Health insurance maze a major financial burden on hospitals, doctors, businesses

June 20, 2012 — According to the Centers for Medicare and Medicaid Services (CMS), nearly $850 billion was funneled through private health insurance companies in the United States in 2010, the most recent year for which detailed data is available, representing more than 5 percent of GDP. Most of that money went directly into health services, such as hospital care, physician reimbursement, and prescriptions drugs. The rest, some $102 billion, went into profits, marketing, and another broad category of expenses known as “administrative costs.”

The United States spends significantly more than any other country on the administration of health care — broadly defined as the amount of time, effort, and money that is spent coordinating the provision of services and payment between patients, providers, insurers, employers, and the government.

According to James G. Kahn, a professor at the Institute for Health Policy Studies at the University of California San Francisco, the billions of dollars spent by insurance companies on administrative costs (a portion of the $102 billion mentioned above) are only the tip of the iceberg. Doctors, hospitals, and employers are burdened with the additional costs of navigating the complex health insurance system, Kahn said, “and those costs are then borne, indirectly, by patients.”

Researchers have estimated that, all together, the costs add up to hundreds of billions of dollars a year, a huge share of total health care spending. “In all the discussion about the money spent on health care,” Kahn said, “those costs have received a surprisingly small amount of attention.”

How much?

Over the last decade, there have only been a handful of academic studies that have attempted to estimate the amount of time and money that is spent on the administration of health care every year. Part of the reason for this is that, while the government and other groups do collect data on total administrative costs in various settings, they do not separate out the portion of those costs that can be attributed to interacting with insurance companies, as opposed to other kinds administrative tasks, such as quality review.

Still, those studies that have been done provide a sense of the scale of the administrative costs associated with billing and insurance-related tasks. Most of that work has looked at the costs borne by physicians and hospitals. In a 2005 study, for example, Kahn and three colleagues used survey data to estimate the number of hours that hospitals, physicians, and clinical staff spent on administrative tasks associated with billing and insurance in California. They found that physician offices were spending between 13.9 and 14.5 percent of their total revenue on those tasks, while hospitals were spending between 6.6 and 10.8 percent of total revenue.

A more recent study, in 2009, produced similar results on the national level. The study found that physicians spent an average of three hours a week interacting with health insurance plans. For each physician in a medical practice, nursing staff, in the aggregate, spent an average of 23 weeks per year interacting with health plans, and clerical (non-clinical) staff, in the aggregate, spent an average of 44 weeks per year. The study estimated the total cost to each practice at $68,274 per physician per year. In a separate 2009 study, using a different methodology, other researchers estimated that cost at $85,276 per physician.

In 2010, Kahn synthesized the findings of these and other studies to estimate the total costs of the health care administration that is related to billing and insurance. The results became a chapter in a book published by the Institute of Medicine on health care costs. The number that he came up with was $361 billion, representing about 15 percent of total healthcare costs in 2009.

“When we finally had a number that we felt confident about, we kind of stepped back and said, ‘Wow,’” Kahn said.

Since his synthesis study was published, however, there have been some new estimates of the costs borne by physicians, which have made Kahn believe that his previous estimates were too low. He is currently updating his synthesis. Since his numbers are preliminary, he could not give an exact figure, but said, “We’re definitely looking at more than $400 billion.”

And that estimate does not include the costs borne by employers, which are even more difficult to parse. The only study that has attempted to estimate those costs, by Stephanie Woolhandler, a practicing physician and a professor at the City University of New York School of Public Health, and two colleagues, was published in the New England Journal of Medicine in 2003. Woolhandler estimated that the costs to employers of administering health insurance coverage for their employees was $15.9 billion in 1999. While more recent data is not available, Woolhandler said that if her 1999 estimate were adjusted by the same rate that total employer health care costs have risen since then (about 130 percent, according to the Kaiser Family Foundation), the total for 2009 would be estimated at about $37 billion.

“That’s certainly a low estimate,” Woolhandler said. “It’s the best we can do with the data we have, but the costs to employers are very hard to quantify. I think we can safely say that it’s at least that much, and very likely significantly more.”