US Administrative Healthcare Spending Reached $812B in 2017

January 09, 2020 - Administrative healthcare spending totaled $812 billion in 2017, representing over one-third (34.2 percent) of total expenditures for physician practices, hospitals, long-term care, and private payers, according to a new study.

The study published in Annals of Internal Medicine earlier this week revealed inefficiencies within the US’ multi-payer system compared to the single payer used in Canada. Canada spent half the amount on administration as a percent of total national healthcare spending compared to the US, the report highlighted. The gap in dollars per capita was even larger with greater than a four-fold disparity.

But it wasn’t always like that, researchers pointed out. For example, in 1970, healthcare spending was nearly the same in Canada and the US. Specifically, healthcare spending represented 6.2 percent and 6.4 percent of gross domestic product (GDP) in the US and Canada, respectively, at the time. But by 2017, US healthcare spending far exceeded that of Canada, with healthcare spending in the US representing 17.9 percent of GDP. Healthcare spending in Canada increased to just 11.3 percent of GDP by that time.

Administrative healthcare spending in the US increased since the 1970s, largely due to higher overhead costs for private payers, researchers found using cost data from 2017, or the most recent year available.

For payers, administrative costs in 2017 totaled $274.5 billion, representing 9.6 percent of total expenditures by insurers and other third-party payers and 7.9 percent of national health expenditures, the study showed. While Canadian expenditures to administer healthcare programs totaled $5.360 billion, or $146 per capita, 3.8 percent of expenditures was for insurers and other third-party payers, which accounted for just 2.8 percent of national health expenditures.

READ MORE: CBO: Single-Payer System to Impact Provider Pay, Physician Shortage

But payers were not the only stakeholders significantly impacted by higher administrative costs. The study also found that the mean share of total expenditures due to administration at US hospitals was 26.6 percent, which translated to a national total of $303.5 billion, or $933 per capita. The mean share of total expenditures due to administration at Canadian hospitals was 13.1 percent, representing a total of $7.190 billion, or $196 per capita, in 2017.

Administrative costs for physician practices also increased in the US compared to Canada. Interacting with payers cost US physician practices a mean of $169,302 annually per physician, which is equivalent to $151.2 billion nationally or $465 per capita. The estimates for Canada showed $36,825 per physician and $87 per capita.

Furthermore, administrations mean share of total expenditures at US nursing homes was 26.7 percent or $44.4 billion in 2017. US home care agencies and hospices administrative mean was 39.8 percent and 39.3 percent respectively, which was equivalent to $38.46 billion nationally.

Many of the price differences were reported to come from tighter control of drug prices, physicians’ fees, hospital budgets, and investments in high-tech facilities, the study highlighted. And previous research showed that excess administrative costs by US hospitals were a hidden surcharge that inflated prices and fees.

Researchers estimated that if the US were to cut administrative healthcare spending to match Canadian levels, the country would save over $600 billion in one year.

READ MORE: National Healthcare Spending Increased to $3.6T in 2018

Reducing administrative burden is a top priority for CMS, which released its Patients Over Paperwork initiative in 2017 to reduce the amount of administration providers have to do and get them back to interacting with patients.

By January of 2019, CMS estimated that the US healthcare system would save nearly 40 million hours and $5.7 billion through reduced regulatory burden. It also expected to increase administrative efficiency, improve the beneficiary experience, and increase the amount of time providers spend interacting face-to-face with patients.

However, some policymakers feel CMS can take their administrative burden efforts a step further to reduce national healthcare spending. For these policymakers, a single-payer system similar to the one used in Canada is the solution.

According to a 2017 report in the Annals of Internal Medicine, a single payer system could produce an estimated savings of $220 billion on insurance costs and over $150 billion in hospital administration. Total expenditures for healthcare administration were expected to decrease by 46.1 percent.

But the Trump Administration is against the single-payer idea. "It doesn't make sense for us to waste time on something that's not going to work," CMS Administrator Seema Verma said during a payer debate at the San Francisco-based Commonwealth Club. 

READ MORE: 25% of Total Healthcare Spending Attributed to Waste, Study Finds

The Trump administration believes a single payer system is unaffordable and limits choice for patients. 

"Ideas like Medicare for All would only serve to hurt and divert focus from seniors, all the while expanding the regulatory burden and the misaligned and perverse incentives of a government-run system," she said. "In essence, Medicare for All would become 'Medicare for None.'"

The single payer system will continue to be a major debate as national health spending continues to rise and stakeholders seek relief from administrative costs/burdens.