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The High Cost of Administration in Health Care: Part of the Problem or Part of the Solution?

Published online by Cambridge University Press:  01 January 2021

Randall R. Bovbjerg
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Type
Review Essay
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Journal of Law, Medicine & Ethics , Volume 23 , Issue 2 , Summer 1995 , pp. 186 - 194
Copyright
Copyright © American Society of Law, Medicine and Ethics 1995

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References

The quotation is attributed to Lord Leverhulme of Unilever, a giant Anglo-Dutch conglomerate (see “How to Turn Junk Mail into a Goldmine—or Perhaps Not,” Economist, Apr. 1, 1995, at 51–52). The Economist calls consumer-goods marketing “a costly mess,” marked by high spending on advertising and by high rates of new product failure, but it is skeptical of computerized “database marketing” targeted by mailing lists as a solution.Google Scholar
See Himmelstein, David U. Woolhandler, Steffie, “Cost Without Benefit: Administrative Waste in U.S. Health Care,” N. Engl. J. Med., 311 (1986): 441–45; Woolhandler, Steffie and Himmelstein, David U., “The Deteriorating Administrative Efficiency of the U.S. Health Care System,” N. Engl. J. Med., 324 (1991): 1253–58; Woolhandler, Steffie, Himmelstein, David U. and Lewontin, James P., “Administrative Costs in U.S. Hospitals,” N. Engl. J. Med., 329 (1993) 400–03; and Woolhandler, Steffie and Himmelstein, David U., Letter: “Correction: The Deteriorating Administrative Efficiency of the U.S. Health Care System,” N. Engl. J. Med., 331 (1994): 336.CrossRefGoogle Scholar
This administrative report is part of a larger, eight-country study on international differences in health care technology and costs. A November 1993 background paper previously covered international health statistics.Google Scholar
The report lists fifty-eight sources as references, and appendices B and C provide some methodological detail.Google Scholar
See U.S. Congress, Office of Technology Assessment, International Comparisons of Administrative Costs in Health Care (Washington, D.C.: U.S. Government Printing Office, BP-H-135, Sept. 1992): at 1 (hereafter OTA). OTA further emphasizes the large-dollar estimates by calling them “robust” (id. at 2).Google Scholar
See, for example, id. at 4.Google Scholar
See, for example, id. at 2.Google Scholar
Most active among single-payer advocates were the Physicians for a National Health Program (id. at 37), who supported and adopted the findings of Himmelstein and colleagues (see supra note 2). They were joined by the Nader consumer advocates (see Hellander, I. et al., Administrative Waste in the U.S. Health Care System in 1991: The Costs to the Nation, the States, and the District of Columbia (Washington, D.C.: Public Citizen Health Research Group, 1991)).Google Scholar
Thorpe, Kenneth E., “Inside the Black Box of Administrative Costs,” Health Affairs, 11, no. 2 (1992): 41–55.CrossRefGoogle Scholar
OTA consultant James Hahn who, like Thorpe, is an economist at the University of North Carolina, also urged OTA to consider countries’ differing production functions for health, including the contribution of administration (Hahn, J.S., Administrative Costs in the Health Care Systems of the United States, Canada, Germany, and the United Kingdom: A Framework for Comparative Analysis (Washington, D.C.: U.S. Congress, Office of Technological Assessment, unpublished contractor report, June 1993.) Such a task evidently went beyond OTA's scope of work and available data, and its report remained descriptive.Google Scholar
Glaser, William A., Administration in Health Care: A Plan for Cross-National Comparisons (Washington, D.C.: U.S. Congress, Office of Technology Assessment, unpublished contractor report, Dec. 1993.) Perhaps in part because the categorizations were constrained to fit within a word table (see OTA, supra note 5, at 10–12, tbl. 2.2), they are not entirely clear, especially in distinguishing management as policy making versus policy implementing. However, all health-related activities seem to be defined as administrative except those directly for clinical services, public health work, and policy decisions. Thus Glaser's work, OTA's, this reviewer's, and this journal's all contribute to the U.S. administrative spending under attack as excessive.Google Scholar
See Glaser, , supra note 11.Google Scholar
