Hospital budgets consumed by bureaucracy

The administrative costs of U.S. hospitals far outstrip those of international hospitals and current pay-for-performance models are likely to boost those costs even higher.

The proportion of hospital costs pegged to administration was 25.3 percent in the U.S. – the highest of the countries an international team of health policy experts studied and twice the percentages for Canada and Scotland, who had the lowest.

In the U.S., for-profit hospitals had higher administrative costs (27.2 percent) than did nonprofits (25 percent) or public hospitals (22.8 percent). Administrative costs for teaching hospitals (mostly nonprofits) were 23.6 percent, 24.7 percent for rural hospitals and 25.5 percent for urban hospitals.

The international team of researchers examined official hospital cost accounting data for 2010 and 2011 from the U.S., Canada, England, Scotland, Wales, France, Germany and the Netherlands.

In a paper published in the September issue of Health Affairs, the researchers said that the data suggest that the higher administrative costs in the U.S. could be attributed to the larger the number of managers and clerical workers rather than to differences in wage levels, benefit costs or non-wage costs.

“In all nations, hospital administrators must procure and coordinate the facilities, supplies, and personnel needed for good care,” the researchers wrote. “In nations where administrators have few responsibilities beyond these logistical matters, administration seems to require about 12 percent of hospital expenditures.”

When administrators’ roles include securing operating and capital funds and when billing is more complex, the cost of administration goes up.

For example, in countries such as Canada, Scotland and Wales where administrative costs are low, hospitals receive global, lump-sum budgets, but in countries like the U.S., where per patient billing requires more clerical and management personnel and special-purpose IT systems, the administrative burden is higher.

Administrative costs are also higher in countries where hospital administrators take on the additional work of identifying and pursuing “profit opportunities.” The “entrepreneurial incentive” of such activities may lead to cutting unnecessary operating costs, which improves efficiency, the researchers noted, but may also encourage the diversion of resources to less efficient activities such as upcoding patient bills and cherry-picking profitable patients, physicians and services.

The researchers noted that factors such as a greater intensity of care, such as in the U.S., may contribute to higher administrative costs. However, they found that higher administrative costs do not translate into better care for patients nor do they mean that the money funneled into more administration to eliminate clinical waste or enhance market competition will result in lower total hospital costs. In fact, the researchers found that hospital costs were highest in the countries that had the highest administration costs.

While pay-for-performance reimbursement models are being touted as the future of healthcare, resulting in lower costs and better care, the researchers concluded that such models may actually boost administrative costs because of the increase in documentation requirements and the emphasis on data analysis. The researchers also noted that the strategy of accountable care organizations encourages the creation of bureaucratic structures that are in themselves administration-heavy.

Moving the U.S. healthcare system to single-payer, they said, could result in huge administrative savings. Per their calculations, if U.S. would have saved $158 billion or $156 billion, respectively, if the country operated in a system like Canada’s or Scotland’s, both of which are single-payer.