Administrative Waste in the U.S Health Care System in 2003

The Cost to the Nation, the States and the District of Columbia, With State-Specific Estimates of Potential Savings

August 27, 2003

• Statements by Sidney Wolfe, M.D. and David Himmelsten, M.D.
• State Specific Data Chart
• New England Journal of Medicine Report

by David U. Himmelstein, M.D., Steffie Woolhandler, M.D., M.P.H. and Sidney M.  Wolfe, M.D. 

From the Division of Social and Community Medicine, Department of Medicine, The Cambridge Hospital and Harvard Medical School, Cambridge, MA and The Public Citizen Health Research Group, Washington, DC

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Introduction

This report compares the cost of health care bureaucracy in the U.S. to that in Canada in 2003.  We also calculate the cost of excess bureaucracy in each of the 50 states and the District of Columbia.  These state-by-state estimates represent the amount spent on administration and the potential savings through the implementation of a single payer, universal health care program similar to Canada’s.  This information should be useful to consumers, national and state legislators, health policy experts, economists, and others concerned with skyrocketing medical costs and declining access to medical care.

Administrative Costs 1969-1999

The administrative structure of the U.S. health care system consumes a large share of health spending.  In 1999, administrative spending consumed at least 31.0 percent of health spending, according to a report in today’s New England Journal of Medicine.  In contrast, administrative costs in Canada, which has had a national health program since 1971, are about 16.7% of health spending.

In 1969 administrative personnel accounted for 18.2% of the health care work force in the U.S. By 1999 administration’s share had risen to 27.3% of total employees – a 50% increase.  This figure excludes the 926,000 employees in life/health insurance firms, and 724,000 employed in insurance brokerages.  Overall, at least 31.0% of health spending was devoted to administration in the U.S. in 1999.

In contrast, administration’s share of health employment in Canada (where a national health program has been in place since 1971) grew only 17% between 1971 and 1986, and has remained virtually unchanged since 1986.  In 1996 administrative workers accounted for 19.1% of health employees vs. 27.3% in the late 1990s in the U.S. (both of these figure exclude health insurance company workers, who are far more numerous in the U.S. Administration consumed 16.7% of Canadian health spending in 1999.

Nationwide Administrative Costs in 2003

In 2003 bureaucracy will consume at least $399.4 billion ($1,389 per capita) out of total health expenditures of $1,660.5 billion ($5,775 per capita).   This estimate is based on the conservative assumption that administrative overhead represents the same share of health spending on hospital care, nursing home care, physicians’ services, home care, employers’ costs to administer health benefits and insurance overhead now as in 1999 (ie. that administrative costs have not continued to rise).  It excludes the administrative costs of  health sectors for which administrative cost data were unavailable (e.g. drug stores, ambulance companies, and medical equipment suppliers).

Streamlining administration to Canadian levels would save $286.0 billion in administrative costs in 2003, $982 per capita (see Methodology section for details of calculations).

The Single Payer Advantage

The huge gap in administrative costs between the U.S. and Canada arises from their differing mechanisms of paying for health care.  While Canada has a single insurance plan, or “single-payer”, in each province that pays the bills for everyone, the U.S. has a complex and fragmented payment structure built around thousands of different insurance plans, each with its own regulations on coverage, eligibility, and documentation.

The participation of private insurers raises administrative costs.   The small private insurance sectors in Australia, Canada, Germany, and the Netherlands all have high overheads: 15.8%, 13.2%, 20.4% and 10.4% respectively, far higher than the 1% to 4% overhead of public insurance programs.  Functions essential to private insurance but absent in public programs – e.g. underwriting, marketing, and corporate services – account for about two-thirds of private insurers’ overhead.  In addition, private insurers have incentives to erect administrative hurdles – by complicating and stalling payment they can hold premiums longer, boosting their interest income.  Such hurdles also discourage some patients and providers from pursuing claims.

A fragmented payment structure is intrinsically more expensive than a single payer system.   For insurers, it means the duplication of claims processing facilities and reduced insured-group size, which increases overhead.

Fragmentation also raises costs for providers who deal with multitudes of different insurance plans – at least 755 in Seattle alone.  This means providers must determine each patient’s insurance coverage and eligibility for a particular service, and keep track of varying co-payments, referral networks, approval requirements and formularies.  In contrast, Canadian physicians send virtually all bills to a single insurer using a simple billing form or computer program, and may refer patients to any colleague or hospital.

The multiplicity of insurers also precludes paying hospitals on a lump sum, or global-budgeted basis as in Canada.  Global budgets eliminate most billing, and simplify internal accounting since costs and charges need not be attributed to individual patients and insurers.

