The high administrative costs in U.S. health care

Health Affairs, Letters, November 2014

PNHP note: The following letters appeared in the November issue of the journal Health Affairs in connection with a feature article in the September issue titled “A Comparison Of Hospital Administrative Costs In Eight Nations: US Costs Exceed All Others By Far,” by David U. Himmelstein, Miraya Jun, Reinhard Busse, Karine Chevreul, Alexander Geissler, Patrick Jeurissen, Sarah Thomson, Marie-Amelie Vinet, and Steffie Woolhandler.

High Administrative Costs At US Hospitals

By Samuel Metz

David Himmelstein and coauthors (Sep 2014) show that administrative costs in US hospitals exceed those in hospitals in seven other developed nations and indicate that this extra spending buys more administrators, not more benefits. This raises the question of why American hospitals need more administrators than foreign hospitals do.

The authors say that the extra administrators in the United States determine patients’ insurance benefits and their ability to pay costs that are not covered by insurance. These functions are unnecessary elsewhere.

Unlike nations with national insurance plans, the United States spends billions of dollars to fragment our population into thousands of insurance pools and then to fragment those pools into tens of thousands of subsets with differing benefits. This format generates substantial administrative challenges. For example, physician offices in Chicago might deal with 17,000 different payment schedules.[1]

It costs more money to exclude patients and restrict benefits that it would to provide comprehensive care to all patients without fragmentation. Two authors of the September article previously estimated that replacing our multipayer system with a national health program would recover $320 billion in administrative costs.[2] This exceeds the estimated $220 billion in additional costs needed to provide comprehensive care to everyone.[3]

The message is clear: Barriers to health care cost more than universal access to health care.

1.  Kagel R. Blue crossroads: insurance in the 21st century. [serial on the Internet]. 2004 Sep 20 [cited 2014 Sep 15]. Available from:
2. Woolhandler S, Campbell T, Himmelstein DU. Costs of health care administration in the United States and Canada. N Engl J Med. 2003;349(8):768–75.
3. Sheils J, Haught RA. The Health Care for All Californians Act: cost and economic impacts analysis [Internet]. Falls Church (VA): Lewin Group; 2005 Jan 19 [cited 2014 Sep 15]. Available from:

Portland, Ore.


High Administrative Costs: The Authors Reply

By David U. Himmelstein and Steffie Woolhandler

Samuel Metz aptly characterizes the wasteful complexity of US health care financing, compared to a single-payer system — for example, an improved version of Medicare for all Americans. His estimate of administrative savings achievable through such reform is too low, however, because it’s based on an analysis of 1999 data. Our study (Sep 2014) found that since 2000, US hospitals’ administrative costs have risen from 0.98 percent of gross domestic product to 1.43 percent. And per capita annual insurance overhead costs have tripled since 2006, reaching $731.[1] Switching to a single-payer system today could save more than $400 billion annually on bureaucracy.

These savings would make it possible to provide universal coverage without copayments or deductibles and with no increase in health expenditures. In contrast, the Affordable Care Act has added another layer of bureaucracy — the health insurance exchanges — that cost $6 billion to get up and running, or $750 per new enrollee.

Economics texts preach that markets breed efficiency, but the most market-oriented health systems are the least efficient. The transformation of American health care into a business has sharply increased transaction costs and rewarded entrepreneurs for financial games that add no value.

One hospital that we know paid upcoding consultants $600,000 to advise interns on the best language for chart notes. Typing “moderately malnourished” instead of “malnourished” apparently ups diagnosis-related group payments (and also improves risk-adjusted mortality scores). That useless expenditure garnered an extra $3 million in revenues for the hospital.

A simple national health insurance program is the best way to meet both the moral imperative to care for the sick and the economic imperative to do so efficiently.

1. Centers for Medicare and Medicaid Services. National health expenditure data, historical data [Internet]. Baltimore (MD): CMS. Table 4: national health expenditures by source of funds and type of expenditures: calendar years 2006–2012; [cited 2014 Sep 17]. Available from:

City University of New York, New York, N.Y.