30% of Medical Bills Go To Administrative Costs

Cropped SingleCare logo By | July 18, 2016

Of first world nations, the United States spent a leading $3.0 trillion in 2014 on healthcare, even though other nations normally see better outcomes in their citizens’ health. Yet, healthcare costs continue to rise with no relief in sight.

In fact, according to a Commonwealth Fund report, in 2013, the average US citizen spent about $9,086 on healthcare. That’s about 50 percent more than a citizen of Australia, Canada, Denmark, France, Germany, Japan, the Netherlands, New Zealand, Norway, Sweden, Switzerland or the United Kingdom. While there are many reasons for this unfortunate reality, one factor is administrative costs in US healthcare.

So Why Is This Administrative Cost So Large?

When you visit the doctor, your medical bill isn’t just for your doctor’s time. You’re also charged for the personnel needed to process billing and insurance-related activities like chasing after unpaid medical bills, processing insurance claims and making sure the insurance on file is up-to-date. This is why administrative costs account for about 30 percent of of every dollar paid on a medical bill in the individual marketplace. That 30% adds up quickly. The National Institutes of Health found that administrative expenses totaled $156 billion in 2007 and estimate that this amount will reach $315 billion by 2018—that’s some serious money.

Hospitals in the United States have administrative costs that are among the highest in the world. Health Affairs published a study analyzing data from Canada, England, Scotland, Wales, France, Germany, the Netherlands and the United States and found that for the United States, 25.3 percent of total hospital expenditures were for administrative costs. This figure is more than any other country assessed and double the percentage for both Canada and Scotland, which have the lowest administrative costs.

American hospitals and physicians have to navigate a complex billing and insurance space that requires heavy administrative work. They must figure out how to bill a patient on case-by-case basis, with no set formula like as in a single-payer healthcare system. Each insurance bills for the same procedure differently, and administrators have to collect money from patients on a variety of mediums. As David Cutler, a health economist in the United States explained,

Duke University Hospital has 900 hospital beds and 1,300 billing clerks. The typical Canadian hospital has a handful of billing clerks. Single-payer systems have fewer administrative needs.

Americans also receive more medical care than people in other countries, as Cutler notes, which requires additional administrative work.

medicine, age, health care and people concept - doctor and nurse with clipboards visiting senior patient woman at hospital ward
[Image: dolgachov/Thinkstock]
So How Do We Fix It?

There’s no easy solution to cutting administrative costs in the United States’ healthcare system, but here are some ideas experts have brought to the table:

  • Per-Patient Billing Doesn’t Work: When there are multiple payers like in the United States, “billing is even more complex, since each hospital must negotiate payment rates separately with each payer and conform with a variety of requirements and billing procedures,” as a report from the Commonwealth Fund details. So, the United States should try shifting to direct government capital grants and separate operating budgets like Canada and Scotland, instead of payments from individual patients and insurance companies.
  • Standardization: The United States federal government needs to streamline how healthcare administrators electronically process common transactions. Even though HIPAA created one, cohesive format for electronic healthcare claims, payers can still request additional data from providers, which undoes the standardization HIPAA is trying to enforce. The Department of Health and Human Services (DHHS) have also been vague in their regulations, which David Cutler claims has resulted in “payers and providers never [agreeing] on a truly common standard.”
  • Fix the High Churn Rate: Medicare patients switch from one policy to another quite frequently with new jobs or just by moving to a different state, which constantly requires administrators to stay up-to-date on patients’ plans and their respective insurance company’s system for processing claims. The Department of Health and Human Services and state governments should “coordinate coverage policies and administrative systems across Medicaid, the new state health insurance exchanges, and the private market, and should promote continuous-enrollment policies” as the Center for American Progress reports, to lower administrative costs.

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