Health Care Waste-Administrative Costs

The recent paper by Jiwani et al  concerning medical administrative costs has attracted a lot of attention. This paper in BMC Health Services Research calculates the costs of billing and insurance related activities (BIR) in the United States. Using 2012 figures, the authors conclude that BIR costs were approximately $471 billion. “Added BIR” was the amount which was judged to exceed costs in systems with simplified requirements using the Canadian single payer system and U.S. Medicare figures for comparison.

BIR Costs graph                                    Graph from Jiwani et al. BMC Health Services Research (2014) 14:556 

Excessive costs due to administrative complexity is just one of the five areas of health care spending examined by Berwick and Hackbarth using 2011 figures. These authors calculated the costs of our administrative complexity as a range with a mid-point of $248 billion compared to the updated and refined figure of $337 billion provide by Jiwani et al. The 20ll study also included estimates of wasteful spending in the areas of failures of care delivery, failures of coordination, overtreatment, and pricing failures. The total was $734 billion with an added $177 billion lost in fraud and abuse.

Waste 2011 graph

Recent commentators, including Jiwani et al , have noted that simplifying our system and recovering that $337 billion of excess administrative costs would pay for the upgrading of our present coverage including adding the presently un-insured. In dollars amount that makes sense but adoption of a single payer system would not immediately capture those savings. Elimination of the excessive overhead of the insurance industry would be done quickly and could recover half of that waste. The rest would have to wait for the development of new payment and delivery systems. The physician overhead portion would be especially difficult because it is built into the staffing of multiple scenarios, e.g., solo, small and large clinic, single and multiple specialties, self- and other-employed. The staffing includes multiple employees serving multiple roles with overlapping clinical and administrative functions. The savings can be harvested only by reducing the payments to the physicians. The current fee-for-service payment system would make it difficult to calculate a workable and equitable phase-out plan. However the physicians’ portion of the added BIR is only 13% so the needed gradual development of an improved physician compensations system would still be workable. The change in payments to hospitals and other health services would be easier to conceptualize.

When one looks at the other categories of waste it is obvious that there is a large opportunity for savings that can be realized only by a single payer system.

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