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Policy & Regulation News

ACA Adds Billions in Bureaucratic Waste, Administrative Costs

By Jacqueline DiChiara

- The Affordable Care Act (ACA) will prove a tremendous financial burden to the healthcare industry. Although the administrative costs of healthcare are projected to remain high throughout 2022, the ACA only promotes billions of dollars in bureaucratic waste, confirms a Health Affairs blog study from David U. Himmelstein, MD, FACP, Professor at the City University of New York School of Public Health at Hunter College and Lecturer of Medicine at Harvard Medical School and Steffie Woolhandler, MD, MPH, FACP, Professor in the CUNY School of Public Health at Hunter College, Adjunct Clinical Professor at Albert Einstein College of Medicine, and Lecturer in Medicine at Harvard Medical School.

Affordable care act

“The roughly $6 billion in exchange start-up costs pale in comparison to the ongoing insurance overhead that the ACA has added to our health care system — more than a quarter of a trillion dollars through 2022,” the researchers assert. This idea is presented in direct connection with earlier 2014 projections released by the Office of the Actuary from the Centers for Medicare & Medicaid Services (CMS). According the CMS’s forecast summary, healthcare spending will increase at the rate of 5.8 percent until 2022.

“Improving economic conditions, the Affordable Care Act (ACA) coverage expansions, and the aging of the population, drive faster projected growth in health spending in 2014 and beyond,” says CMS. “By 2022, the ACA is projected to reduce the number of uninsured people by 30 million, add approximately 0.1 percentage-point to average annual health spending growth over the full projection period, and increase cumulative health spending by roughly $621 billion,” CMS confirms.

Himmelstein and Woolhandler note CMS projects over $2.7 trillion in spending for private insurance overhead and administering government health problems – predominately Medicare and Medicaid – between 2014 and 2022. This number includes $273 billion in new administrative costs associated with the ACA.

“Most of this soaring private insurance overhead is attributable to rising enrollment in private plans which carry high costs for administration and profits,” the researchers explain.

Public insurance simply provides more bang for your buck, Himmelstein and Woolhandler state. The administrative costs associated with the ACA are steep, especially compared to more economically efficient alternatives, the researchers maintain. Traditional Medicare, for instance, exhibits a 2 percent overhead, they say.

The accuracy of this overhead number has been debated within the healthcare industry. There is not a lot of attention devoted to Medicare’s overhead costs, says the Physicians for a National Health Program (PNHP). Confusion abounds due to conflicting government reports and to the possibility that Medicare’s overhead costs may not be accurately reported by the government. Research asserts there is no tangible documentation behind such estimates.

Nonetheless, savings are tangible. “Traditional Medicare is a bargain compared to the ACA strategy of filtering most of the new dollars through private insurers and private HMOs that subcontract for much of the new Medicaid coverage,” according to Himmelstein and Woolhandler. If the ACA-based 22.5 percent overhead figure decreased to match the traditional Medicare level, projected savings would result in nearly $250 billion by 2002, Himmelstein and Woolhandler claim.

“Between 2014 and 2022, the ACA will add $273.6 billion in new administrative costs over and above what would have been expected had the law not been enacted,” states Himmelstein. “That's equivalent to $1,375 per newly insured person per year, or 22.5 percent of total federal expenditures for the program.”

Himmelstein and Woolhandler maintain that approximately two-thirds of this new overhead – over $172 billion – is connected to private insurers’ administrative costs and profits. Remaining added overhead, they explain, “is attributable to expanded government programs, i.e. Medicaid. But even the added dollars to administer Medicaid will flow mostly to private Medicaid HMOs, which will account for 59 percent of total Medicaid administrative costs in 2022.”

Administrative costs represent a minor fraction of total healthcare expenses. Says Woolhandler, the numbers presented are “shocking” and are only now being brought to light for the very first time. The bureaucracy will eat up almost a quarter of federal spending, she maintains.

The active need to lessen administrative financial waste is a tangible yet massively far-reaching goal the healthcare industry should collectively focus on. The aging Baby Boomer population especially depends on urgent, innovate cost focus.


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