Cost & Quality Problems

Excessive Administrative Spending

Administrative costs refer to the costs incurred by health plans, hospitals, providers and other entities to conduct the business side of health care; including billing, enrollment, marketing, provider and medical management, member relations and corporate services.

Some administrative spending is valuable and necessary to the functioning of the health care system. We define excessive administrative spending as any administrative spending that exceeds what is necessary to achieve the overall goals of our system.

Significant research gaps make it difficult for policymakers to grasp the total magnitude of wasteful administrative spending in health care. Yet, evidence suggests that administrative spending can be reduced without harming patient care. 

Commonly, the billing and related expenses incurred by insurers come to mind when we think of administrative waste. However, to understand the full picture of administrative spending, reveal evidence gaps and identify potential for savings, it is useful to consider the various health care stakeholders and two types of administrative expenses (see table). 

Administrative Activities by Stakeholder

	Billing and Insurance-Related Expenses	Other Administrative Expenses
Hospital and Clinician Providers	Interactions with insurers, filing claims, gaining pre-authorizations for health care services and managed care administration	Admitting processes, inputting information into EHRs, customer services, finance and accounting, legal compliance and filing services, marketing
Private and Public Health Plans	Claims processing and payment activities	Communications with members, customer service, finance and accounting, actuarial, legal compliance and filing services, marketing
Patients	Submitting claims for reimbursement, tracking expenses eligible for reimbursement, appealing coverage denials, addressing unaffordable bills through payment plans or other methods	Enrolling in coverage

Sources: American Academy of Actuaries, Critical Issues in Health Reform: Administrative Expenses (2009);  Merlis, M., Simplifying Administration of Health Insurance, National Academy of Social Insurance and National Academy of Public Administration (2009). 

 

The key cause of excess administrative spending in the U.S. is our complex, multi-payer health care financing system, which adds costs due to complexity of the financing system and the duplication of tasks related to coverage, billing, and eligibility. Myriad studies have found potential for savings in the administrative spending by private health plans and providers, whereas the patient’s administrative burden (to enroll in coverage, receive care and get reimbursed for expenses, etc.) has never been tallied and represents the greatest gap in our understanding of administrative burden.

Solutions fall into two camps: those that work within our current multi-payer financing system and those that reduce this core source of administrative burden by moving to all-payer or single-payer systems.  The former approach includes strategies such as: 

• Simplifying eligibility for insurance, thereby reducing churn and enrollment costs;​
• Standardizing and simplify health plan benefit designs and making cost sharing affordable so patients can pay their bills on time​;
• A single standardized process for accreditation and licensing providers​;
• Standardizing reporting requirements for quality and safety programs;
• Standardizing provider-payer payment rules and pre-authorization process​es; and
• Paying providers based on the largest bundle of services possible​.

All told, additional research and data collection are needed to better identify and reduce administrative waste.