The Deteriorating Administrative Effeciency of the US Health Care System
Reprinted from the New England Journal of Medicine 324:1253-1258 (May 2), 1991
Abstract Background and Methods. In 1983 the proportion of health care expenditures consumed by administration in the United States was 60 percent higher than in Canada and 97 percent higher than in Britain. To asses the effects of recent health policy initiatives on the administrative efficiency of health care, we examined four components of administrative costs in the United States and Canada for 1987: insurance overhead, hospital administration, nursing home administration, and physicians’ billing and overhead expenses. Most data were provided by the two nations’ federal health and statistics agencies, supplemented by state and provincial data and published sources. Because data on physicians’ billing costs were limited, we estimated a range for these costs by two methods that rely on different sources of data. All figures are reported in 1987 U.S. dollars.
Results. In 1987 health care administration cost between $96.8 billion and $120.4 billion in the United States, amounting in 19.3 to 24.1 percent of total spending on health care, or $400 to $497 per capita. In Canada, between 8.4 and 11.1 percent of health care spending ($117 to $156 per capita) was devoted to administration. Administrative costs in the United States increased 37 percent in real dollars between 1983 and 1987, whereas in Canada they declined. The proportion of health care spending consumed by administration is now at least 117 percent higher in the United States than in Canada and accounts for about half the total difference in health care spending between the two nations. If health care had been as efficient as in Canada, $69.0 billion to $83.2 billion would have been saved in 1987.
Conclusions. The administrative structure of the U.S. health care system is increasingly inefficient as compared with that of Canada’s national health program. Recent health policies with the avowed goal of improving the efficiency of care have imposed substantial new bureaucratic costs and burdens. (N Engl J Med 1991; 324:1253-8.)
MEDICINE is increasingly a spectator sport. Doctors, patients, and nurses perform before an enlarging audience of utilization reviewers, efficiency experts, and cost managers (Fig. 1) .A cynic viewing the uninflected curve of rising health care spending might wonder whether the cost-containment experts cost more than they contain; one is reminded of the Chinese proverb “There is no use going to bed early to save candles if the result is twins.”
In 1983 the proportion of health care spending consumed by administrative costs in the United States was 60 percent higher than in Canada and 97 percent higher than in Britain.2 Recent U .S. health policies have increased bureaucratic burdens and curtailed access to care. Yet they have failed to contain overall costs. This study updates and expands estimates of the costs of health administration in North America through 1987.2 The results demonstrate that the bureaucratic profligacy of the U.S. health care system has increased sharply, while in Canada the proportion of spending on health care consumed by administration has declined.
METHODS
We examined four components of administrative costs in the United States and Canada: insurance overhead, hospital administration, nursing home administration, and physicians’ overhead and billing expenses. All estimates are for fiscal year 1987, the most recent year for which complete data were available. Costs are reported in 1987 U.S. dollars, based on the 1987 exchange rate of $1.33 (Canadian) = $1 (U.S.); calculations of per capita spending were based on populations of 243,934,000 in the United States and 25,652,000 in Canada.
Figures on insurance overhead in the United States were obtained from the Health Care Financing Administration.3 Although nationwide data on the costs of hospital and nursing home administration were not available, the California Health Facilities Commission regularly compiles detailed cost data, based on Medicare cost reports, on that state’s hospitals and nursing homes. Four years ago we confirmed that administrative costs in California’s health facilities were similar to those in at least two other states.2 Since then, trends in hospital and nursing home financing and organization in California have paralleled developments in the nation as a whole.4,5 We computed total hospital administrative costs by summing costs in the following categories: general accounting, patient accounting, credit and collection, admitting, other fiscal services, hospital administration, public relations, personnel department, auxiliary groups, data processing, communications, purchasing, medical library, medical records, medical-staff administration, nursing administration, in-service education, and other administrative services. We excluded costs attributed to research administration, administration of educational programs, printing and duplicating, depreciation, amortization, leases and rentals, insurance, licenses, taxes, central services and supply, other ancillary services, and unassigned costs. We assumed that administration represented the same proportion of total hospital costs in California as nationwide. We derived estimates of nationwide administrative costs for nursing homes from the California data in a similar manner.
Although Canada’s 10 provincial health programs differ in some details, they share common structural features that tend to streamline bureaucracy. Each program provides comprehensive coverage for virtually all provincial residents under a single publicly administered plan. Private insurance may cover additional services, but duplication of the public coverage is proscribed; hospitals are paid a lump-sum (global) amount to cover operating expenses, and physicians bill the program directly for all fees.
