How Administrative Costs Increase the Cost of Healthcare

Illustrated man demonstrating administration costs

This is the second post in our 5-part series in which we attempt to shed a little light on what drives the costs of healthcare. In our first post, “Why Is Healthcare So Expensive?“, we identified 4 factors that influence healthcare costs: administrative costs, defensive medicine, pharmaceutical companies, and the third-party payer. This post dives deeper into administrative costs and how they can increase the amount you spend on healthcare.

According to The Commonwealth Fund, administrative costs account for around 30% of all healthcare spending in the United States. If the U.S. had reduced its spending on healthcare administration to that of Scotland or Canada, it could have saved over $150 billion in 2011. U.S. administrative costs rose about 2% between 2000 and 2011, and these costs are thought to continue to rise. Even with the increased administrative costs, there was no obvious increase in the quality of care.

What exactly are administrative costs? Administrative costs are expenses that an organization pays for which are not directly tied to a specific business function like finance, marketing, or sales. Administrative costs are charges for basic functions within a business. Let’s look at some of the major factors influencing high administrative costs in the U.S.

What is Bill-able?

Healthcare providers can only bill for certain services. These are usually doctor visits, tests, and procedures. A lot more goes into a visit than just showing up, though. You might have to call someone to schedule the procedure or check-up. Maybe you will need to send in records for the doctor to review, and you’ll surely want a follow-up appointment regarding the results of your examination. The problem for healthcare providers is they must pay staff to perform these tasks but can’t charge the patient directly for those services. For every hour a patient spends with a doctor many more hours are spent behind the scenes doing work for that same patient.

In response to this, healthcare providers increase the cost of the visits or procedures to make up for these services. It’s estimated that 30% of every dollar charged for a medical bill is tied to administrative costs. Healthcare providers need to find a middle ground price to charge patients, knowing that many patients’ care won’t necessitate a 30% administrative cost.

The Complex Payer System

Insurance companies and healthcare providers both need to hire staff to do a lot of work processing bills, negotiating costs and payments, and communicating with patients. These aspects of healthcare include multiple steps and require a great amount of detailed work, which costs both insurance companies and care providers money.

There are many factors that determine the costs of a procedure and how much an insurance company will cover. The differences in what hospitals charge and what insurance providers pay leads to increased administrative costs. Unlike single-payer systems where the government provides financial oversight for care, there are many different payers and plans in the U.S. that all have different processes, coverage, and reimbursement rates. The complexity of the payer system increases the amount of work, which, in turn, increases administration costs. In short, as the healthcare industry grows and expands, its workings become more complicated, and administration fees increase.

The Downstream Effects

Hospitals have made updates to accommodate new changes in healthcare such as those brought about by the Affordable Care Act, and this has changed the way organizations provide care to their patients. Doctors need nurses, physician assistants, nurse practitioners, and other staff to do much of the work they might have done previously. This reduces physician work and frees them up to do what only they can do: generate income for the organization.

The less personal and less direct care provided by doctors has not been appreciated by many patients, and it isn’t expected to get better anytime soon. Reports estimate a large shortage of doctors in the future, and this shortage is made worse by an increasingly elderly population and retirement for many physicians.

Although there are challenges facing the healthcare industry, there is hope. With each new generation of healthcare providers, new solutions to help reduce costs for patients and provide quality care sprout up. The future of healthcare is tied to the innovative generation of incoming care providers. While administrative fees are driving up the cost of healthcare, the healthcare industry is passing the torch to new providers who are committed to excellent care and finding solutions for health and the cost of healthcare.

POSTED ON: November 29, 2017
By PatientX Agency | Patient Experience
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