Administrative Costs Highest in US, According to NEJM and Health Affairs Studies; Reduction Efforts Will Impact Clinical Laboratories
Clinical laboratory test claims make up a substantial proportion of all claims filed each year. Thus, any effort to streamline or reform claims adjudication and administration in the US will alter how labs and pathologists conduct business
Clinical laboratory managers and anatomic pathologists know how costly and complex the US healthcare system can be. However, expenses associated with care and treatment are only part of the total picture. Resources devoted to paperwork and administrative costs apparently increase overall expenditures associated with healthcare to a much higher degree than is generally known.
That’s according to several studies The New York Times reported on in July.
US Administrative Costs Higher than All Other Nations
One study conducted by The New England Journal of Medicine (NEJM) in 2003 estimated administrative costs account for approximately 30% of all healthcare expenditures in the US. The researchers examined data from 1999 to reach those conclusions. In today’s economy, those numbers are higher. On average, $5,700 of every $19,000 that US workers and their employers pay for family coverage each year goes towards administrative costs.
A 2014 study published by Health Affairs compared administrative costs for US hospital expenditures to those of seven other countries: Canada, England, France, Germany, the Netherlands, Scotland, and Wales. This study evaluated data from 2010/2011 and found that hospital administrative costs in the US far exceed rates in other nations. According to the study, administrative costs accounted for:
- 25.3% of total hospital expenditures in the US;
- 19.8% in the Netherlands;
- 15.5% in England; and,
- 12% in Canada and Scotland.
According to the Health Affairs study, more than $150 billion could have been saved in 2011 by reducing per capita spending for administrative costs to the levels observed in Canada and Scotland.
“The extraordinary costs we see are not because of administrative slack or because healthcare leaders don’t try to economize,” Kevin Schulman, MD, Professor, Department of Medicine, Duke University, and co-author of the Health Affairs study told The New York Times. “The high administrative costs are functions of the system’s complexity.” (Photo copyright: Duke University.)
Complexity of Payer System Partly to Blame
One reason for the costliness in the US healthcare system is the myriad of payers that healthcare organizations have to grapple with to receive payment. Private health insurers and public health programs like Medicare and Medicaid, each have their own procedures, regulations, and forms that need to be submitted to receive payments. This translates to more employee time devoted to billing.
Another factor driving costs is the staff time devoted to the collection of debts. A 2017 Health Affairs study examined medical claims data from 88,000 healthcare providers contracted with Athenahealth to determine the percentage of bills paid within one year from the initial service.
The study found that 93.8% of patient bills under $35 were paid within a year. However, that percentage decreased as the patient obligation increased:
- 90.5% of patients paid bills between $35 and $75 within one year;
- 83.7% paid bills between $75 and $200 in the same time period; however,
- When bills increase to $200 or more, just 66.7% were paid within a year’s time.
Providers wrote off approximately 16% as abandoned or bad debts, with an additional 17% going to collection agencies.
Another study, published in Health Affairs in 2009, surveyed 895 physicians about the time they spent dealing with administrative tasks. On average, physicians reported spending 43 minutes per workday interacting with health plans. This number is the equivalent of three hours/week and almost three weeks/year. Those numbers have reportedly increased since then.
EHRs Do Not Reduce Administrative Costs, Contrary to Belief
Efforts have been made to reduce administrative costs in the US healthcare industry. One such measure involved increased use of certified electronic health record (EHR) systems, which the federal government spent billions of dollars promoting and incentivizing providers to adopt on the claim that EHRs would reduce healthcare costs, in part by removing most of the paperwork.
However, a 2018 study published in the Journal of the American Medical Association (JAMA) reported the adoption of EHRs did not reduce administration costs. Researchers at Duke University and Harvard Business School utilized a cutting-edge accounting method to determine the administrative costs within a large academic healthcare system that was using a certified EHR.
Their study determined the administrative costs for processing a single medical bill ranged from $20 for a doctor visit to $215 for an inpatient surgical procedure. These costs accounted for 3%-25% of total professional revenue for the provided services.
“We need to understand better how complexity is driving these enormous costs within the system, costs that do not add value to patients, employers, or providers,” noted Barak Richman, JD, PhD, Duke University School of Law and Margolis Center for Health Policy, one of the study’s authors.
Clinical Lab Test Claims a Major Portion of Administrative Costs
Nevertheless, administrative costs are a necessary part of doing business and not always as negative as perceived. An article published by Health Affairs in 1992 divided administrative costs in the healthcare industry into four categories:
- Transaction-related: claims processing, billing, admissions, and tracking employee hiring/terminations;
- Benefits Management: quality assurance, plan design, statistical and internal analyses, and management information systems;
- Selling and Marketing: strategic planning, underwriting, and advertising; and,
- Regulatory and Compliance: waste management, licensing requirements, and discharge planning.
“We hope that this work is the first step toward informing policy solutions that could reduce these non-value-added costs largely hidden within the healthcare system,” Schulman stated in a Duke University news release.
The issue of costly paperwork and administrative expenditures is significant for the clinical laboratory profession as lab test claims make up a substantial portion of all medical claims filed annually. Efforts to streamline or reform claims adjudication and administration will have an impact on the way clinical labs and anatomic pathology groups conduct business in the future.
—JP Schlingman
Related Information:
Hidden from View: The Astonishingly High Administrative Costs of U.S. Health Care
NEJM: Costs of Health Care Administration in the United States and Canada
Heath Affairs: Inside the Black Box of Administrative Costs
Heath Affairs: As Patients Take on More Costs, Will Providers Shoulder the Burden?
Heath Affairs: What Does It Cost Physician Practices to Interact with Health Insurance Plans?
