Hidden From View: The Astonishingly High Administrative Costs of U.S. Health Care

https://theincidentaleconomist.com/wordpress/upshot-administrative-costs/

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It takes only a glance at a hospital bill or at the myriad choices you may have for health care coverage to get a sense of the bewildering complexity of health care financing in the United States. That complexity doesn’t just exact a cognitive cost. It also comes with administrative costs that are largely hidden from view but that we all pay.

Because they’re not directly related to patient care, we rarely think about administrative costs. They’re high.

A widely cited study published in The New England Journal of Medicine used data from 1999 to estimate that about 30 percent of American health care expenditures were the result of administration, about twice what it is in Canada. If the figures hold today, they mean that out of the average of about $19,000 that U.S. workers and their employers pay for family coverage each year, $5,700 goes toward administrative costs.

Such costs aren’t all bad. Some are tied up in things we may want, such as creating a quality improvement program. Others are for things we may dislike — for example, figuring out which of our claims to accept or reject or sending us bills. Others are just necessary, like processing payments; hiring and managing doctors and other employees; or maintaining information systems.

That New England Journal of Medicine study is still the only one on administrative costs that encompasses the entire health system. Many other more recent studies examine important portions of it, however. The story remains the same: Like the overall cost of the U.S. health system, its administrative cost alone is No. 1 in the world.

Using data from 2010 and 2011, one study, published in Health Affairs, compared hospital administrative costs in the United States with those in seven other places: Canada, England, Scotland, Wales, France, Germany and the Netherlands.

At just over 25 percent of total spending on hospital care (or 1.4 percent of total United States economic output), American hospital administrative costs exceed those of all the other places. The Netherlands was second in hospital administrative costs: almost 20 percent of hospital spending and 0.8 percent of that country’s G.D.P.

At the low end were Canada and Scotland, which both spend about 12 percent of hospital expenditures on administration, or about half a percent of G.D.P.

Hospitals are not the only source of high administrative spending in the United States. Physician practices also devote a large proportion of revenue to administration. By one estimate, for every 10 physicians providing care, almost seven additional people are engaged in billing-related activities.

It is no surprise then that a majority of American doctors say that generating bills and collecting payments is a major problem. Canadian practices spend only 27 percent of what U.S. ones do on dealing with payers like Medicare or private insurers.

Another study in Health Affairs surveyed physicians and physician practice administrators about billing tasks. It found that doctors spend about three hours per week dealing with billing-related matters. For each doctor, a further 19 hours per week are spent by medical support workers. And 36 hours per week of administrators’ time is consumed in this way. Added together, this time costs an additional $68,000 per year per physician (in 2006). Because these are administrative costs, that’s above and beyond the cost associated with direct provision of medical care.

In JAMA, scholars from Harvard and Duke examined the billing-related costs in an academic medical center. Their study essentially followed bills through the system to see how much time different types of medical workers spent in generating and processing them.

At the low end, such activities accounted for only 3 percent of revenue for surgical procedures, perhaps because surgery is itself so expensive. At the high end, 25 percent of emergency department visit revenue went toward billing costs. Primary care visits were in the middle, with billing functions accounting for 15 percent of revenue, or about $100,000 per year per primary care provider.

“The extraordinary costs we see are not because of administrative slack or because health care leaders don’t try to economize,” said Kevin Schulman, a co-author of the study and a professor of medicine at Duke. “The high administrative costs are functions of the system’s complexity.”

Costs related to billing appear to be growing. A literature review by Elsa Pearson, a policy analyst with the Boston University School of Public Health, found that in 2009 they accounted for about 14 percent of total health expenditures. By 2012, the figure was closer to 17 percent.

One obvious source of complexity of the American health system is its multiplicity of payers. A typical hospital has to contend not just with several public health programs, like Medicare and Medicaid, but also with many private insurers, each with its own set of procedures and forms (whether electronic or paper) for billing and collecting payment. By one estimate, 80 percent of the billing-related costs in the United States are because of contending with this added complexity.

“One can have choice without costly complexity,” said Barak Richman, a co-author of the JAMA study and a professor of law at Duke. “Switzerland and Germany, for example, have lower administrative costs than the U.S. but exhibit a robust choice of health insurers.”