See OTA, supra note 5, at 16. Curiously, only payment-system complexity seems objectionable to single-payer supporters. They seem little concerned about the complexity of innumerable autonomous medical providers and suppliers each setting their own internal compensation and external bills.Google Scholar
Poullier, Jean-Pierre, “Administrative Costs in Selected Industrialized Countries,” Health Care Financing Review, 13 (1992): 167–72.Google Scholar
See OTA, supra note 5, at 20, fig. 3–1.Google Scholar
Id. at 25–31, tbl. 3-1. OTA's presentation comes from Himmelstein, and Woolhandler, , supra note 2; Woolhandler, and Himmelstein, , supra note 2; Woolhandler, , Himmelstein, and Lewontin, , supra note 2; U.S. General Accounting Office, Canadian Health Insurance: Lessons for the United States (Washington, D.C.: GAO #HRD-91-90, June 1991); U.S. General Accounting Office, Canadian Health Insurance: Estimating Costs and Savings for the United States (Washington, D.C.: GAO, #HRD-92-83, Apr. 1992); and Sheils, J.F. and Young, G.J., “National Health Spending Under A Single Payer System: The Canadian Approach,” staff working paper for Lewin/ICF, Fairfax, Virginia, Jan. 8, 1992.Google Scholar
See OTA, supra note 5, at 37, tbl. 3-2. In selecting its overall estimate of $47 to $98 billion in savings, OTA dropped the earliest (and lowest) estimate of $39 billion; it also took the high end of the highest study ($81 to $98 billion) (id. at 37).Google Scholar
Himmelstein, David U. et al., Center for National Health Program Studies, Harvard Medical School/The Cambridge Hospital, Cambridge, Massachusetts, The Health Care Labor Force: U.S., Canada, and Western Germany (Washington, D.C.: U.S. Congress, Office of Technology Assessment, unpublished contractor report, Mar. 19, 1993). The published OTA report only presents findings on the United States and Canada, and characterizes the German information as “preliminary” (see OTA, supra note 5, at 39, n.27).Google Scholar
See OTA, supra note 5, at 35–36, 38–39; see also Sheils, and Young, , supra note 16; and Danzon, Patricia M., “Hidden Overhead Costs: Is Canada's System Less Expensive?,” Health Affairs, 11, no. 1 (1992): 21–43. For another economic view questioning the extent of potential savings promised by “policy entrepreneurs,” see Newhouse, Joseph P., “Economists, Policy Entrepreneurs, and Health Care Reform,” Health Affairs, 14, no. 1 (1995): 182–98.Google Scholar
The estimate comes from the public-private Workgroup for Electronic Data Interchange, established by Health and Human Services Secretary Louis Sullivan, WEDI 1993 Report (Washington, D.C.: Workgroup for Electronic Data Interchange, 1993).Google Scholar
See OTA, supra note 5, at 48, citing Sheils, and Young, , supra note 16 (dollar estimates not presented). Newhouse suggests almost no savings, because the “information requested by the various payers solely for purposes of payment (not considering utilization review) is reasonably standardized now” (see Newhouse, , supra note 19, at 198, n.45).Google Scholar
Paquel, N., Frizzole, C., and Glaziou, S., CANOPE Consulting, Paris, France, Smart Cards in the French Health Care System (Washington, D.C.: U.S. Congress, Office of Technology Assessment, unpublished contractor report, 1993).Google Scholar
See OTA, supra note 5, at 53, box 4-1.Google Scholar
I cannot resist commenting that administrative cards combined with an automated system for direct billing, verification of eligibility, and status of cost-sharing obligation have greatly simplified our family's trips to the pharmacist. Information on medical history, however, seems different. I can report that even when an eager new patient arrives with a full medical record from a prior practitioner, the new practice insists on creating a complete new medical history from scratch (N = 1).Google Scholar
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See Himmelstein, D.U., Steffie Woolhandler, and the Writing Committee of the Working Group on Program Design, “A National Health Program for the United States: A Physicians' Proposal,” N. Engl. J. Med., 320 (1989): 102–08.CrossRefGoogle Scholar
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A good supplement are the articles and letters from two issues of Health Affairs. The spring 1992 issue includes: Sheils, John F., Young, Gary J., and Rubin, Robert J., “Oh Canada: Do We Expect Too Much from Its Health System,” Health Affairs, 11, no. 1 (1992): 7–20; Danzon, , supra note 19; and Barer, Morris L. and Evans, Robert G., Commentary: “Interpreting Canada: Models, Mind-Sets, and Myths,” Health Affairs, 11, no. 1 (1992): 44–61. The summer issue contains: Thorpe, , supra note 9; and letters to the editor, including ones from Danzon and Himmelstein (see Letters, , Health Affairs, 11, no. 2 (1992): 230–38).CrossRefGoogle Scholar
