Administrative costs in Health Care
By Arnold Kling
There is a symposium on health care spending in the latest issue of the Journal of Economic Perspectives.
In the United States, there are 1.5 administrative personnel per hospital bed, compared to 1.1 in Canada. Duke University Hospital, for example, has 900 hospital beds and 1,300 billing clerks. On top of this are the administrative workers in health insurance. Health insurance administration is 12 percent of premiums in the United States and less than half that in Canada
They argue that administrative costs are an important component of the high spending rate in the U.S.
In 1988, 73 percent of private insurance policies purchased through employers were “conventional” fee-for-service plans (see Figure 2); by 2010, fee-for-service plans had virtually disappeared, comprising only 1 percent of employer-sponsored plans (Kaiser Family Foundation and Health Research and Education Trust, 2010). These plans have been displaced by various managed care plans, such as health maintenance organizations, preferred provider organizations, and point of service plans (which grew from 30 percent of employer-sponsored policies in 1988 to more than 85 percent today), and high-deductible health insurance plans (which over the last four years have grown from 4 percent of employer-sponsored policies to 13 percent).
It seems to me that managed care sets up a game between insurance companies and physicians, with the former trying to hold spending down and the latter trying to get as much as they can under the insurance companies’ rules. I suspect this helps to explain the high number of administrators working in doctors’ offices and hospitals.
Baicker and Goldman point out that patient cost-sharing has tended to decline over time, so that element of cost control has been taken out of the picture. They argue that it is not easy to bring cost-sharing back into play in a useful way, but they suggest that there are approaches worth trying.
Mark McLellan argues for payment systems to health care providers that provide incentives to improve quality and reduced cost. My fear is that the intended savings will be mitigated or offset by increased administrative expenses as providers devote more effort to gaming the new payment systems.
When you have third-party payments, you can have either simple rules or complex rules. With simple rules, the administrative costs are lower, but the provider’s incentives may be poorly aligned with cost-effectiveness. With complex rules, you can better tune the incentives, but you raise administrative costs as providers try to game the system.
My guess is that in the U.S. we have gravitated toward complex rules, particularly in private health insurance. I think that those, like McLellan, who argue that more complex rules are the answer, are probably not taking into account of the subsequent moves by providers in this particular chess game.
I think that challenge is to come up with a way that puts most of the decision-making responsibility in the hands of consumers, while still providing genuine insurance. With something as personal and hands-on as health care, the notion that you can manage it from an insurance company headquarters or government office strikes me as implausible.