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
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
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
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.