Why Does U.S. Health Care Cost So Much? - Part II: Indefensible Administrative Costs

By Uwe E. Reinhardt, New York Times Economix Blog

In my previous blog post [1],
I showed that America suffers from “excess spending” in its health care
system. Here I will discuss one factor that drives up that spending:
indefensibly high administrative costs.

To review: “Excess health spending” in this context refers to the
difference between what a country spends per person on health care, and
what the country’s gross domestic product per person should predict that
that country would spend. (The prediction is based on trends in other
countries in the Organization for Economic Cooperation and
Development.) The word “excess” here should not be taken as “excessive”
unless one could demonstrate that what the other O.E.C.D. nations spend
is appropriate and what we spend is ipso facto wasteful.

The United States spends nearly 40 percent more on health care per
capita than its G.D.P. per capita would predict. Given the sheer
magnitude of the estimated excess spending, it is fair to ask American
health care providers what extra benefits the American people receive
in return for this enormous extra spending. After all, translated into
total dollar spending per year, this excess spending amounted to $570
billion in 2006 and about $650 billion in 2008. The latter figure is
over five times the estimated $125 billion or so in additional health
spending that would be needed [2] to attain truly universal health insurance coverage in this country.

One thing Americans do buy with this extra spending is an
administrative overhead load that is huge by international standards.
The McKinsey Global Institute estimated that excess spending on “health
administration and insurance” accounted for as much as 21 percent of
the estimated total excess spending ($477 billion in 2003). Brought
forward, that 21 percent of excess spending on administration would
amount to about $120 billion in 2006 and about $150 billion in 2008. It
would have been more than enough to finance universal health insurance
this year.

The McKinsey team estimated that about 85 percent of this excess
administrative overhead can be attributed to the highly complex private
health insurance system in the United States. Product design,
underwriting and marketing account for about two-thirds of that total.
The remaining 15 percent was attributed to public payers that
are not saddled with the high cost of product design, medical
underwriting and marketing, and that therefore spend a far smaller
fraction of their total spending on administration.

Two studies using more detailed bilateral comparisons of two
countries illustrate even more sharply the magnitude of our
administrative burden relative to that in other developed countries.

One of these is an earlier McKinsey study [3]
explaining the difference in 1990 health spending in West Germany and
in the United States. The researchers found that in 1990 Americans
received $390 per capita less in actual health care but spent $360 more
per capita on administration.

A second, more recent study [4]of
administrative costs in the American and Canadian health systems was
published in 2003 by Steffie Woolhandler and David Himmelstein in The
New England Journal of Medicine in 2003. The study used a measure of
administrative costs that includes not only the insurer’s costs, but
also the costs borne by employers, health-care providers and
governments – but not the value of the time patients spent claiming
reimbursement. These authors estimated that in 1999, Americans spent
$1,059 per capita on administration compared with only $307 in purchasing power parity dollars [5] (PPP $) spent in Canada.

More and more Americans are being priced out of health care as we
know it. The question is how long American health policy makers, and
particularly the leaders of our private health insurance, can justify
this enormous and costly administrative burden to the American people
and to the harried providers of health care.