Wednesday, April 09, 2008

ECON 365: Administrative Costs

An excellent summary from a nice article in health affairs (that actually describes several other reasons for high costs in the US than I've outlined):
. By international standards, the U.S. approach to financing health care is extremely complex. Research suggests that a sizable fraction of higher U.S. health spending, not explainable by higher GDP per capita, can be traced to the higher administrative overhead required by such a complex system.16 To quote economist Henry Aaron on this point: "Like many other observers, I look at the U.S. health care system and see an administrative monstrosity, a truly bizarre mélange of thousands of payers with payment systems that differ for no socially beneficial reason, as well as staggeringly complex public system with mind-boggling administered prices and other rules expressing distinctions that can only be regarded as weird."17

Aaron’s comment was part of his response to a recent paper by Steffie Woolhandler, Terry Campbell, and David Himmelstein, who find that administrative costs for insurers, employers, and the providers of health care in the U.S. health system (not even including the time costs patients bear in choosing health insurance and claiming reimbursement) were "at least" $294.3 billion in 1999, or about 24 percent of total U.S. health spending.18

Aaron’s remarks may leave the impression that public insurance programs are the chief culprits in this "administrative monstrosity." However, as Commonwealth Fund president Karen Davis observed in her recent testimony before Congress, administrative expenses for private insurance in the United States are two-and-one-half times as high as those for public programs.19

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