Healthcare challenge:Administration may cost $1 trillion

Various newspaper health care advertisements from lobbying groups. Reshaping the nation's healthcare
system has spurred some shotgun marriages of convenience.  A slick Web site offering one-click ways
to contact Congress, share health care stories and even buy T-shirts is run by a coalition
of business, labor and the AARP.
(AP Photo/Manuel Balce Ceneta)
 

Administrative cost may be the healthcare industry's dirty little secret.   Remarkably little research details the real cost of maintaining the American healthcare delivery system.   If the best data available is accurate, healthcare administrative expense could be approaching $1 trillion annually.

A California report from the Journal “Health Studies,” found that a third of healthcare dollars goes to support an administrative bureaucracy.   The California estimate tends to confirm the findings of two other major independent investigations.  Doctors from the Harvard University Medical School found a 300 percent higher administrative cost structure in the U.S. when contrasting similar costs with Canadian data.  A wider analysis, by researchers from Johns Hopkins University, compared U.S. costs with those of six similar OECD (Organization for Economic Cooperation and Development) countries and calculated that the U.S. spends an average 256 percent more on administration.

The McKinsey Global Institute attributes 85 percent of this overhead differential to the highly complex private, U.S. health insurance system. Product design, underwriting, and marketing costs are responsible for 2/3 of overhead costs while more publicly supervised programs cost much less.

No two American private healthcare insurers exactly mirror any other insurer. Payment and benefit infrastructures are reinvented for each company. This is part marketing strategy, part benefit expense management, and part intentional opaque design.  Side by side comparisons are intentionally made difficult. Even more potentially sinister are sets of secret agreements between insurers and providers.

Adding to costs are duplicate medical staffs; proprietary policy and procedures handbooks; individual underwriting and actuarial departments; independent coordination of benefit departments; plus ancillary investments in related businesses by each insurer.  The investment activity acts as an incentive to delay regular payments for covered services because insurers earn returns on the premium float and this further inflates provider cost. 

Many companies that ordinary people think of as insurers have morphed into pure administrators.  They have exited most insurance activity in favor of hybrid, employer-funded, insurance look-a-like plans.  The benefit administrator maintains a traditional insurance company's functions, but has shifted most risk to the sponsoring employers. 

Premiums are deposited in special accounts against future claims.  High deductable group insurance (a “stop-loss” policy) is purchased against catastrophic claims. The theory is that premiums are held down by limiting the insurer's risk. Benefits are paid out of employer and employee deposited funds.

The sponsoring employer hopes for a-lower-than-predicted claims year and an eventual premium rebate.  A sad side effect of this scheme is a disincentive to hire older employees or folks with known medical problems. The practice is illegal, but rarely contested.

If claims should balloon and “the stop-loss” kicks in, the company’s actuarial profile changes radically. One company with 300 employees lost a single employee to a fatal illness.  Her final expenses caused premiums to jump by 24 percent the following year.

Benefit administration as described is only one leg of the total administrative costs, is the genesis of a wave of administrative cost that ripples through the rest of the system.

Next: Administrative costs on the provider side

As America searches for solutions leading to a reformation of its own health care system, knowing the successes and shortcomings of health care regimes in other developed nations will be essential in negotiating the most palatable and efficient design for all concerned. This series attempts to connect the dots and explode the talking points in hopes that the folks who actually have a vote might come to a conclusion.

Al Portner is a former daily newspaper editor and publisher in seven states and author of the forthcoming “Mark Twain and the Tale of Grant’s Memoir.” Portner is also the proprietor of The Assignment Desk, LLC and provides writers, editors, and photographers for numerous kinds of contract projects from proposals and speeches to public relations and journalism. Reach him at alanportner@gmail.com.