U.S. Health Care Administration Costs Are Responsible For At Least 25% Of Medical Bills
This is Part 5 of an 11-part series. Read the other stories here.
Americans spend an average of $12,642 on medical care every year, about twice as much as other wealthy countries spend on their residents, and U.S. spending is rising fast.
Why do we pay so much? One reason is the high cost of administering America’s complicated system. Between 25 and 33 cents of every dollar you spend on medical care pays for health care’s back office. That means as a country we spend about $1 trillion a year on administration, based on government estimates of total health care spending — more than we spend on Medicare.
That money pays for a lot of important things, like the people and software needed to update medical records and book appointments. But studies show between one-quarter and one-half of that is wasted on things that are necessary only because our health care system is so complex.
Pat Moll knows a lot about that complexity. She’s the chief financial officer of Carolinas HealthCare System Blue Ridge, a 300-bed hospital in Morganton.
“We deal with many, many, many different insurance companies, and many insurance companies offer multiple plans and each one of those plans has nuances,” Moll said. “Certain things require authorizations, some things don’t. It’s different with every one of those plans.”
Of the hospital’s 1,800 employees, 112 deal just with billing and insurance. Billing and insurance alone account for more than half of all U.S. administrative costs. Moll said that department has increased 40% in the last decade, even though the hospital hasn’t increased the number of beds.
But those 112 people aren’t enough, so Moll outsources some billing functions to three different firms. And she gets help from the larger system of which the hospital is a part.
“Just keeping up with contract changes, who requires an authorization for this procedure or that procedure changes frequently and just being able to keep up with that, it takes a village,” Moll said.
Every medical provider and laboratory in the country has to negotiate with insurance companies. And since there are 900 health insurers, 6,000 hospitals and more than 100,000 physician practices — many of which are independent of larger systems — there are hundreds of thousands of negotiations. That creates complexity not seen in other wealthy countries, said health care consultant Dan O’Neill.
“We take a fragmented market and then we make a choice to make it as complicated as possible when it comes to contracting and pricing,” O’Neill said.
That means every medical bill and health insurance premium you pay includes salaries for lots of lawyers and accountants and billing clerks.
“And then on top of that, there’s a lot of gamesmanship that goes on for both providers and payers to try to establish leverage and manage the costs of care,” O’Neill said.
The gamesmanship occurs because insurance companies try to push back on providers to curtail unnecessary care and try to limit how much they pay, while providers try to get as much money as possible.
“And that just becomes a tug-of-war and a bit of an arms race,” O’Neill said.
The arms race has to do with optimizing something called medical coding to increase reimbursement. The U.S. system is the only one in the world to require that all diagnoses and treatments be translated into a special codes so they can be reimbursed. There are 70,000 codes, so providers hire specially trained and certified coders who can translate each patient record into codes.
And those codes are very specific.
For example, V97.33XD says the patient was sucked into a jet engine. V00.01XD means he was injured by a roller-skater while he was walking. W55.41XA says he was bitten by a pig, while W61.62XD means he was struck by a duck.
“Then you have software companies that come in that sell tools that help providers optimize coding, which is to say, extract as much money as possible, avoid as many authorizations as possible,” O’Neill said. “And then you have the same thing go on at the insurance companies in reaction.”
O'Neill should know. He used to manage one of those companies. It’s one of more than 250 firms in the $137 billion “revenue cycle management” industry spawned by the U.S. health care system.
“Some of these companies quite literally sell very similar tools to both sides,” O’Neill said. “It’s like any war — the arms dealers do fine.”
The cost of all that software ultimately gets passed on to patients through premiums and deductibles.
Government programs have much lower administrative costs than commercial plans, but they also impose a lot of regulations, said Harvard University health economist David Cutler. He was an adviser to President Clinton and the first presidential campaign of then-U.S. Sen. Barack Obama — and he helped design the Affordable Care Act.
“Medicare has over 2,000 quality standards, and just collecting all of that is a big burden,” he said.
Remember "Medicare for All," a catchphrase from the 2020 elections? Democratic presidential hopeful Sen. Bernie Sanders said it would “save hundreds of billions” on administrative costs “because right now we have to administer thousands of separate plans.”
Medicare for All would make the U.S. more like a single-payer country like Canada, which spends half as much as we do on administration.
But countries like Germany and Japan — which, like the U.S., rely on lots of insurers — also spend billions less on administration. German law requires all the providers and insurers to negotiate together to agree on a common price for services. And a study published earlier this year found the United States can save as much or more with that kind of simplification than with a single-payer system.
But the U.S. hasn’t tried to force insurers to standardize.
“The government really has not typically seen it as its job to do that, which is crazy,” Cutler said.
Cutler said the health care system could follow the example set by banking. Mobile banking is easy because the Federal Reserve won’t let each bank make up its own rules for transferring money; it has to use a standard process.
“The Federal Reserve has basically said you cannot do it any other way,” Cutler said. “Now you can be a bank and not use that system, but you cannot do it any other way.”
Cutler estimates Americans could save between $50 billion and $75 billion a year just by standardizing the rules like the banking system does, without more radical changes to the health care system.
And, he explained, it’s one of the easier ways of reducing Americans’ health care bills.