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Excessive overhead may be the largest problem with American healthcare [ClearOnMoney]
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Excessive overhead may be the largest problem with American healthcare

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Commentary

Excessive overhead may be the largest problem with American healthcare

29 Jun 2011 by Jim Fickett.

Most of us have been frustrated at times by the amount of paperwork involved in medical care. A recent academic study compares the US and Canada, and shows that, within the large amount by which US spending on healthcare exceeds that in Canada, the largest single contributor is higher administrative overhead in the US.

Few things matter more for the future economic health of the US than healthcare costs.

Today James Hamilton at Econbrowser points to an interesting study, entitled The (Paper)Work of Medicine: Understanding International Medical Costs. The authors, David M. Cutler and Dan P. Ly, attempt to break down differences in costs between the US and other nations, in order to find where the US is least cost-efficient.

First, the problem – much more spending but no better outcomes:

In 1960, U.S. spending on acute medical care as a share of GDP—hospitals, physicians, and pharmaceuticals, but not long-term care—was only 10 percent above that of other high-income countries. By 1980, the gap had doubled to 21 percent. The gap has since more than doubled again. By 2007, U.S. spending on acute medical care was 25 percent higher than the next-highest country (Switzerland) and 55 percent above the average of other high-income countries. When coupled with the well-known finding that life expectancy and quality of life are relatively similar across high-income countries, the enormously higher healthcare spending in the United States raises the possibility of substantial waste. …

If 30 percent of medical spending is not necessary, then the potential waste is more than $700 billion annually.

Drawing on several previous studies comparing the US and Canadian healthcare systems, they summarize the evidence that administration costs are much higher in the US:

  • One study of hospital and physician spending difference in 2002 showed 39% of the cost difference attributable to administration; this is an underestimate because nurse time on administration was not counted; administration was the largest contributor to the US/Canadian cost difference, with the second largest contributor being provider incomes, at 31%
  • Physicians spend 13% of their time on administration in the US; 8% in Canada
  • Adjusting for population, there are 44% more administrative staff in the US than in Canada
  • All the above covers only the direct providers of healthcare, but the insurance industry is also inefficient: administration is 12% of premiums in the US and less than 6% in Canada

If one would like to make the system more efficient, one must begin by asking what all the administrative time is being spent on. Here are some examples:

There are several functions of the administrative staff … One part is credentialing—receiving permission to practice medicine in a particular hospital or for a particular health plan. The average physician submits 18 credentialing applications annually—each insurer, hospital, ambulatory surgery facility, and the like, requires a different one—consuming 70 minutes of staff time and 11 minutes of physician time per application. Verifying eligibility for services is also costly. Insurance information must be verifified for 20 to 30 patients daily, including three or four patients for whom verifification must be sought orally. Because people change insurance plans frequently and the cost-sharing they are charged varies with plan and with past utilization (for example, how much of the deductible have they spent?), the determination of what to charge a patient is especially difficult. Because of lags in claim reporting, providers often have to collect additional money from patients well after care has been delivered.

Finally, signifificant time is spent on billing and payment collection … On average, about three claims are denied per physician per week and need to be rebilled. Often, claims are denied because additional documentation is required, which often cannot be supplied electronically due to outdated computer systems, or because coverage status is uncertain. Three-quarters of denied bills are ultimately paid, but the administrative cost of securing the payment is very high. Provider groups in the United States employ 770 full-time equivalent workers per $1 billion collected, compared to an average in other U.S. industries of about 100. By all indications, the administrative burden is rising over time as insurance policies have become more complex, while the technology of administration has not kept pace.

These authors suggest that the Federal government, as the largest single payer, could take the lead in requiring a more efficient infrastructure:

For example, the government could require physicians’ offices, hospitals, and insurers that participate in Medicare, Medicaid, or the soon-to-be-created insurance exchanges to use common credentialing forms, to expand the range of electronic interchange they accept, and to standardize billing, enrollment, and renewal information.

I haven't seen a great deal of evidence suggesting that the federal government is good at increasing efficiency, but perhaps it is worth a try. Certainly it would seem not too challenging to improve on the current mess.