Health insurers and health care providers in the United States spent approximately $812 billion on administration in 2017, amounting to $2497 per capita (34.2% of national health expenditures) versus $551 per capita (17.0%) in Canada, according to a study published in 2020 by David Himmelstein, MD, and Stephanie Woolhandler, MD, distinguished professors at the School of Urban Public Health at Hunter College and the founders of Physicians for a National Health Program, which advocates for single-payer health insurance in the United States. (Ann Intern Med. 2020;172:134.)
That includes $844 versus $146 for insurers’ overhead; $933 versus $196 for hospital administration; $255 versus $123 for nursing home, home care, and hospice administration; and $465 versus $87 for physicians’ insurance-related costs.
They noted that health spending as a share of gross domestic product (GDP) was virtually identical in the two nations in 1970: 6.2 percent in the United States and 6.4 percent in Canada. U.S. costs by 2017 had reached 17.9 percent of GDP while Canada’s were 11.3 percent.
A lot of those costs can be attributed to administrative positions. The number of new hospital administrators has exploded in recent years. Five decades ago, the U.S. and Canadian health care systems reported similar numbers of administrative personnel: 43.8 persons per 10,000 population in the United States versus 40.8 persons per 10,000 population in Canada. That number had tripled in the United States by 2017, to 129.7 per 10,000 population, while in Canada it had merely doubled, to 88.9 per 10,000 population.
“The 40.8 per 10,000 population difference in administrative personnel accounted for 56% of the difference in the delivery system workforce, suggesting that administrative work accounts for a substantial share of differences in provider costs (and prices),” Drs. Himmelstein and Woolhandler wrote.
Same Care, Different Cost
“Administrative costs in Canada are half or less what they are in U.S. hospitals, which tells us that half or more of hospital administrative costs in the United States are pure waste,” Dr. Woolhandler told Emergency Medicine News. “Canada shows us that you can run a great hospital with a much smaller amount of administration. You can only conclude that it’s our payment system because if you have a heart attack in the United States or in Canada, you receive the same kind of treatment.
“Our physicians are sometimes licensed in both countries or licensed in one and move to another, and they practice a very similar style of medicine. There are some small differences, but mostly they read the same journals and practice the same way. With the administrative costs being more than twice in the U.S. what they are in Canada, all you can conclude is that the reason is primarily the difference in the way we pay for care.”
Maybe it’s just Canada? No, the United States compares unfavorably in health care administrative costs with other nations as well, according to another study published by Drs. Himmelstein and Woolhandler that compared the United States with seven other countries. They found at that time that U.S. administrative costs were by far the highest at 25.3 percent of total hospital expenditures; the next highest were in the Netherlands (19.8%) and England (15.5%), both of which are transitioning to market-oriented payment systems. (Health Aff [Millwood]. 2014;33:1586.)
They also teased out differences between certain types of U.S. hospitals, finding that for-profit hospitals had higher administrative costs (27.2%) than nonprofit (25.0%) or public (22.8%) institutions; teaching hospitals had lower-than-average administrative costs (23.6%).
“The performance of U.S. for-profit hospitals—whose explicit goal is profitability and whose administrative costs are high—helps clarify whether, on balance, entrepreneurial incentives improve efficiency. Compared to other U.S. hospitals, for-profit institutions spend less on clinical personnel such as nurses, but provide costlier care,” they wrote.
Automation Hasn’t Delivered
The promise of automation in health care administration hasn’t delivered significant cost savings, Dr. Woolhandler noted. “There were several editorials in the Journal of the American Medical Association recently that were full of ideas about ways to standardize billing and automate more functions in order to reduce administrative costs, but you have to be very skeptical about those kinds of claims given history,” she said. “Software companies have raised billions of dollars for decades on the claim that they would lower administrative costs in health care, but those claims haven’t panned out. The issue isn’t connectivity; it’s the increasing complexity of the information that is required by the way health care is financed in the United States.”
In fact, some aspects of automation have themselves contributed to increasing costs. “We’re now seeing primary care providers offered as much as $30 per visit to use an AI computer program that can help them upcode, so that’s $30 per visit to use new software that helps you game the system and adds nothing of value to the care the patient receives,” Dr. Himmelstein said.
He argued that the move to value-based care has actually increased administrative costs at U.S. hospitals. “The Medicare Payment Advisory Commission has estimated that about $200 per enrollee is going to excess administration for accountable care organizations. Basically, we’re paying more and more people to try and prevent us from delivering care,” he told EMN.
