5 Takeaways from Study Showing Higher US Administrative Costs

A new study in the September edition of Health Affairs finds American hospitals spend far more on administrative costs than 7 other nations.

The study compared costs in the US to those of Canada, England, Scotland, Wales, France, Germany and the Netherlands. Using data from 2010 and 2011, researchers found American hospitals spent 25.3% of their total budgets on administrative costs. The next-highest was the Netherlands, which spent 19.8% of its hospital spending on administrative costs. Scotland had the lowest rate, devoting 11.6% of hospital spending to administration.

The study notes that most national healthcare spending comparisons tend to compare the US only to Canada. This is the first time a study has been done among a variety of nations, with a variety of healthcare systems, ranging from Canada’s single-payer model to America’s private insurer system.

In addition to the top-line findings, researchers made a number of other key points. Among them:

1. America’s administrative costs are on the rise. US Hospital administrative costs were 23.5% of total hospital costs in 2000, but rose to 25.3% by 2011. Hospital administration’s share of gross domestic product (GDP) rose from 0.98% to 1.43% during that same time frame. Meanwhile, in Canada the proportion of administrative spending dropped from 12.9% in 1999 to 12.4% in 2011. Had the US been able to keep administrative spending at 2000 levels, it could have saved $74.4 billion by 2011.

2. For-profit hospitals had higher administrative costs. In the US, the study found 27.2% of total expenditures by for-profit hospitals went to cover administrative costs. Nonprofit hospitals spent 25% of their budgets on administrative costs. Public hospitals spent only 22.8% of their expenditures on administrative costs. The study also found teaching hospitals (23.6%) and rural hospitals (24.7%) had lower-than-average administrative costs.

3. Cutting administrative costs could mean big savings. The study found per-capita spending on hospital administration was $667 in 2010, compared to $158 in Canada and $164 in Scotland. The next-highest nation after the US was the Netherlands, which spent $323 per capita. The study found the US would have saved more than $150 billion in 2011 had it been able to reduce its hospital administration rates to Canada’s or Scotland’s per-capita levels.

4. It’s hard to draw a line between costs and quality. The study notes that there are pros and cons in all of the systems. The biggest driver of hospital administrative costs appears to be the complexity of the country’s reimbursement model as well as its method of funding administrative costs. All that choice means Americans have the widest array of insurers to choose from. However, patients in many of the nations surveyed have greater choice when it comes to picking a hospital. The study also notes that American for-profit hospitals, which have the highest administrative costs, don’t necessarily give better care than nonprofits. “For-profit hospitals also score lower on Medicare quality measure, and their patient perceive their care less favorably, compared to nonprofit institutions,” the authors wrote.

5. Pay for performance may boost accountability, but it could also boost administrative costs. The study notes that new payment systems often come with steep documentation requirements and incentives for mining patients’ data to find exceptions. “The [Accountable Care Organization] strategy also stimulates hospitals to develop bureaucratic structures to carry out tasks that resemble components of managed care, such as referral management, underwriting, and utilization review,” the study notes.