Administrative Cost in Health Care HSPM J712 Oct. 27, 2010

Himmelstein and Woolhandler

What do Himmelstein and Woolhandler include in “administrative cost?”

Canada’s hospital administrative costs are less because … Global budgets, negotiated with Province – Operating budget – Capital investment budget No bills – No need to track and bill for individual services and goods – No collections cost

Physicians’ administrative costs are lower in Canada because … One place to send bills One set of rules T. R. Reid: France, Germany, and Japan, have multiple competing private insurers, but … – One system of submitting bills – One set of rules for what gets paid for – One set of prices for each provider (no price discrimination to manage)

Number of Insurance Products

Canada’s insurance system’s administrative cost is lower because … No need to determine who is eligible for what – Canada’s overall administrative % close to Medicare (before Medicare + Choice), less than Medicaid No marketing of insurance No underwriting (determining risk and adjusting premiums) No billing or collecting insurance premiums No looking for reasons to disqualify or cancel

Private insurers’ High Overhead

How can a market system be inefficient? Grumet: “Paradoxically, the savings that ordinarily accrue to an efficiently managed business are reversed in the case of insurance carriers, whose bungling, confusion, and delay impede the outflow of funds.”

Rejections of claims in California “Six of the state's largest insurers rejected 45.7 million claims for medical care, or 22% of all claims, from 2002 to June 30, 2009, according to the California Nurses Assn.'s analysis of data submitted to regulators by the companies.” “‘… not … denials of care for consumers or widespread denials of insurance coverage,’ said [the] spokeswoman for the California Assn. of Health Plans. ‘… the so-called denials are merely paperwork issues.’”

Himmelstein and Woolhandler (1986), letter from James A. Cowan Cowan: “I wonder if the U.S. public would accept the restrictions of a national health program like those in Canada and Britain. “… it is an American virtue to expect and demand the best … The present U.S. health care system responds to this expectation by emphasizing service … This service comes at a price, part of which is high administrative overhead.”

Himmelstein and Woolhandler (1986), reply to letter from James A. Cowan H&W: “Cowan seems unaware that many millions of uninsured or underinsured Americans face limitations far more severe than those confronting anyone in Britain or Canada. The high administrative overhead of the U.S. health care system is not the price of avoiding such limitations, but the cost of enforcing them.” [Emphasis is mine.]