How Administrative Costs Increase the Cost of Healthcare

Illustrated man demonstrating administration costs

This is the second post in our 5 part series where we are shedding 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 Third Party Payer. This post dives deeper into Administrative Costs and how they can increase your healthcare costs.

According to The Commonwealth Fund, administrative costs account for around 30% of all healthcare spending in the United States. If the U.S. reduced its spending on healthcare administration to that of Scotland or Canada, it could have saved over $150 billion in 2011. Also, U.S. administrative costs rose about 2% between 2000 and 2011. 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? Well, administrative costs are expenses that an organization pays for that 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 and tests and procedures. But, a lot more goes into a visit than just showing up. You might have to call someone to schedule the procedure or visit. Maybe you had to send in records for the doctor to review. Surely you wanted to follow up regarding the results of your test. The problem for healthcare providers is they must pay staff to perform these tasks but can’t charge the patient directly for these 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 will be for administrative costs. Healthcare providers need to find a middle-ground price to charge patients knowing that many patients won’t cost the full 30% but that some patients will cost well over what they were charged.

The Complex Payer System

Insurance companies and healthcare providers both need to hire staff to do a lot of work to process bills, negotiate costs and payments, and communicate with patients. These processes include multiple steps and require a great amount of detail.

There are many factors that determine the costs of a procedure and how much will be covered. The differences in what hospitals charge and what insurance providers pay lead to increased administrative costs. Unlike single-payer systems where the government provides care for its citizens, 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.

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. Don’t expect this to get better, however. Reports estimate a large shortage of doctors in the future. This shortage is made worse by an increasingly elderly population and many physicians coming into retirement age.

Stay tuned for our upcoming posts where we explain the other costs of healthcare: Defensive Medicine, Pharmaceutical Companies, and Third Party Payer.

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