An additional source of costs for health care providers is chasing patients for their portion of bills, the part not covered by insurance. With deductibles and co-payments on the rise, more patients are facing cost sharing that they may not be able to pay, possibly leading to rising costs for providers, or the collection agencies they work with, in trying to get them to do so.

Using data from Athenahealth, the Harvard health economist Michael Chernew computed the proportion of doctors’ bills that were paid by patients. For relatively small bills, those under $75, over 90 percent were paid within a year. For larger ones, over $200, that rate fell to 67 percent.

“It’s a mistake to think that billing issues only reflect complex interactions between providers and insurers,” Mr. Chernew said. “As patients are required to pay more money out of pocket, providers devote more resources to collecting it.”

A distinguishing feature of the American health system is that it offers a lot of choice, including among health plans. Because insurers and public programs have not coordinated on a set of standards for pricing, billing and collection — whatever the benefits of choice — one of the consequences is high administrative burden. And that’s another reason for high American health care prices.

 

 

 

Are Limited Networks What We Hope And Think They Are?

https://www.healthaffairs.org/do/10.1377/hblog20180208.408967/full/

 

 

There has long been an imperative to find ways to reduce health care spending, but the advent of public exchanges pressured the industry to find ways to offer health insurance at a more affordable premium. Health plans hoping to participate in public exchanges responded by creating insurance offerings that gave patient members access to a smaller pool of providers—limited or narrow networks. These smaller networks give payers leverage in negotiations and may eliminate more expensive providers. They have also caught the attention of employers and other health care purchasers and are growing in prevalence in the commercial market.

But what exactly are limited or narrow networks, and are they what we want them to be? We set out to understand how health plans form limited networks, postulating that the criteria to select providers for participation in limited networks across health plans would be fairly consistent. We thought we might be able to conclude, for example, that a limited network is one in which health plans exclude providers whose prices are one standard deviation above the mean or that don’t meet minimum quality thresholds.

In addition, we wanted to learn how health plans determine who among certain provider types is eligible to participate (primary care physicians, specialists, hospitals). Is there a consistent process for selecting providers? Does the health plan, for example, generally start by selecting primary care physicians and then assess the hospitals with which those physicians are affiliated?

An Elusive Concept

Catalyst for Payment Reform (CPR) reached out to a dozen health plans, diverse in size and geography, to learn more about how they form narrow networks. We began by querying them about their use of cost and quality thresholds to select providers for their limited network products.

Across health plans, CPR found no consistent formula for selecting providers by type, below a certain price point, or above a specific level of quality. We learned that health plans primarily consider which hospital or provider group will agree to a certain price (based on a premium analysis), whether excluding others is feasible given each provider’s market power or “must have” status, and whether exclusions create access issues. It is notable that among the health plans we spoke to, none used provider quality as the primary selection criterion. Health plans may consider quality while developing a limited network, but it is secondary to other criteria.

Local market characteristics significantly influence how payers define a network. The design of a limited network depends on the number of providers available as well as the level of competition among them. If a health plan develops a limited network with few providers, consumers may have to travel significant distances to receive care. When there are more provider options, competition helps health plans find a provider group willing to offer a better price. The selected provider group assumes it will make up the potential lost revenue with an increase in patient volume. Therefore, health plans perceive the presence of competition among providers as critical to the development of a limited network product. In circumstances in which health plans have greater market power, they may also consider whether providers are willing to take on some financial risk—now or in the future.

CPR’s search also revealed wide variation in the types of providers health plans focus on when they begin narrowing their networks. While most start with the hospital and then select affiliated primary care physicians and specialists, others start with the primary care physicians and look at affiliated hospitals. Some health plans include all primary care physicians in the limited network and then tier the hospitals and specialists based on cost and sometimes quality criteria. The only consistency we found was that there is no consistency! The only commonality among the narrow networks we examined was that they all contained fewer providers than a given health plan’s broadest network.

A Strategy That Is Here To Stay?

Employer and other health care purchasers’ awareness about the variation in quality and payment amounts has steadily grown, as has their need for savings. Purchasers also recognize that threatening to exclude providers from a pool of patients will strengthen their negotiating position as well as that of other payers. The latest survey data suggest that narrow networks are becoming more prevalent—a trend that is likely to continue.

