We're No. 1, Not In A Good Way: Highest Hospital Administrative Costs

By Alvin Tran
Guest Contributor

When it comes to hospital administrative costs, a new Health Affairs study finds, our country is No. 1 and we're way ahead of the curve — unfortunately.

In the study, researchers analyzed hospital accounting data to compare administrative costs across eight countries: Canada, England, France, Germany, the Netherlands, Scotland, the United States and Wales. They found that administrative costs accounted for more than 25 percent of total U.S. hospital expenditures — far ahead of the pack.

“We were surprised by just how big the differences have grown. The U.S. is in another league than every other country,” said Dr. David Himmelstein, the study’s lead author and a professor at the City University of New York’s School of Public Health.

Himmelstein and his colleagues also found that countries operating under a single-payer health system, such as Canada and Scotland, had the lowest administrative spending, and calculated that the U.S. could save $150 billion a year if it had a system like theirs.

"You’re pulverizing all this money on something that does not make people better."

Economist Uwe Reinhardt

Based on Medicare Costs Report data from 2011, hospital administrative spending in the U.S. amounted to $667 per capita — more than double what the Netherlands and England spend.

In the Netherlands, administrative costs consumed just 19.8 percent of hospital budgets — compared to 25.3 percent in the U.S. —  and in England, just 15.5 percent.

In a phone interview, Himmelstein said American hospital administrative costs have doubled over the last decade. “We anticipate that they’ll continue to go up because we’re continuing to pursue health policies that stimulate administration,” he added.

Uwe Reinhardt, a health economist and professor at Princeton University, sees high hospital administrative costs as a moral question. “You’re pulverizing all this money on something that does not make people better — doesn’t improve their health,” he said.

Reinhardt, who said he had once believed the new federal health law would lower administrative costs, now thinks Obamacare has become too challenging and complex, especially with the addition of navigators and health exchange administrators.

“I think the administration of the American health system has outpaced our ability to cope with it. Even the best IT people cannot cope with it anymore,” he said, adding that “Obamacare, if anything, adds to the administrative overhead.”

So, does having higher administrative costs result in better patient care in the U.S.?

According to the study’s authors, the answer is no. They cited previous research that found no significant relationship between higher administrative costs and better care in the U.S.

As for potential solutions, Himmelstein, who is a cofounder of Physicians for a National Health Program, says he is in favor of switching to a single-payer health-care system. He believes the new federal health law is steering the country in the wrong direction: “It moves us to more private insurance when expanding Medicare would have been much more efficient,” he says, adding that the law created another layer of insurance bureaucracy.

“The U.S., of course, has a very complex system where there are multiple payers paying different prices for different health care services,” says Dylan Roby, an assistant professor at the UCLA Fielding School of Public Health. “The findings probably are indicative of the fact that we have a very complex and fragmented system."

Roby, however, says that he thinks switching to a single-payer system isn’t necessarily the only solution or even the best option.

“I think there might be some sort of solution between what we have now and single payer that is still somewhat market-driven and that may come out of the ACA, if there’s political support for it,” he said.

Alvin Tran is a doctor of science student at the Harvard School of Public Health.