Beware especially the “expert” flying in for the excursion-fare period, particularly one with a broad topic. Travelers are always impressed with their blinding insight into a new country after five days abroad. After five weeks, perhaps, their eyes are opened to the complexities of how some sector of a foreign culture actually works. Enlisting a native guide, or an American who has gone native, is the most cost-effective way to do better, faster.Google Scholar
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I suspect, however, that homegrown, nationwide experience in automated financial transactions deserves just as close a look as the first steps in French medical insurance automation. It appears generally conceded that American software and computer systems lead the world, not European models. For cautionary lessons on confidentiality as well as on national data banks, we should probably also look to our own experience with credit bureaus and the Medical Information Bureau in addition to France.Google Scholar
See OTA, supra note 5, at 2. However, note that it is relatively easy to do broad-brush comparisons, as shown by Himmelstein and colleagues, OTA itself, and General Accounting Office (GAO) (see supra notes 2 and 15). In contrast, the operational details come much harder. Consider, for example, GAO's response when asked to evaluate specific plans for federal administrative improvements. GAO could not determine whether the plans would work, noting “the lack of (1) a commonly accepted and understood definition of administrative expenses and (2) information on agency performance and productivity” (U.S. General Accounting Office, Budget Issues: Assessing Executive Order 12837 on Reducing Administrative Expenses (Washington, D.C.: GAO/AIMD-94-15, Nov. 1993): at 1).Google Scholar
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An 1892 Oscar Wilde play originated the expression in defining cynic (see Bartlett's Familiar Quotations (Boston: Little Brown, 16th ed., 1992), at 566, n.23).Google Scholar
For example, OTA emphasizes Sheils and Young's unpublished estimate (supra note 16) that a $47 billion administrative savings would result from changing to single payer in the United States (see OTA, supra note 5, at 37, tbl. 3-2), but omits their more consequential estimate, that total spending would actually increase by nearly $30 billion, because added utilization would more than offset reduced administrative spending (see Sheils, , Young, , and Rubin, , supra note 30, at 17). OTA merely drops a footnote in the summary to assert that the issue of increased utilization is “a complex issue beyond the scope of this paper” (see OTA, supra note 5, at 4, n.1). I think Sheils et al. are probably wrong; surely utilization would initially rise—which is a major reason for favoring universal coverage—but single payer comes with its own mechanisms for controlling spending, especially growth over time. OTA should have recognized and discussed this point, at least giving arguments for and against, not just swept it under the rug.Google Scholar
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For a thoughtful essay on Americans’ mistrust of public administration and its implications for health care, see Morone, James, “American Political Culture and the Search for Lessons from Abroad,” Journal of Health Politics, Policy and Law, 15 (1990): 129–43; for sociological insight into the differences between the Canadian and American national characters, see Lipset, Seymour Martin, Continental Divide: The Values and Institutions of the United States and Canada (New York: Routledge, 1990).CrossRefGoogle Scholar
Fraud and abuse are often asserted to claim 10 percent of spending (perhaps a suspiciously round number). See, for example, McGinley, Laurie, “Medicare Proposals Raise Questions,” Wall Street Journal, May 9, 1995, at B1; see also Bilirakis, Michael, “First Get the Fraud out of Medicare,” Washington Times, May 16, 1995, at A17. The source of the 10 percent figure is evidently a 1992 GAO report on vulnerable populations.Google Scholar
