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Report: Bureaucracy Consumes One-Quarter of U.S. Hospitals’ Budgets — Twice As Much As Other Nations

Authors say single-payer reform could save $150 billion annually on hospital overhead

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

Administrative costs were lowest (about 12%) 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 study is the first analysis of administrative costs across multiple nations with widely varying health systems. It was conducted by an international team from the U.S., the U.K., France, Germany and the Netherlands, and was coordinated by researchers at the City University of New York and the London School of Economics.

The researchers analyzed accounting data that hospitals reported to each nation’s government. The data covered virtually all hospitals in each nation.

Hospital administrative spending totaled $667 per capita in the U.S., compared with $158 in Canada, $164 in Scotland, $211 in Wales, $225 in England, and $325 in the Netherlands. Comparable dollar estimates could not be calculated for French and German hospitals because of accounting differences. However, their hospital administration costs were approximately 20% higher than in Canada and Scotland, but still 40% below the U.S. levels.

The study found no evidence that the high U.S. administrative costs translated into better care or yielded any other benefits.

The study also found that U.S. hospital administrative costs rose from 23.5% of hospital budgets ($97.8 billion, or 0.98% of the gross domestic product [GDP]) in 2000 to 25.3% ($215.4 billion, or 1.43% of the GDP) in 2011. In comparison, the proportion spent on administration by Canadian hospitals fell slightly from 12.9% in 1999 to 12.4% in 2011.

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 achieve profits (or, for nonprofit hospitals, surpluses) in order to fund the modernization and upgrades essential to survival.

Paradoxically, this entrepreneurial imperative has reduced hospitals’ efficiency, driving them to divert personnel and dollars to marketing, to cherry-picking profitable patients and services (and avoiding unprofitable ones), and to expensive computer systems and consultants to game the payment system, according to the report.

The researchers found that, in the U.S., administrative costs were highest (27.2% of spending) at for-profit hospitals.

The relatively high hospital administrative costs in the Netherlands, and rising costs in England — both of which are transitioning to market-oriented hospital systems — were also cited as evidence that increasing reliance on market mechanisms increases administrative costs.

“We’re squandering $150 billion each year on hospital bureaucracy,” said lead author Dr. David Himmelstein. “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.’”

Dr. Steffie Woolhandler, senior author of the study, said: “For three decades our policy makers have pushed market-oriented strategies that have turned health care into a business. As a result, Americans now have the world’s costliest health care, and our life expectancy is years shorter than in most other wealthy nations. It’s time to admit that, when it comes to caring for sick people, markets don’t work.”

Sources: PNHP; September 8, 2014; and Health Affairs; September 2014.

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