Administrative Waste: The Cost to the States

If the states were as efficient at administering health care as the Canadian provinces, they would save   more than enough to fund universal coverage, without any increase in total health spending.  Table 1 shows estimated spending for health administration in each state in 2003, as well as a minimum estimate of potential administrative savings under a single payer system.  The table also displays the number of uninsured in 2001 (the latest data available) and the administrative savings available per uninsured resident.

California has the largest state health budget; personal health spending is estimated at $163 billion in 2003.  That state would save at least $33.699 billion on health bureaucracy by instituting a single payer reform, $5,016 for each of the 6.7 million Californians who are uninsured.  At the other end of the scale in terms of population, Wyoming, with an estimated 78,000 residents without health insurance, would save at least $376 million in 2003, $4,814 per uninsured resident of that state.  The available administrative savings per uninsured resident vary widely – from $3,925 per uninsured resident in Texas to $17,771 in the District of Columbia.  The variation reflects differences in uninsurance rates (with Texas having a very high percentage uninsured), and (to a lesser extent) differences in per capita health administration costs.  Despite the range, in every state the potential savings on administration would be sufficient to cover the uninsured.

Our estimates are based solely on administrative savings, only one part of the potential savings under a Canadian-style national health insurance system.   The Canadian single-payer health system is also better at controlling systemwide inflation.  Health expenditures in the U.S. are currently rising three times as rapidly as the U.S. Gross National Product; in Canada they are rising at a rate only slightly greater than growth in the Gross National Product.

Since we to not include the savings that national health insurance would generate by controlling non-administrative health inflation, our estimates represent a lower bound of what could be achieved with a single-payer national health program.

Conclusion

In 2003 the U.S. will spend $399.4 billion ($1,389 per capita) on health bureaucracy, out of total expenditures of $1660.5 billion ($5,775 per capita).  The states could save $286.0 billion dollars in 2003 if they streamlined administration to Canadian levels by adopting a single-payer national health insurance system.  The potential savings are equivalent to at least $6,940 for each of the 41.6 million Americans uninsured in 2001.

These potential administrative savings are far higher than recent estimates of the cost of covering the uninsured.   For instance researchers from The Urban Institute estimate that covering all of America’s uninsured with an “average” private insurance policy would cost $69 billion annually (Hadley and Holahan, Health Affairs, May/June, 2003).  Thus, the $286.0 billion in administrative savings could cover all of the uninsured, with $217 billion left over to upgrade coverage for Americans who are currently under-insured – e.g. to offer first dollar drug coverage to seniors.

Methodology

We added six components of administrative expense (insurance overhead, employers’ costs to administration health benefits, hospital administration, nursing home administration, practitioners overhead, and home care agency administration) to calculate total administrative spending by state in 2003.

Each state’s 2003 spending by category of expenditure (e.g. hospitals, physicians etc.) was estimated by adjusting 1998 state-by-state expenditure data from the Office of the Actuary, National Center for Health Statistics (the most recent state-by-state health spending data available).    This adjustment was carried out under the assumption that each state’s health care cost increases since 1998 mirror those of the nation as a whole.  Nationwide changes in health expenditures since 1998 were estimated using figures from the Office of the Actuary, National Center for Health Statistics.

Administrative spending on each component was then calculated by multiplying 2003 projected state spending in each of six areas (insurance overhead, employers’ costs to administer health benefits, hospitals, nursing homes, practitioners’ offices, and home care agencies) by the percentage of spending in each area devoted to administration in 1999.   We assumed that administration would consume the same percentage of each type of spending in each state in 2003 as it did in the nation in 1999: 100 percent of insurance overhead and employers’ costs to administer health benefits; 24.3 percent of expenditures for hospital care; 19.2 percent of expenditures for nursing home care; 35.0 percent of homecare expenditures; and 26.9 percent of spending on physicians’ services.  (For further details on the 1999 estimates of administrative spending in each category see: Woolhandler S, Campbell T, Himmelstein DU. New England Journal of Medicine.).  This is a conservative assumption since administration’s share has probably continued to grow since 1999.

Our figures for administrative costs exclude spending in health sectors for which no administrative cost data were available (e.g. retail pharmacies, ambulance companies and medical equipment suppliers).   Hence, our dollar estimates understate total administrative costs in each state and in the nation.