Employer-buyers of health care are delighted that, for the first time in memory, this past year large groups saw a decline in spending for health coverage. See, for example, Hilzenrath, David S., “Health Care Costs Fell in ’94, Survey Finds; Rise of Managed-Care Plans Was Key Factor,” Washington Post, Feb. 14, 1995, at C1. Others think that any savings will be short lived, having little impact on the continuing rise in spending. See, for example, Schwartz, William B. and Mendelson, Daniel N., “Eliminating Waste and Inefficiency Can Do Little to Contain Costs,” Health Affairs, 13, no. 1 (1994): 224–38.Google Scholar
Personally, administrative cost as such troubles me most when I contribute to a charity; my main goal there is to achieve a pass-through to deserving recipients. But doctors and hospitals are not in that same charitable category. Even for charities, most donors probably like overhead devoted to assuring that the recipients actually are deserving and that they actually do get the money. Overhead devoted heavily to fundraising and support of fancy corporate offices and salaries is objectionable. Alas, one cannot often tell them apart from the outside.Google Scholar
See OTA, supra note 5, at 2, 8. Rhetoric seems important in this debate. “Clerical” is quite different from “managerial”; “excess” from “superiority.” The late Sydney J. Harris used to devote an occasional Chicago Sun-Times column to what he called “antics with semantics,” illustrating the very different connotations of similar expressions, such as: “He is a shyster, you are a lawyer, I am an attorney. He is a sawbones, you are a doctor, I am a physician.” How about “She is a paper pusher, you are an administrator, I am an executive”?Google Scholar
“What Computers Are For,” Economist, Jan. 22, 1994, at 74.Google Scholar
Held, Philip J., now Professor of Medicine and Health Services Management and Policy at the University of Michigan.Google Scholar
A contemporary account comments on “the accounting inadequacies of hospitals,” and cites a Blue Cross official as stating: “Many a hospital administrator is going to be amazed to find out what his costs are.” See Somers, Herman R. and Somers, Anne R., Medicare and the Hospitals: Issues and Prospects (Washington, D.C.: The Brookings Institution, 1967): at 160, 162, n.9.Google Scholar
See OTA, supra note 5, at 2. Sector-by-sector analysis might prove instructive. For example, the asserted recent growth in administration in the United States (id. at 39–45) evidently has occurred in medical sectors rather than in the insurance sector. According to the statistics kept by the Health Care Financing Administration, the percentage of U.S. health spending for program administration and net cost of health insurance has hovered between 4 and 6 percent for the past fifty years; it is projected to decline below 4 percent in the next century. See, for example, Levit, Katherine R. et al., “National Health Expenditures, 1990,” Health Care Financing Review, 13, no. 1 (1991): 29–54; and Burner, Sally T., Waldo, Daniel R., and McKusick, David R., “National Health Expenditures Projections Through 2030,” Health Care Financing Review, 14, no. 1 (1992): 29–54. It appears that HCFA's accounting does not capture the costs of employers’ benefits offices or self-insurance functions, however.Google Scholar
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For a good start, see Fuchs, Victor and Hahn, J.S., “How Does Canada Do It? A Comparison of Expenditures for Physicians’ Services in the United States and Canada,” N. Engl. J. Med., 323 (1990): 884–90.CrossRefGoogle Scholar
See OTA, supra note 5, at 42, fig. 3–6.Google Scholar
The decline occurred mainly within the subcategory of hospital employment, which also suggests a tie to prospective payment. Id. at 44, figs. 3–10, 3–11.Google Scholar
See supra note 1. Bradley et al. confirm William Jesketh Lever, 1851–1925, as the source, with slightly different phrasing. See Bradley, John P., Daniels, Leo F. and Jones, Thomas C., The International Dictionary of Thoughts (Chicago: Gerguson, 1969): At 14.Google Scholar
For example, Schultze, Charles L., The Public Use of Private Interest (Washington, D.C.: The Brookings Institution, 1977).Google Scholar
See, for example, Nichols, Len M. et al., “Assessing Health System Integration: Lessons for State Policy Makers” (Washington, D.C.: Urban Institute Paper, No. 06433-003-01, Apr. 1995).Google Scholar
See Bovbjerg, Randall R. et al., “The Minnesota Model for Health Care: Market Developments and the Role of State Policy over Time” (Washington, D.C.: Urban Institute Paper, No. 06433-003-03, June 1995).Google Scholar
The author is solely responsible for this review essay, not the Urban Institute or any of its hinders.Google Scholar