Overhauling America’s Healthcare Machine, an excerpt

An excerpt from Overhauling America’s Healthcare Machine: Stop the Bleeding and Save Trillions, published by Financial Times Press (2011).  Reprinted with permission of FT Press, and imprint of Pearson.

In recent years, more and more of the revenue collected by U.S. healthcare facilities ends up paying for costs that have nothing to do with providing actual healthcare goods and services: things such as administration, billing, documentation, and the cost of complying with thousands of rules and regulations.

This escalating overhead ends up being built into the fees of doctors and hospitals each year, but doesn’t add a penny to their salaries or profits.

Calculating a “true” administrative overhead rate for outpatient practices nationwide is difficult.  First, there are well over a million healthcare providers in the United States, including physicians, physician assistants, nurse practitioners, dentists, podiatrists, chiropractors, therapists, and others.  Performing valid financial surveys on such a large and diverse population is rarely, if ever, done.  Second, practice conditions vary wildly – from solo independent practices to huge medical groups, private HMOs, and government facilities.  This makes accounting comparisons extremely difficult.  Third, it’s often difficult to account for the true cost of “administration and overhead” when providers perform so many different tasks in a given day.  Nevertheless, one study did attempt to quantify these costs as of the year 2000.  The results are shown in Figure 4.2.

 

Overhauling America’s Healthcare Machine, an excerpt

Figure 4.2

As you can see, between 20-27% of every dollar collected by the outpatient clinics surveyed in 2000 went to purely administrative overhead, with much higher rates being prevalent in multi-specialty and primary care practices.  Note that these numbers are for administrative expenses only, and specifically do not include the other costs that we might normally think of as overhead, such as rent, utilities, clinical staff salaries, transportation, and so on.  When these costs are included, non-clinical costs as a percentage of revenue can easily climb higher than 50% – especially in smaller practices, where overhead costs are not spread across a large number of providers.  Billing and insurance-related expenses alone accounted for about 12-15% of gross revenue in the year 2000.

These numbers are pretty high, but can’t be interpreted in isolation.  An international point of comparison is needed, and again we’ll turn to Canada.  Current data comparing non-clinical expense rates between countries is extremely difficult to obtain, but the data that does exist is quite plain.  As shown in Figure 4.3, while the number of outpatient medical practitioners in the United States per million of population increased by just 27.4% between 1971 and 1986, the number of healthcare administrators and managers increased by 136%.  Over the same period of time, the number of Canadian practitioners increased by 40%, while the number of administrators increased by 67.2%.

 

Overhauling America’s Healthcare Machine, an excerpt

Figure 4.3

 

Another way of looking at the same data is to compare the ratio of outpatient administrators to practitioners.  In 1971, the United States had about three administrators for every four practitioners.  Just 15 years later, there were almost five and a half administrators for every four practitioners.  As healthcare researchers Himmelstein, Lewontin, and Woolhandler wrote in 1996:

“Twenty-seven percent of U.S. medical care workers do mostly paperwork.  If the United States duplicated Canada’s 1986 staffing patterns, the country’s hospitals and outpatient facilities would require 1,407,000 fewer clerks and managers.”

That was fifteen years ago.  Today there are far more administrators than ever before, both in absolute numbers and as a proportion of the healthcare workforce.  Figure 4.4 goes beyond outpatient care and graphs the growth in total U.S. medical administrative personnel, compared to the growth in physicians between 1968 and 1993.  According to the Bureau of Labor Statistics, in 2010 there were more than 4.5 million Americans employed in healthcare management and administrative support.  In contrast, there were only about 820,000 clinically active physicians in the United States – more than a 5:1 ratio of administrators to doctors!

 

Overhauling America’s Healthcare Machine, an excerpt

Figure 4.4

 

Amazingly enough, even these numbers still significantly underestimate the real number of non-clinical jobs in the U.S. healthcare system as a whole.  They fail to include the growing ranks of workers dedicated to setting up and maintaining ever more sophisticated computer and information technology (IT) networks.  They exclude more than 926,000 additional people in the United States who work for life and health insurance companies, more than 724,000 employees of insurance brokers and consulting firms, and tens of thousands working in corporate health benefits departments and the corporate headquarters of hundreds of supporting companies.  Most importantly, these statistics neglect the fact that clinical personnel themselves are being forced to spend more and more time and money on paperwork, computer work, and administrative tasks each year.

