 1999, administrative costs were 31.0% of total healthcare spending in the United States and 16.7% in Canada. So in 1999 the gap was similar, though since then the administrative cost margin has risen in both countries.
Interestingly, though exact data are not available, the authors estimate that back in 1969--when the two countries' healthcare systems were more similar in structure--their administrative cost margins were probably also similar. It's in the United States where the administrative margin has soared. In Canada, it has remained low.
These authors are the only researchers who have attempted a national system-wide look into administrative costs. But lots of narrower studies have come to similar conclusions. In 2014, a Health Affairs research team looked into hospital administrative costs in eight countries. Result: Costs in the United States were just over 25%, versus 11-12% in most of the others. (And remember, that's a lower percentage of a much lower share of GDP.) Many researchers have looked specifically into billing- and insurance-related (BIR) costs. BIR comprises a large share of total administrative costs (see second chart below).
One team found that BIR alone costs a typical medical group 14% of total revenue and required 0.67 FTE staff for every one FTE physician. Another found that BIR is four times more costly as a share of revenue for a U.S. physician than for a Canadian physician. Yet another that BIR adds 15% to total healthcare costs relative to a single-payer administrative system (like Medicare).
High administrative costs are not the only reason that America spends so much on healthcare... and with such indifferent results. Compared to other high-income countries, we're about the same in doctors per capita and in how much we utilize doctors. Where we differ--to our detriment, IMO--is the exaggerated skew in America toward the number of specialists versus the number of general internists and in how much specialists get to determine their own standard for what constitutes "medically necessary" care.
The predictable result: Scandalous overdiagnosis and overtreatment. (See, e.g., "Trendspotting 12/16/19, Keyword: Statin.") Other large cost drivers include rampant price discrimination by big pharma and big insurers and growing pricing power in hands of providers--who are everywhere hoovering up small practices to achieve effective regional monopolies.
Yet all of these drivers--and high administrative costs in particular--are directly connected to central illogic of how the U.S. healthcare system works... its original sin, so to speak. We promise providers open-ended fee-for-service reimbursement. We pay those providers almost entirely from third parties (in America, the government pays for about 63% of healthcare; private insurers for 27%; and patients themselves for only 10%).
And then we smother everyone with the most detailed and obtrusive regulatory system on earth to try to prevent providers (and patients) from gaming the system to their advantage. But of course every party tries its best to game the system anyway, including the patients themselves, who routinely waste their own time (this is not counted in any of the administrative cost studies) battling providers and insurers over surprise billings and overcharges.
The result? America ends up with all of the vices of "socialized" medicine--third-party reimbursement for most care and crushing regulatory oversight. But with none of the advantages--since there is no top-down cost control and no uniformity in pricing or reimbursement. The typical doctor's office has to deal with hundreds of different insurers, each with different coverage definitions, legal provisos, and market power. It's crazy. It's a wild-west anarchy of negative-sum bargaining. See the last chart below: According to the authors, personnel in a typical doctor's office spend 80 hours every week, per physician, interacting with payers.
The sheer size and affluence of the United States ought to give it huge economies of scale in handling administrative costs relative to, say, Scotland (yes, Scotland runs its own NHS). But apparently, in this case, America suffers from diseconomies of scale.
This is an excerpt from a new Demography Unplugged research note written by Neil Howe. Click here to learn more and subscribe.
