The US spent about $3.7 trillion on healthcare this year. Bernie Sanders estimates his Medicare-for-all Plan (the Plan) would reduce US healthcare spending by 20%, achieved mostly by cheaper drugs and lower administrative costs, thanks the bargaining power and inherent efficiencies of a single payer system. A 20% cut in healthcare spending would have saved $740 billion in 2018.

In the last post, I estimated the Plan might be able to save about $66 billion a year on drugs, assuming 2018 spending levels. Not much in the scheme of things. How much could be cut on the administrative side of healthcare spending? The online Plan description doesn’t provide specific figures* but seems to say that reduced administrative spending would result in major savings. To quote:

“Creating a single, public insurance system will go a long way towards getting health care spending under control. The United States has thousands of different health insurance plans, all of which set different reimbursement rates across different networks for providers and procedures resulting in high administrative costs.” Bernie Sanders’ Medicare-For-All Plan

I’m not sure where Sanders got his “thousands” of different healthcare plans. After much searching, I found one article to that effect, noting that “by one account” there are over 1200 private insurance companies offering health insurance in the US”, each offering “tens of thousands of distinct health insurance plans” – but the authors provided no reference for these numbers. More importantly, it doesn’t matter how many insurance companies or plans exist in the US, because the individual states regulate health insurance and within each state only a few health insurers are allowed to operate. Limited number of insurers per state means fewer health plans for medical providers to deal with. For instance, in California, 15 companies are allowed to provide health insurance, of which just seven companies control 96% of the private health insurance market (Kaiser alone controls 43%). I don’t know how many health plans these seven companies offer, but I’m betting well less than 100 total.

But what about those high administrative costs? According to The Commonwealth Fund, the share of hospital costs devoted to administration is 25% in the US, compared to 20% in The Netherlands, 16% in England, and just 12% in Canada. That sounds pretty damning, but it’s important to remember that administrative costs are often unrelated to insurance matters or are dual-purpose. For instance, hospital documentation systems are essential to improving patient care and they may be used to generate information for medical billing. Plus, the fact that one country spends more or less on healthcare administration doesn’t tell us how much of that spending is worthwhile or wasteful. Sometimes more is better, depending on what it’s paying for.

Take Canada, which has had low healthcare administrative costs for decades. Back in the early 1990s, these costs were 11% of overall healthcare spending, compared to 24% in the US (Thorpe 1992). However, an analysis at the time revealed that part of the cost difference was due to America’s greater investment in healthcare management information systems, which are used for research and to improve quality of care.

Another indication that high administrative costs in the US are about more than who is paying the bills is that government hospitals spend almost as much on administration as private hospitals - about 23% versus 27% of total costs, even though government hospitals generate less of their revenue from billing insurance companies. And then there are HMOs, which generate most of their revenue from monthly premiums and not medical billing. Since medical billing is less complicated for HMOs than for other types of health plans, one would think their administrative costs would be lower as well. And that is indeed the case.  As a rule, annual premiums are also lower for HMOs – but not by much:  

“…the Kaiser Family Foundation found that the average annual cost of an employer-sponsored PPO plan is $6,800 and the average cost of an HMO plan is $6,576, both for singles. Family coverage averages $19,003 for PPOs and $17,978 for HMOs.” - Which Plans Are Cheaper: HMOs or PPOs? Tom Campbell/The Motley Fool; December 15, 2016

Premium savings for HMOs were just 3-5% in the above study, much of which could be attributed to cost-saving measures unrelated to medical billing, such as use of GP gatekeepers and incentives to avoid unnecessary testing and treatment.

It should also be noted that lower administrative costs may not translate into less administrative work for physicians. For instance, one study found that physicians employed by HMOs spend about the same amount of time on administrative work as physicians working at private hospitals - 17 hours a week (Woolhandler & Himmelstein, 2014). Physicians working for medical schools reported the most administrative work - 27 hours a week. Interestingly, physicians with financial incentives to increase services reported less administrative work than physicians with incentives to reduce services (15 to 19 hours a week). Clearly, something other than medical billing considerations is driving these differences in administrative workload.

And then there’s the added complication that some administrative tasks actually reduce unnecessary healthcare spending - and may even save lives. I can’t address how much a single-payer Medicare-for-all Plan could save on administrative costs without tackling that thorny issue. Next

* After writing this, I did come across a 2017 interview with Sanders, in which he said the US could “save approximately $500 billion a year just in administration costs." More on that in the next post.

References:

Himmelstein , David U. “A Comparison of Hospital Administrative Costs in Eight Nations: U.S. Costs Exceed All Others by Far”. The Commonwealth Fund; September 8, 2014 https://www.commonwealthfund.org/publications/journal-article/2014/sep/comparison-hospital-administrative-costs-eight-nations-us

Thorpe, Kenneth E.  (1992) "Inside the Black Box of Administrative Costs." Health Affairs 11(2): 41-55. https://www.healthaffairs.org/action/showCitFormats?doi=10.1377%2Fhlthaff.11.2.41

Woolhandler, S., & Himmelstein, D. U. (2014). “Administrative Work Consumes One-Sixth of U.S. Physicians’ Working Hours and Lowers their Career Satisfaction”. International Journal of Health Services, 44(4), 635–642. https://doi.org/10.2190/HS.44.4.a