For our estimate of total potential administrative savings we summed potential savings on each administrative component.   Each state’s savings on each component was calculated as the product of 2003 projected state spending in each of six areas (insurance overhead, employers’ costs to administer health benefits, hospital administration, nursing home administration, practitioners overhead, and home care agency administration) and the ratio between per capita spending for that administrative component in Canada and the U.S. in 1999.  For instance, in 1999 Canada spent $47 per capita on health insurance overhead while the U.S. spent $259. We assumed that this ratio (47:259) remained the same as both nations’ health spending increased between 1999 and 2003, i.e. that Canadian administrative costs rose at the same rate as U.S. administrative costs.

Acknowledgement

This report is based, in part, on a study funded by the Robert Wood Johnson Foundation.   Thanks to Dr. Ida Hellander and Ms. Laura Keating who provided invaluable assistance.

Notes:

a U.S. figure is for total health expenditures; state figures are for personal health expenditures, which exclude a few expense categories such as research and construction.  2003 state estimates were calculated from 1998 state-specific health spending adjusted for the national rate of health expenditure growth between 1998 and 2003, and for changes in state population.

b Administrative spending was calculated by multiplying 2003 state (or, for the U.S., national) spending in each of six categories (insurance overhead, employers’ costs to administer health benefits, hospitals, nursing homes, practitioners’ offices, and home care agencies) by the percentage of spending in each area devoted to administration in 1999.

c Potential administrative savings were calculated for each of six categories (insurance overhead, employers’ costs to administer health benefits, hospitals, nursing homes, practitioners’ offices, and home care agencies) by subtracting estimated per capita costs for that category in Canada from the per capita cost for the category in the state (or the U.S. as a whole), and multiplying by the state’s population.  The potential administrative savings in the six categories were then summed.

d Estimates of the number of uninsured residents in each state are from the March 2002 Current Population Survey.  Although CPS uses a nationally representative survey, it may not provide precise estimates for smaller states.

e Calculated by dividing potential administrative savings in 2003 by the number of uninsured state residents as of 2001.

f State figures may not sum to national totals due to rounding error and the exclusion of non-resident military personnel.

Statements on Administrative Waste in the U.S. Health Care System in 2003

“Administrative Waste in the U.S. Health Care System in 2003: The Cost to the Nation, the States and the District of Columbia, With State-Specific Estimates of Potential Savings” — a Report by David U. Himmelstein, M.D., Steffie Woolhandler, M.D., M.P.H. and Sidney M. Wolfe, M.D.

Statement by David U. Himmelstein, M.D.
Associate Professor of Medicine, Harvard Medical School

My name is David Himmelstein. I am an author of both the Special Article in the New England Journal of Medicine and of the Harvard/Public Citizen Report released today. I am a primary care doctor practicing in Cambridge, Massachusetts and an Associate Professor of Medicine at Harvard Medical School. I am also a founder of Physicians for a National Health Program.

Our studies document the enormous administrative waste in U.S. health care. In 1999, our nation spent at least $294 billion on health care bureaucracy. This year, health care bureaucracy will cost at least $399 billion, nearly one out of three health care dollars. On a per capita basis, Canada spends only one-third as much as we do on health care paperwork, and the difference between the U.S. and Canada is widening.

Our research analyzed detailed cost reports submitted by thousands of hospitals, home care agencies and nursing homes in the U.S. and Canada. We analyzed data on practitioners’ overhead from surveys of physicians in the two nations. For figures on insurance overhead we relied on the insurance industry’s own reports of their costs. Finally, we used detailed labor force data from the U.S. and Canadian Census Bureaus to compare the numbers of administrative workers in health institutions and offices over the past 3 decades

Our estimates of administrative costs are conservative. We excluded the administrative costs of health businesses for which reliable administrative cost data were unavailable – for instance, drug firms, pharmacies, and ambulance companies.

Our data are the most detailed and comprehensive analysis of administrative costs ever undertaken. They underwent painstaking review during the editorial process at the New England Journal of Medicine. The Harvard/Public Citizen report updates the analysis presented in the New England Journal of Medicine to 2003, based on government estimates of health spending this year, and provides state-by-state estimates.

The huge gap in administrative costs between the U.S. and Canada arises from the differences in the ways we pay for health care. While Canada has a single insurance plan, or “single-payer”, in each province that pays the bills for everyone, the U.S. has a complex and fragmented payment structure built around thousands of different insurance plans. My small group practice must deal with dozens of different plans, each with its own regulations on coverage, eligibility, and documentation. This wastes my time – and the time of my colleagues – looking up which drugs and specialists each plan will pay for. And it forces us to employ extra clerical staff to deal with the insurance paperwork – to play man-on-man defense against the insurance bureaucrats. In contrast, Canadian colleagues bill by checking one of ten boxes on a simple form, and send all their bills to one agency. They can refer any patient to any specialist they want.