The Health Statistics Branch of Health and Welfare Canada and Statistics Canada’s Canadian Center for Health Information provided unpublished data on nationwide spending for insurance, hospitals, and nursing homes. These data were derived from the provincial governments’ reports of their expenditures for insurance administration and from detailed cost reports submitted by hospitals and nursing homes. We computed total hospital administrative costs by summing costs in the following categories: hospital administration (“other”), advertising, association-membership fees, business machines, collection fees, postage, auditing and accounting fees, other professional fees (such as legal fees but excluding medical fees), service-bureau fees, telephone and telegraph, indemnity to board members, travel and convention expenses, medical records and hospital library, and nursing administration. We excluded administrative and support services for educational and research programs, insurance, interest, printing, stationery and office supplies, materiel management, and central supply. Statistics Canada tabulates administrative costs for nursing homes as a single category. These data are less reliable than the hospital figures, since cost reporting by nursing homes is voluntary, and the number of facilities reporting varies substantially from year to year.
We confirmed the accuracy of the Canadian federal data, using more detailed but incomplete data from British Columbia, the Maritimes, Ontario, Quebec, and Saskatchewan6-10 (and personal communications: Cunningham D, British Columbia Ministry of Health; Lim P, Continuing Care Employee Relations Association of British Columbia; and Davis J, Ontario Ministry of Health). Because these data generally matched the national figures, we have not reported them separately.
Only indirect or incomplete information is available on the billing costs of Canadian and U.S. physicians. We therefore used two different methods to estimate these costs, one based on physicians’ reports of their professional expenses and the other on the numbers of employees in physicians’ offices. The expense-based method (Method I) probably overestimates the actual difference in billing costs between the two nations, whereas the personnel-based approach (Method 2) may underestimate the difference.
Our first approach, Method I, rests on the assumption that the entire difference in physicians’ billing and overhead expenses (excluding malpractice premiums11,12) between the United States and Canada is attributable to the excess administrative costs borne by American doctors. The American Medical Association (AMA) estimates U.S. physicians’ incomes and practice expenses on the basis of the results of a survey of a representative sample of nonfederal, practicing physicians (excluding interns and residents).12 Revenue Canada tabulates physicians’ professional expenses on the basis of tax returns (Rehmer L, Health Information Division, Health and Welfare Canada: personal communication). Because these figures are “distorted, primarily because of the way group practice physicians tend to report expenses” (Rehmer L, Health Information Division, Health and Welfare Canada: personal communication), we used Revenue Canada’s corrected tabulation, which included only the 91 percent of physicians who reported professional expenses amounting to between 5 percent and 300 percent of their net in- comes. We added to both the U.S. and Canadian figures an estimate of the value of the physicians’ time devoted to billing13 (and Peachey D: personal communication); we assumed that this time was valued at the same rate as other professional activity.
Using Method 2, we also estimated physicians’ billing costs on the basis of data on the number of clerical and managerial personnel employed in their offices, as well as the costs of outside billing services. For the United States, we obtained information on physicians’ office personnel from data tapes from the Census Bureau’s March 1988 Current Population Survey (CPS).14 Since comparable survey data were unavailable for Canada, we used information from a detailed study of office staffing patterns in the province of Quebec in 1977.15 These earlier figures were slightly higher than informal current estimates provided by the Ontario Medical Association (Peachey D: personal communication). For both the United States and Canada, we assumed that the total annual cost per employee averaged $35,000 (including wages, benefits, taxes, work space, equipment, telephone, supplies, and other costs attributable to the employee) and that the ratio of clerical workers to physicians (excluding residents) was identical in offices and other settings. We added to both the U.S. and Canadian figures estimates of the value of physicians’ personal time spent on billing, calculated as described above. For the United States we added the cost of outside billing services as determined by a recent survey by the AMA.13
Finally, to evaluate trends over time, we recalculated the 1987 figures to maintain strict comparability with the less detailed and less complete data for 1983.2 As in our earlier paper,2 we estimated physicians’ billing and overhead costs by the expense-based method (Method I). However, we excluded the cost of physicians’ time spent on billing because comparable data were unavailable for 1983. In keeping with our earlier method, we included malpractice costs in physicians’ overhead expenses but corrected for increases over time in these costs.11,12,16 For each country we took average total professional expenses in 1987, subtracted the average 1987 malpractice premium, then added the average 1983 malpractice premium (all expressed as a percentage of gross income). The 1983 figures were converted to 1987 dollars with use of the gross-domestic-prodct price index for each country.17
RESULTS
Insurance Overhead
In 1987 private insurance firms in the United States retained $18.7 billion for administration and profits out of total premium revenues of $157.8 billion.3 Their average overhead costs (11.9 percent of premiums) were considerably higher than the 3.2 percent administrative costs of government health programs such as Medicare and Medicaid ($6.6 billion out of total expenditures of $207.3 billion).3 Together, administration of private and public insurance programs consumed 5.1 percent of the $500.3 billion spent for health care, or $106 per capita.
The overhead costs for Canada’s provincial insurance plans amounted to $235 million (0.9 percent) of the $26.57 billion spent by the plans17 (and Health Information Division, Health and Welfare Canada: personal communication). The administrative costs of Canadian private insurers averaged 10.9 percent of premiums ($200 million of the $1.83 billion spent for such coverage) (Health Information Division, Health and Welfare Canada: personal communication). Total administrative costs for Canadian health insurance consumed 1.2 percent of health care spending, or $17 per capita.
Hospital Administration