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Wednesday, July 08, 2009

"Administrative Costs in Health Care"

A follow-up to this post on administrative costs in health care:

Administrative Costs in Health Care: A Primer, by Ezra Klein: ...Paul Krugman, Greg Mankiw, Tyler Cowen and a handful of others began arguing about [administrative costs]... I'm not convinced any of them have it right.

Administrative costs are ... confusing... What counts as an "administrative cost" for a health insurer? We all agree that paying bills counts. But does ... disease management? Advertising? A nurse who dispenses health advice over the telephone? Hard to say. But all of them get grouped under administrative costs at various times. Indeed,... there's not perfect unanimity on how to measure any of this.

But most seem to think that Medicare's administrative costs are significantly undersold... An apples-to-apples comparison would not leave you with the 2 percent of total Medicare spending often bandied about in debate. That doesn't count, for instance, Medicare's premium collection, which is done through the ... IRS. Nor does it count most of Medicare's billing, which is outsourced -- and this might surprise people -- to private insurers like Blue Cross Blue Shield and listed under vendor services rather than program administration. A more straightforward estimate ... would be in the range of 5 to 6 percent.

Nor is it easy to measure administrative costs among private insurers. For one thing, which private insurers? ... Among employer-based plans, the largest firms had the lowest costs. Plans covering companies with at least 1,000 employees had a mere 7 percent in administrative costs. Those covering companies with fewer than 25 employees spent 26 percent of premiums on administration. And the individual market was a mess: 30 percent.

This tells us ... size matters. The most important predictor of administrative costs is not whether the plan is public or private, but whether it is large. ...

But administrative costs among ... insurers ... are only part of the story. And they may not even be the most important part. The hospitals and physicians ... are spending tremendous sums of money too. Hospitals ... employ people to argue over claims and navigate the rules of the dozen or so different insurance plans they contract with. And here the experts were unanimous: The problem is that the system is fractured. There's no standardization..., every insurer is complicated in its own way. And that complexity costs a lot of money.

As of now, no one I spoke with knew of good data separating the costs of dealing with Medicare and with private insurers. But there are studies comparing Canada and the United States that show a single payer vastly reduces administrative spending. ...

But ... slashing administrative costs ... will never be a panacea... Rick Kronick, a political scientist at the University of California at San Diego,... summed the situation up quite well. "The main question," he said, "is why are health care costs going up at 2.4 percent a year faster than GDP? And most of the answers to that question have nothing to do with administrative costs. The answers are that we do more stuff and have more technology. Even if we could wring administrative savings out of the system, which ... would be a good thing, we'd still be facing the question of how to slow the rate of cost growth."

    Posted by on Wednesday, July 8, 2009 at 01:45 AM in Economics, Health Care | Permalink  TrackBack (0)  Comments (33)


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