“The common theme is that running health care as a business leads to increased costs,” said Dr. Himmelstein. “Health care providers are trying to extract as much money as they can, using a whole panoply of new options—devices, artificial intelligence, revenue cycle management, upcoding, and every trick in the book to get every dime they can. Insurers are fighting on the other side of the battle trying to keep every dime they can—again, not for patients but for themselves.”
What does that mean for the ED? “I think the pay-for-performance models have not only increased administrative costs, but we’ve seen that perversely, in some cases, they actually decrease the quality of care because of the gaming of results,” Dr. Himmelstein said. He pointed to a 2018 study as an example that found that the decrease in 30-day readmissions under the Hospital Readmissions Reduction Program (HRRP) was accompanied by an increase in 30-day risk-adjusted mortality for heart failure patients. (JAMA Cardiol. 2018;3:44; https://bit.ly/33xHxmm.) “The incentives to stop readmissions probably increased heart failure deaths,” he said.
That may have been in part because some hospitals may be treating patients in the emergency department under observation status to avoid recording readmissions and getting penalized. “For patients discharged after heart attacks, the urgent return rate has actually risen slightly,” Drs. Himmelstein and Woolhandler noted. “The reported 1.8 percent fall in readmission is more than offset by a 0.7 percent increase in observation stays and a 1.2 percent increase in ED visits.” (Health Affairs blog. Aug. 27, 2015; https://bit.ly/3k5FGx1.)
The current health system incentive structure and insufficient health care capacity is a significant cause of ED crowding, said Gabor Kelen, MD, a professor and the chair of emergency medicine at Johns Hopkins University, in a new paper published in the New England Journal of Medicine, which argued that the ED is the canary in the coal mine of health care system functioning. (NEJM Catalyst. Sept. 28, 2021; https://bit.ly/3mG8xK4.)
“Health care financing forces many hospitals to structure operations that ensure the inevitability of both hospital and ED crowding,” Dr. Kelen wrote. “ED visits in the last 2 decades have strongly outpaced population growth. However, during this time frame, admissions rose 21% while acute care hospitals and staffed beds decreased by 7% and 11%, respectively. Total EDs have decreased, and inpatient bed capacity has decreased by 27%, to 2.41 from 3.32 per 1,000 population.” All this occurred as administrative positions and costs dramatically increased.
If hospitals and health systems are to relieve the dangerous problem of ED crowding, they are not going to do so by adding more and more administrative positions. Administrative positions and budgets have grown over the past several decades, but health care capacity has not. Dr. Kelen noted inpatient capacity has declined while the shortage of nurses—particularly highly skilled ICU and ED nurses—reached crisis levels in many areas. Functional outpatient capacity is also lacking, and inpatient psychiatric beds have decreased even as ED behavioral health visits have increased. He argued that health systems and hospitals must realign reimbursements and incentives that tend to promote ED boarding and force high hospital occupancy.
“Basically, the financial bottom line is what’s driving health care on every level, and that has to change,” Dr. Himmelstein said. “In the ED, what difference does it make to the care that you’re providing to the patient if you document every comorbidity and every detail that might be used to jack up the bill? Yet that’s at the center of what doctors are not just being told to do but required to do. On the other hand, if health insurance weren’t run as a business, they would reach reasonable accommodation with EDs and other health care providers on the funds needed to provide good care. But the business of health care is more important than health care at this point to our health care system.”
He argued that the conversation should be focused on having a rational system for taking care of people in the ED and throughout the health care system. “I’ve had two friends recently who needed urgent attention from a specialist, and it took them weeks to get care, this in the most over-doctored part of our nation, in Boston,” Dr. Himmelstein said. “We have tremendous health care costs, and in many areas, a surplus of specialists, but patients still can’t get in. Now, I’m an internist, so I’m used to losing and remaining hopeful. We have to recognize that this journey is part of making the world a better place. We’ve had a lot of downs recently, but I remain confident that eventually we will do better.”
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Ms. Shawis a freelance writer with more than 20 years of experience writing about health and medicine. She is also the author of Having Children After Cancer, the only guide for cancer survivors hoping to build their families after a cancer diagnosis. You can find her work athttp://www.writergina.com/Home.html. Follow her on Twitter@writergina.
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