By implementing a single payer national health insurance program we could save $286 billion this year on paperwork, $6,940 for each of the 41.2 million Americans who were uninsured as of 2001. That’s more than enough to cover the uninsured, with money left over to upgrade coverage for the millions of others who are under-insured.

Our nation already spends enough to provide every American with superb medical care – 42% more per capita than in Switzerland, which has the world’s second most expensive health care system, and 83% more than in Canada. On a per capita basis, our government spends more on health care than any nation with national health insurance – if we include the costs of care for our President and other government workers, and the huge tax subsidies to private health insurance (subsidies that go mainly to the wealthy). But we don’t get what we pay for because we waste a fortune on useless medical paperwork – at least $286 billion this year. Even greater savings would be available if we curtailed the profiteering of the drug industry and for-profit hospitals.

In essence, National Health Insurance would pay for itself through administrative savings. No other reform can slash administrative costs. Senator Kerry, and some others who have proposed patchwork reforms, assert that they could cut administration through computerization. Such assertions are not credible. Most health insurance claims are already computerized. Extensive research demonstrates that as long as private insurance firms are in, administrative costs are high.

While Republicans are trying gut Medicare with proposals for privatization, and offering a pitifully inadequate drug benefit, our health care system is rapidly failing. Unfortunately, the Democratic presidential contenders – except for Dennis Kucinich – are pushing reforms that are tired retreads of policies that have already failed. They have no hope of covering the uninsured, but are sure to protect insurance companies.

Two weeks ago 7,784 physicians called for National Health Insurance in the Journal of the American Medical Association. How many Americans must die from lack of coverage? How many seniors must choose between medicines and food? How bad does it have to get before politicians are willing to stand up to the drug and insurance industries and pass the National Health Insurance our nation needs?

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Statement of Sidney M. Wolfe, M.D., Director, Public Citizen’s Health Research Group

My name is Sidney Wolfe. I am a co-author of the second of the two papers being released today, the Harvard/Public Citizen report, and I am the director of Public Citizen’s Health Research Group.

This study documents the state-by-state potential administrative savings achievable with national health insurance. I will go through examples from several states, but first will illustrate how these calculations were made. As discussed in more detail by Dr. David Himmelstein, we used projections by the government to adjust the 1999 health expenditures to 2003. We assumed that administration would consume the same percentage of each type of spending in each state in 2003 as it did in the nation in 1999: 100 percent of insurance overhead and employers’ costs to administer health benefits; 24.3 percent of expenditures for hospital care; 19.2 percent of expenditures for nursing home care; 35 percent of homecare expenditures; and 26.9 percent of spending on physicians’ services. These data comprise the column “Administrative Expenses in 2003” in the table in the Harvard/Public Citizen paper.

The “Potential Administrative Savings” for each state in the next column were derived by subtracting from the administrative expenses in 2003 the administrative costs that would be encountered were there the simplified amount of administration that exists in the Canadian system. (For further details on the 1999 national estimates of administrative spending in each category, see: Woolhandler S, Campbell T, Himmelstein DU, being published in tomorrow’s issue of The New England Journal of Medicine).

As mentioned by Dr. Himmelstein, for the entire country, the potential administrative savings in 2003 will be $286 billion – $6,940 for each of the 41.2 million Americans who were uninsured as of 2001. This is more than enough to provide them with insurance coverage and fund a Medicare drug benefit.

New York state, for example, with 2.9 million uninsured residents, could save $23.4 billion a year ($8,037 per uninsured resident of the state) if it streamlined administration to Canadian levels. Massachusetts, with 560,000 uninsured state residents, could save about $8.6 billion in 2003 ($16,453 per uninsured resident of that state). New Mexico, with 373,000 uninsured, could save $1.5 billion on health bureaucracy ($4,022 per uninsured resident). California, with 6.7 million uninsured, could save $33.7 billion a year ($5,650 per uninsured resident).

As can be seen in the table in our paper, administrative savings available per uninsured resident in other states include: Pennsylvania, $12,559 per uninsured resident; Illinois, $7,362; Michigan, $9,375; Ohio, $9,330; Georgia, $5,672; Florida, $5,977; Virginia, $7,920; Colorado, $5,534 and Washington, $6,735.

These data should awaken governors and legislators to a fiscally sound and humane way to deal with ballooning budget deficits. Instead of cutting Medicaid and other vital services, officials could expand services by freeing up the $286 billion a year wasted on administrative expenses. In the current economic climate, with unemployment rising, we can ill afford massive waste in health care. Radical surgery to cure our failing health insurance system is sorely needed.