Study: $286 Billion on Health Care Paperwork, Medicare Drug Bill Will Increase Bureaucratic Costs, Reward Insurers and the AARP

by Steffie Woolhandler, MD and David Himmelstein, MD

Health Letter, February 2004

Public Citizen Research Group

A study by researchers at Harvard Medical School and Public Citizen published in the January issue of the International Journal of Health Services finds that health care bureaucracy last year cost the United States $399.4 billion. The study estimates that national health insurance (NHI) could save at least $286 billion annually on paperwork, enough to cover all of the uninsured and to provide full prescription drug coverage for everyone in the United States.

The study was based on the most comprehensive analysis to date of health administration spending, including data on the administrative costs of health insurers, employers' health benefit programs, hospitals, nursing homes, home care agencies, physicians and other practitioners in the United States and Canada. The authors found that bureaucracy accounts for at least 31 percent of total U.S. health spending compared to 16.7 percent in Canada. They also found that administration has grown far faster in the United States than in Canada.

The potential administrative savings of $286 billion annually under national health insurance could:

1. Offset the cost of covering the uninsured (estimated at $80 billion) 2. Cover all out-of-pocket prescription drugs costs for seniors as well as those under 65 (estimated at $53 billion in 2003).

3. Fund retraining and job placement programs for insurance workers and others who would lose their jobs under NHI (estimated at $20 billion). 4. Make substantial improvements in coverage and quality of care for U.S. consumers who already have insurance.

Looked at another way, the potential administrative savings are equivalent to $6,940 for each of the 41.2 million people uninsured in 2001 (the most recent figure available for the uninsured at the time study was carried out), more than enough to pay for health coverage. The study found wide variation among states in the potential administrative savings available per uninsured resident. Texas, with 4.96 million uninsured (nearly one in four Texans), could save a total of $19.5 billion a year on administration under NHI, which would make available $3,925 per uninsured resident per year. Massachusetts, which has very high per capita health administrative spending and a relatively low rate of uninsurance, could save a total of $8.6 billion a year, which would make available $16,453 per uninsured person. California, with 6.7 million uninsured, could save a total of $33.7 billion a year, which would make available $5,016 per uninsured person.

Last week, the government reported that health spending accounts for a record 15 percent of the nation's economy and that health care spending shot up by 9.3 percent in 2002. Insurance overhead (one component of administrative costs) rose by a whopping 16.8 percent in 2002, after a 12.5 percent increase in 2001, making it the fastest growing component of health expenditure over the past three years. Hence the figures in the Harvard/Public Citizen Report (which was completed before release of these latest government figures), may understate true administrative costs.

The authors of the International Journal of Health Services study attributed the high U.S. administrative costs to three factors. First, private insurers have high overhead in both nations but play a much bigger role in the United States. Second, The United States' fragmented payment system drives up administrative costs for doctors and hospitals, who must deal with hundreds of different insurance plans (for example, at least 755 in Seattle alone), each with different coverage and payment rules, referral networks, etc. In Canada, doctors bill a single insurance plan, using a single simple form, and hospitals receive a lump sum budget, much as a fire department is paid in the United States. Finally, the increasing business orientation of U.S. hospitals and insurers has expanded bureaucracy.

The Medicare drug bill that Congress passed last month will only increase bureaucratic spending because it will funnel large amounts of public money through private insurance plans with high overhead.

"The recent Medicare bill means a huge increase in administrative waste and a big payoff for the AARP," said study author Dr. David Himmelstein, an associate professor of medicine at Harvard and former staff physician at Public Citizen's Health Research Group. "At present, Medicare's overhead is less than 4 percent. But all of the new Medicare money- $400 billion -will flow through private insurance plans whose overhead averages 12 percent. So insurance companies will gain $36 billion from this bill. And the AARP stands to make billions from the 4 percent cut it receives from the policies sold to its members."

Dr. Steffie Woolhandler, a study author, associate professor of medicine at Harvard and a founder of Physicians for a National Health Program said, "Hundreds of billions are squandered each year on health care bureaucracy, more than enough to cover all of the uninsured, pay for full drug coverage for seniors and upgrade coverage for the tens of millions who are underinsured. U.S. consumers spend almost twice as much per capita on health care as Canadians who have universal coverage and live two years longer. The administrative savings of national health insurance make universal coverage affordable."

Dr. Sidney Wolfe, director of Public Citizen's Health Research Group added: "This study, documents the state-by-state potential administrative savings achievable with national health insurance. These enormous sums could be used to provide health care for the more than 43 million uninsured people in the United States and drug coverage for seniors. 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."

Dr. Himmelstein described the real-world meaning of the difference in administration between the United States and Canada by comparing hospitals in the two nations. Several years ago, he visited Toronto General Hospital, a 900-bed tertiary care center that offered an extensive array of high-tech procedures, and searched for the billing office. It was hard to find, though; it consisted of a handful of people in the basement whose main job was to send bills to U.S. patients who had come across the border. Canadian hospitals do not bill individual patients for their care and so have no need to keep track of who receives each Band-Aid or an aspirin.

"A Canadian hospital negotiates its annual budget with the provincial health plan and receives a single check each month to cover virtually all of its expenses," Himmelstein said. "It need not fight with hundreds of insurance plans about whether each day in the hospital was necessary, and each pill justified. The result is massive savings on hospital billing and bureaucracy."

Doctors in Canada face a similarly simple billing system. Every patient has the same insurance. There is one simple billing form with a few boxes on it. Doctors check the box indicating what kind of visit they provided to the patient (i.e., how long and whether any special procedures were performed) and send all bills to one agency.

Himmelstein returned to Boston and visited Massachusetts General Hospital, which was similar to Toronto General in size and in the range of services provided. Himmelstein was told that Massachusetts General's billing department employed 352 full-time personnel, not because the hospital was inefficient, but because this department needed to document in detail every item used for each patient and fight with hundreds of insurance plans about payment.

"U.S. doctors face a similar billing nightmare," Himmelstein said. "They deal with hundreds of plans, each with different rules and regulations, each allowing physicians to prescribe a different group of medications, each dictating that doctors refer patients to different specialists.

"The U.S. system is a paperwork nightmare for doctors and patients, and wastes hundreds of billions of dollars."

Dr. Woolhandler and Dr. Himmelstein are co-founders of Physicians for a National Health Program, an organization with over 12,000 members advocating for single-payer national health insurance in the United States. PNHP was founded in 1987 and has physician spokespeople across the country. For a local spokesperson, call the national headquarters at 312-782-6006. Visit them online at www.pnhp.org.

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