Liberal Benefits, Conservative Spending


Savings of the NHP

The administrative efficiencies of a single-payer NHP offer the opportunity for large savings during the implementation of the program.18 Providers would be relieved of much of the expense of screening for eligibility, preparing detailed bills for multiple payers, responding to cumbersome utilization review procedures, and marketing their services. In 1987, California hospitals devoted 20.2% of revenues to administrative functions,19 in contrast to 9.0% spent by Canadian hospitals (L. Raymer, Health and Welfare Canada, written communication, April 1990). (These figures exclude malpractice premium costs and administrative personnel in clinical departments such as nursing.) The 11.2% difference is attributable to Canada's simplified hospital payment method, a method we propose for the United States.

Table 1 - Personal Health Care Costs for 1991, Excluding Nursing Home Care, With and Without a National Health Program (NHP), in Billions of Dollars*

  NHP Current Policies
"Baseline" conditions 567 567
New costs for previously uninsured 12 -
Discount for 11.2% hospital administrative savings (31) -
Discount for 6.25% physician administrative savings (9) -
Subtotal: Personal Health Care 539 567
Insurance administration and profits 8** 35***
Total Personal Health Care Plus Insurance Overhead 547 602

*This assumes Canadian-Ievel administrative efficiency and changes in utilization only among the previously uninsured.
**1.4% of personal health care expenditures.
***This is the amount estimated by the Health Care Financing Administration.9

Determining the potential administrative savings in physician expenditures is more difficult. Although practice expenses are 49% of physician gross income in the United States and only 36% in Canada,20, 21 it is uncertain how much of this difference is due to billing costs. Malpractice costs for US physicians, for example, are higher than those in Canada. We therefore extrapolated billing cost data from a recent American Medical Association survey to project minimum expected administrative savings in physician expenditures.22 The average physician spent approximately $14500 in 1988 billing Medicare and Blue Shield alone, representing 5.5% of gross physician income. In addition, physicians spent approximately 2.75% of their own professional time on billing-related activities for these claims. (The survey did not measure the costs of billing other third parties or patients and therefore yields a low estimate of physician billing costs.) We liberally estimate that physician billing expenses in Canada are 1% of physician costs and that Canadian physicians spend at the most 1% of their time on billing (D. Peachey, MD, Ontario Medical Association, written communication, June 1990). In sum, US billing costs for physician time and practice expenses are at least 8.25% of total physician expenditures in contrast to at most 2% of Canadian physician costs. An NHP functioning at Canadian-level administrative efficiency could save at least 6.25% of physician costs. Most of these savings can be realized rapidly. In the private practice of one of the authors (T.B.), for example, the change to a single payer would allow an immediate reduction in office payroll of 18%.

Administrative savings to hospitals and physicians function as price discounts when calculating costs. For example, if physicians could lower their overhead by 6.25% of gross income by trimming billing expenses, fees could be lowered by 6.25% and physicians would still earn the same net income for the same volume of services. We therefore estimated the minimum potential administrative savings in hospital and physician expenditures to be $40 billion by discounting projected hospital and physician costs by 11.2% and 6.25%, respectively (Table 1).

Additional savings accrue from the reduced administrative "load factor" of a public plan. In 1987, the cost of public and private insurance overhead and profits expressed as a percent of personal health care expenditures was 5.9% in the United States and only 1.4% in Canada.9, 23 If our NHP operated with the efficiency of Canada's, the administration of health insurance would cost $8 billion, less than one quarter the $35 billion projected by the Health Care Financing Administration in 1991.

As indicated in Table 1, the net cost of personal health care and insurance overhead for universal coverage under the NHP, including expanded services for the previously uninsured, would be at most $547 billion if the system operated with the administrative efficiency of the Canadian system. This is $55 billion less than the $602 billion that will be spent in 1991 under current policies that exclude approximately 35 million Americans.

Budgeting Under the NHP

We do not propose reducing the health care budget by $55 billion under the NHP. As noted above, we are uncertain how utilization patterns might respond to universal, first-dollar insurance coverage. Nor can we be completely confident that hospitals and physicians will immediately shed their excess administrative poundage and assume the leaner proportions possible under a simplified payment system. We therefore propose the following budgetary strategy for the NHP: We would set the overall health care budget for the NHP's initial year at the amount projected under current policies ($602 billion if implemented in 1991). To keep expenditures within this target, we would rely on the ability of a single payer to allocate and enforce prospective budgets for physician and hospital services. These budgets would challenge providers to extract administrative savings and redirect resources into patient care for the underserved. The budget would allow a range of utilization responses among patients and physicians.

For example, the NHP could set total hospital operating budgets at the Health Care Financing Administration projected "baseline" 1991 level of $273 billion (Table 2), though some individual hospitals' budgets might be adjusted to reflect past underfunding or large operating surpluses. On average, a hospital able to achieve full administrative savings would have 11.2% of its budget to devote to more or better clinical services. Billing personnel could be transferred to clinical departments to perform clerical duties, freeing up nurses for bedside care. Hospitals unable to realize immediate administrative savings would not be penalized in the short run. However, in the longer run, the single payer within each state would evaluate hospitals' clinical performance and efficiency and modify budgets, taking account of these hospital quality measures as well as community needs. The Canadian experience demonstrates that such a budgeting process need not be cumbersome or expensive, consuming less than $2 per capita in British Columbia (D. Cunningham, British Columbia Ministry of Health, written communication, July 1990).

Prospective budgeting of physician services under fee-for-service methods would require expenditure targets or caps. On average, fees would be set at 6.25% below current levels, reflecting expected administrative savings to physicians. The expenditure target, however, could be set at $154 billion, 6% above the "baseline" projected level for 1991 (Table 2). This would allow physician payments to accommodate a net utilization increase of up to 12.25%, sufficient to satisfy increased demand by the uninsured and underinsured, while allowing a net increase in physician income of 6%. A utilization increase above 12.25% would trigger a compensatory decrease in fees to keep expenditures within the budget target. Such a plan allows for control of costs with a minimum of the administrative waste or encumbrances of our current utilization review mechanisms.24

Summing the aggregate hospital operating budget of $273 billion, the physician budget of $154 billion, and the other categories of personal health care spending and administration would still leave total expenditures $18 billion below our proposed $602 billion budget (Table 2). The $18 billion balance could be used for start-up costs for the NHP, job training and placement programs for displaced administrative personnel, improved long-term care, and revitalized public health programs.

Table 2 - National Health Program (NHP) Budget, by Category of Expenditure, in Billions of Dollars

Category NHP Current Policies*


273 273


154 145


149 149

Insurance administration and profits

8 35


584 602