The financial impact is best summarized by a comparison of the cost of healthcare administration in the United States and Canada published by Woolhandler et al. in 2003.  The results are summarized in Figure Table 4.1.

 

Overhauling America’s Healthcare Machine, an excerpt

Table 4.1

 

In 1999, healthcare administration costs in the United States were at least $294.3 billion.  Total per capita healthcare spending has increased by almost 100% since then, while administration-related costs are rising even faster.  This means that the total bill for healthcare administrative overhead in 2010 was more than $600 billion.

If we were to simply reduce our per capita spending  on healthcare administration to the Canadian level, we would save well over $225 billion in healthcare spending every year.  By now it should be obvious that the major component of disappearing revenue for American healthcare providers is the incredibly high cost of U.S. healthcare overhead and administration.  The magnitude of this expense is so large that it’s almost difficult to appreciate.  However, here is just one example:  There are currently about 50 million uninsured people in the United States.  In 2009, the average annual premium for an employer health plan covering a family of four averaged about $13,375, or $3,344 per person.  At this rate, insuring all 50 million uninsured Americans would cost slightly more thanover $167 billion annually.  Reducing per capita healthcare administration costs to Canadian levels would buy coverage for all of them, and still leave almost $60 billion to spare.

As Thomas Sowell put it: “It is amazing that people who think we cannot afford to pay for doctors, hospitals, and medication somehow think that we can afford to pay for doctors, hospitals, medication, and a government bureaucracy to administer it.”

Doug Perednia is an internal medicine physician and dermatologist who blogs at Road to Hellth. He is author of Overhauling America’s Healthcare Machine: Stop the Bleeding and Save Trillions.

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  • inchoate but earnest

    While it’s a neat trick to enlist both Steffi Woolhandler and Thomas Sowell on the same side of any argument, Dr. Perednia’s earnest but muddleheaded insinuation that if we only leave our noble healers alone to practice whatever way they please, and pay them whatever they deem appropriate for care, all will be best in the best of all possible worlds, is an action plan in the same way that Paul Ryan’s ‘budget plan’ is, y’know, an actual plan to do something.

    Physicians’ aversion to systematic behavior and sharable practice information is at this point about as well-documented as the evidence that smoking causes lung cancer. Their protests to the contrary, it’s painfully clear that that misbegotten set of traits has almost as much to do with the ‘healing by almost always doing something more’ operating principle that has overtaken american medicine as the dysfunctional financial incentives incorporated in 3rd party reimbursement formulae.

    • imdoc

      So…poster #1, your solution then is yet MORE bureaucrats to force the unwieldy non-compliant physicians to toe the line? Everything improves when the anointed elite social engineers exert complete control?
      Since when is response to environmental incentives a “set of traits”, particularly when arising from a diverse group of individuals?

      The people who assume they are smarter than everyone else and try to manipulate economics by government fiat uniformly cause more problems.

  • alex

    Post #1: OK, you got us. It’s all about the bad doctors and their “aversion to systemic behavior”. But we await your explanation for why most of this post is as a comparison to the Canadian system, which has largely similar pools of applicants, educational systems and even (oh no!) fee for service and yet the results are so different.

    I’ve talked to plenty of Canadian colleagues and have my own set of ideas on where the difference lies. And it ain’t the doctors, who are pretty much totally indistinguishable between the two countries. But most people (like mr. first poster) have their mind made up so there’s no sense trying to argue with people about it.

  • doctor1991

    It’s interesting Dr. Perednia compared to Canada. I wonder how a comparison would rate to Singapore? I don’t think that all administration should be eliminated, but we should pay attention to what it’s actually accomplishing. As a practicing physician, it’s amazing how much of our efforts and expenses go towards satisfying silly rules that do nothing to improve care. It’s funny how this never comes up when bureacrats complain about lack of “value” for the money spent.

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