qotd: U.S. far out in front again - in hospital administrative waste

Health Affairs
September 2014
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

Abstract

A few studies have noted the outsize administrative costs of US
hospitals, but no research has compared these costs across multiple
nations with various types of health care systems. We assembled a team
of international health policy experts to conduct just such a
challenging analysis of hospital administrative costs across eight
nations: Canada, England, Scotland, Wales, France, Germany, the
Netherlands, and the United States. We found that administrative costs
accounted for 25.3 percent of total US hospital expenditures—a
percentage that is increasing. Next highest were the Netherlands (19.8
percent) and England (15.5 percent), both of which are transitioning to
market-oriented payment systems. Scotland and Canada, whose single-payer
systems pay hospitals global operating budgets, with separate grants for
capital, had the lowest administrative costs. Costs were intermediate in
France and Germany (which bill per patient but pay separately for
capital projects) and in Wales. Reducing US per capita spending for
hospital administration to Scottish or Canadian levels would have saved
more than $150 billion in 2011. This study suggests that the reduction
of US administrative costs would best be accomplished through the use of
a simpler and less market-oriented payment scheme.

From the Discussion

Hospitals' administrative overhead varied more than twofold across the
nations we studied as a share of total hospital costs and more than
fourfold in absolute terms. These costs were far higher in the United
States than elsewhere.

In all nations, hospital administrators must procure and coordinate the
facilities, supplies, and personnel needed for good care. In nations
where administrators have few responsibilities beyond these logistical
matters, administration seems to require about 12 percent of hospital
expenditures.

Modes of hospital payment can increase the complexity and costs
associated with two additional management tasks: garnering operating
funds and securing capital funds for modernization and expansion.

Garnering operating funds requires little administrative work in nations
such as Canada, Scotland, and Wales, where hospitals receive global,
lump-sum budgets. In contrast, per patient billing (for example, using
DRGs) requires additional clerical and management personnel and
special-purpose IT systems. This is true even in countries—such as
France and Germany—where payment rates, documentation, and billing
procedures are uniform.

Billing is even more complex in nations where each hospital must bargain
over payment rates with multiple payers, whose documentation
requirements and billing procedures often vary, as is the case in the
United States and the Netherlands.

Differences in how hospitals obtain capital funds also appear to affect
administrative costs. The combination of direct government grants for
capital with separate global operating budgets—as in Scotland and
Canada—was associated with the lowest administrative costs. (Wales has
recently transitioned to such a system, reversing previous market
reforms.) Hospitals in France and Germany, where direct government
grants account for a substantial share of hospital capital funding, have
relatively low administrative costs despite per patient, DRG-based billing.

Administration is costliest in nations where surpluses from day-to-day
operations are the main source of hospital capital funds: the United
States and, increasingly, the Netherlands and England. In such health
care systems, the need to accumulate capital funds for modernization and
expansion stimulates administrators to undertake the additional work
that is needed to identify and pursue profit opportunities.

http://content.healthaffairs.org/content/33/9/1586.abstract

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PNHP Press Release
September 8, 2014
Bureaucracy consumes one-quarter of US hospitals' budgets, twice as much
as in other nations: Health Affairs study

A study of hospital administrative costs in eight nations published
today in the September issue of Health Affairs finds that hospital
bureaucracy consumed 25.3 percent of hospital budgets in the U.S. in
2011, far more than in other nations.

Administrative costs were lowest (about 12 percent) in Scotland and
Canada, whose single-payer systems fund hospitals through global,
lump-sum budgets, much as a fire department is funded in the U.S.

The article attributes the high administrative costs in the U.S. to two
factors: (1) the complexity of billing a multiplicity of insurers with
varying payment rates, rules and documentation requirements; and (2) the
entrepreneurial imperative for hospitals to amass profits (or, for
nonprofit hospitals, surpluses) in order to fund the modernization and
upgrades essential to survival.

"We're squandering $150 billion each year on hospital bureaucracy," said
lead author Dr. David Himmelstein, a professor at the CUNY/Hunter
College School of Public Health and lecturer at Harvard Medical School.
"And $300 billion more is wasted each year on insurance companies'
overhead and the paperwork they inflict on doctors."

He added: "Only a single-payer reform can squeeze out the bureaucratic
waste and use the money to give patients the care they need. Instead,
we're layering on more bureaucracy in insurance exchanges and
'accountable care organizations.'"

http://www.pnhp.org/news/2014/september/bureaucracy-consumes-one-quarter-of-us-hospitals'-budgets-twice-as-much-as-in-ot

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Comment by Don McCanne

This international comparison of hospital administrative costs further
documents the profound administrative waste that characterizes U.S.
health care financing. This study is particularly important because it
clarifies the two major factors resulting in this waste: 1) the
administrative complexity of interacting with a multitude of insurers,
and 2) "the entrepreneurial imperative for hospitals to amass profits or
surpluses" in a system with market-driven pricing.

Although all other nations waste less than we do on administration, they
do so in varying degrees. Thus we can learn lessons from them,
especially the two lessons above. Extrapolating from this Health Affairs
article, the solution for hospital financing is obvious: switch to
single payer and use global budgets for hospitals and separate budgeting
for capital improvements. But don't stop there. Apply single payer
principles to the financing of our entire health care delivery system.
That would free up perhaps $400 billion or more that could be used to
ensure appropriate health care for everyone.