According to the Henry J. Kaiser Family Foundation’s 2017 Employer Health Benefits Survey, 12 percent of benefit-offering firms with 50–999 workers, 23 percent of firms with 1,000–4,999 workers, and 31 percent of firms with 5,000 or more workers offer a high-performance or tiered network. In addition, 6 percent of firms offering benefits said that they or their insurer eliminated a health system from a network to reduce the plan’s cost during the past year.

Furthermore, the 2017 Willis Towers Watson Best Practices in Health Care Employer Survey found that more than half of employers with more than 1,000 employees said that they might add high-performance networks by 2019.

Are Providers Likely To Participate In Them If Selected?

In markets where providers lack competition, they may easily push back on the formation of narrow networks. But in markets where there is competition, providers will likely want to be included instead of risk a loss of patient volume. For providers entering into new delivery models and accepting new forms of payment, they may see narrow networks positively, giving them a greater ability to manage and coordinate patient care as there is less “leakage” of patients to a broad pool of providers. In turn, participating providers may be more willing to take on financial risk for their patients if they know it is easier to control where they seek care, minimizing exposure to particularly high-priced providers.

Are Consumers Likely To Select Them?

The experience with the public exchanges suggest that consumers are willing to make the tradeoff of choice for affordability. By seeking care from a defined group of providers, consumers pay lower out-of-pocket costs and have a straightforward benefit design that clearly distinguishes between in- and out-of-network providers and accompanying cost sharing. Consumers may save further by receiving care from high-value providers who are more likely to provide effective and efficient care the first time.

Some of the employers in CPR’s membership that offer limited or narrow networks, such as an accountable care organization product, find they are meeting or exceeding their enrollment expectations—an indicator that certain consumers will choose price over choice.

Americans are willing to make tradeoffs for now, but they may become skeptical if there isn’t an explicit effort to ensure quality and the perception grows that narrow networks are only about cutting costs. With more experience, Americans may find that physicians with targeted expertise (for example, subspecialists in oncology) or individual members of a care team (for example, anesthesiologists) may not be included in the narrow network, preventing access or resulting in surprise bills for consumers.

Conclusion

Through their use of limited networks, payers may be indicating to health care providers that affordable care will be rewarded with more patients (quality of care could also be a criterion). In markets where providers perceive a higher volume of patients as favorable, the introduction and presence of these networks can send a strong economic signal to providers to improve efficiency and lower prices. It may be too early to identify patterns in how health plans design limited networks; perhaps a standard formula will never materialize. As CPR learned, viable approaches depend on market-specific nuances.

FEARFUL LEADERS HOARD CONTROL – COURAGEOUS LEADERS GIVE POWER

Fearful Leaders Hoard Control – Courageous Leaders Give Power

Feeling powerful expands possibility, elevates engagement, and enables initiative. Feeling powerless creates weakness, dependence, and fear.

People who feel powerful see opportunity.

People who feel powerless feel threat.

Control freaks make others feel powerless.

Control freaks:

  1. Pretend to be helpful. In reality they’re pushing their own agenda.
  2. Believe others are the problem.
  3. Over-manage.
  4. Know there is only one right way to get things done. Theirs!
  5. Pretend to step back so others can step in. But when something “important” starts happening, they take over.
  6. Pretend to listen. But they already have their minds made up.
  7. View change as threat.

The smile of a control freak is arrogant sympathy in disguise. They feel sorry for all the lesser people.

How to make people feel powerful by giving control:

#1. Prepare people to feel powerful.

  1. How might you stretch and nudge, rather than shove?
  2. What training is appropriate?
  3. What experiences expand capacity?
  4. How might you build on past success?

#2. Describe the playing field.

  1. What values are in play?
  2. What does success look like?
  3. What’s out of bounds?
  4. How much decision-making power do others have?
  5. How often do you want to be kept in the loop?
  6. How does this project fit into the big picture?
  7. How much authority is being delegated?

#3. Honor expressions of power.

  1. Praise people who give input that differs from your approach.
  2. Thank people for taking action, even if it didn’t work out.
  3. Ask, “What are you learning?” Rather than telling people they screwed up.
  4. Ask, “What will you do next time?” when results disappoint.

More suggestions:

#1. Generate options. The more options you have the safer the path forward seems.

#2. Give choice. After generating options, ask others to make choices.

Choice is an expression of power.

#3. Practice attunement.

Courageous leaders give power to others. Fearful leaders hoard control.

How might leaders make others feel powerful?