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Healthcare's "Indefensible Administrative Costs"

Posted Dec 23 2008 9:35pm
Administrative inefficiencies in U.S. healthcare are obvious to the most casual consumer. But how much inefficiency is there?

On December 2nd 2008, Emdeon and Newt Gingrich's Center for Health Transformation (CHT) announced the formation of the U.S. Healthcare Efficiency Index.

The US Healthcare Efficiency Index measures the progress towards use of electronic transactions and stands at a lowly 43%. Current electronic transaction utilization for medical claims ranges from Claims (75%), Eligibility Verification and Claims Status (both 40%), Claim Remittance Advice (26%) and Payments (10%).

Converting the remaining paper transactions to electronic is estimated to save the U.S. healthcare system $30 billion annually. This is equivalent to the bailout of U.S. automakers... twice per year.

The problem of high administrative costs is much bigger than the issue of administrative simplification as it was contemplated under HIPAA. However, the Efficiency Index reveals that HIPAA has failed to deliver the promised percentage of electronic transactions usage as documented in the final rule for Standards for Electronic Transactions.

So what are the broader parameters of high and inefficient administrative costs?
  • A 2008 California Health Care Foundation (CHFC) Snapshot: Health Care Costs 101, calculates that 7% of the national health expenditure is on administration. Administration costs are growing at an 8.8% rate, much higher than recent growth in overall healthcare spending (6.7%) and higher still than CPI growth (3.2%). Since 1986, administration costs have grown from 5% to 7% of the national health expenditure, rising from $23 billion to $145 billion. Private spending on administration is 9% while public spending administration is 6%.
  • On November 21, 2008, Uwe Reinhardt, economics professor at Princeton criticized these "indefensible administrative costs". In referring to the McKinsey study, his analysis concluded that of the 21% excess spending, "85% of this excess administrative overhead can be attributed to the highly complex private health insurance system in the United States. Product design, underwriting and marketing account for about two-thirds of that total. The remaining 15% was attributed to public payers that are not saddled with the high cost of product design, medical underwriting and marketing, and that therefore spend a far small fraction of their total spending on administration."
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