U.S. hospitals burdened by high administrative costs

By Dr. Steffie Woolhandler
Modern Healthcare, September 13, 2014

When I was a kid in Shreveport, La., my father was chief of radiology at the local hospital. He also ran the hospital and supervised the cafeteria. Today he'd be the COO.

Now hospital administration takes a village. And that's not a good thing.

Hospital administration cost the U.S. $215 billion in 2011. Other nations administer modern, first-class hospitals for far less. 

A study by our international team just published in Health Affairs found that administration consumed 25.3% of U.S. hospital budgets—1.43% of GDP (up from 0.98% in 2000), or $667 per capita. Canada spent $158, Scotland $164, England $225 and The Netherlands $325. If U.S. hospitals ran as efficiently as Canada's or Scotland's, the average family of four would save $2,000 annually on health costs. 

Not surprisingly, administrative costs were highest where hospitals must cope with a multitude of insurers, with varying copayments, rates and regulations. Canada and Scotland—where costs are lowest—have single-payer systems that pay hospitals a lump-sum budget, the way we fund fire stations. And like fire departments, their hospitals don't collect from each victim of misfortune.

But payment complexity isn't the only cost driver. Canadian and Scottish hospital administrators don't have to play financial games that generate profits. Government grants, rather than capital markets or accumulated surpluses, fund new buildings and equipment. Even in Germany and France—which have multi-payer systems—administrative costs remain modest because government grants fund most hospital capital.

In contrast, as England has forced hospitals to seek profits in an increasingly market-oriented system, administrative costs have soared. And administrative costs in the Netherlands, which is implementing radical market-based reforms, are second only to ours.

Our findings challenge conventional wisdom that market discipline leads to hospital efficiency. Within the U.S., for-profit hospitals spend less than not-for-profits on clinical personnel like nurses, yet have higher total and administrative costs. Internationally, hospital efficiency is best in nations shunning market forces.

Accountable care organizations that force hospitals to behave like insurance companies won't streamline administration. But a single-payer reform could realize vast savings on administration and redirect them to improved coverage and care. 

Dr. Steffie Woolhandler is a co-founder of Physicians for a National Health Program and a professor at the City University of New York's School of Public Health at Hunter College.