By David U. Himmelstein, Miraya Jun, Reinhard Busse, Karine Chevreul, Alexander Geissler,
Patrick Jeurissen, Sarah Thomson, Marie-Amelie Vinet, and Steffie Woolhandler
A Comparison Of Hospital
Administrative Costs In Eight
Nations: US Costs Exceed All
Others By Far
ABSTRACT A few studies have noted the outsize administrative costs of US
hospitals, but no research has compared these costs across multiple
nations with various types of health care systems. We assembled a team of
international health policy experts to conduct just such a challenging
analysis of hospital administrative costs across eight nations: Canada,
England, Scotland, Wales, France, Germany, the Netherlands, and the
United States. We found that administrative costs accounted for
25.3 percent of total US hospital expendituresa percentage that is
increasing. Next highest were the Netherlands (19.8 percent) and England
(15.5 percent), both of which are transitioning to market-oriented
payment systems. Scotland and Canada, whose single-payer systems pay
hospitals global operating budgets, with separate grants for capital, had
the lowest administrative costs. Costs were intermediate in France and
Germany (which bill per patient but pay separately for capital projects)
and in Wales. Reducing US per capita spending for hospital
administration to Scottish or Canadian levels would have saved more
than $150 billion in 2011. This study suggests that the reduction of US
administrative costs would best be accomplished through the use of a
simpler and less market-oriented payment scheme.
All nations struggle with rising
health care costs, but the United
States remains a cost outlier. In
2010 it spent 17.6 percent of its
gross domestic product on health
carefar more than the next-highest spenders,
the Netherlands (12.0 percent) and France and
Germany (both 11.6 percent).1 Several factors
help explain the US excess spending: greater
use of high-tech interventions;2 more emphasis
on specialty care and the underprovision of primary care; 3 higher drug prices;4 and higher physician fees.5
A few studies have noted US health insurers
and providers outsize administrative costs,
mostly in relation to Canadian costs.613 However, no research has compared the administrative costs of hospitals across nations representing a broad spectrum of health care systems.
Cross-national differences in accounting standards make such international comparisons challenging. To address this challenge, we assembled
an international team of health policy experts to
analyze hospital administrative costs for eight
nations: Canada, England, Scotland, Wales,
France, Germany, the Netherlands, and the United States. This article summarizes the findings of
this research team and offers some lessons for
policy makers who are searching for payment
strategies that minimize administrative overhead.
doi: 10.1377/hlthaff.2013.1327
HEALTH AFFAIRS 33,
NO. 9 (2014): 15861594
2014 Project HOPE
The People-to-People Health
Foundation, Inc.
David U. Himmelstein
([email protected]) is
an internist; a professor at
the School of Public Health
and Hunter College, City
University of New York
(CUNY), in New York City; and
a lecturer at Harvard Medical
School.
Miraya Jun was a research
officer at the London School
of Economics and Political
Science (LSE), in the United
Kingdom, at the time of this
study. She is now an
independent consultant to the
LSE.
Reinhard Busse is a professor
of health care management at
the Technische Universitt
BerlinWorld Health
Organization Collaborating
Centre for Health Systems
Research and Management, in
Berlin, Germany.
Karine Chevreul is the deputy
director of the Paris Health
Services and Health
Economics Research Unit at
the Assistance Publique
Hpitaux de Paris (the Paris
areas University Medical
Center) and deputy director of
ECEVE (UMR 1123), a
research team of the French
National Institute of Medical
Research, in Paris, France.
Alexander Geissler is a senior
research fellow in health care
management at the
Technische Universitt Berlin,
in Germany.
Patrick Jeurissen is head of
the Celsus Academy on
Sustainable Healthcare,
Nijmegen Medical Centre,
Radboud University, in
Nijmegen, the Netherlands.
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Hospital Costs
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Study Data And Methods
Data Sources And Analysis To assess the impact of a range of payment strategies, we analyzed data from nations with widely varying
health care systems. Three of the nations
England, Scotland, and Walesare within the
United Kingdom. Each has a public National
Health Service (NHS) funded by taxes, but the
three systems vary in their hospital funding.
Canada has a single-payer public insurance
system in each province. France has a system
akin to a single-payer social insurance model.
However, payments are funneled through several nominally separate insurance funds. Germany
and the Netherlands have compulsory, multipayer social insurance systems, but the Netherlands is transitioning to a market-based payment
system. The United States has a largely private,
multipayer health care system.
For each nation we obtained official hospital
cost accounting data that covered most or all
hospitals. The data were for 2010 or 2011.
Starting with the comprehensive Medicare
Cost Reports submitted by US hospitals, we developed a classification scheme that apportioned
costs between clinical and administrative functions, including information technology (IT).We
distributed a few costs, such as employee benefits, between the clinical and administrative categories.We allocated capital costs to administrative and clinical cost centers based on each
centers share of total operating expenses. We
excluded research and teaching costs. These
methods emulate those employed in previous
analyses of US and Canadian hospitals.9
The level of detail in the Medicare data allowed
us to identify administrative costs incurred at
any US hospital locationfor example, costs for
a ward secretary or a clinic receptionist. Some
administrative arms of clinical functions, such as
nursing administration, were categorized separately. In other cases, Medicare required hospitals to allocate administrative costs incurred in
clinical units to administrative categories.
Data for Canada, the Netherlands, England,
Scotland, and Wales were sufficiently detailed
to allow full replication of this analysis. However, in the German and French data, clerical
work performed at clinic or ward locations was
sometimes charged to a clinical cost center, as
were some IT costs. Hence, for these two nations
we could not fully apply the US-based classification scheme. Instead, we constructed an alternative, narrower measure for the German and
French data, which we called central administration costs. This category excluded IT costs and
administrative or clerical work on wards and at
other clinical locations. Data to calculate this
narrower measure were available for all but
the UK nations.
For each of the eight nations we reviewed detailed documentation describing hospital expense categories, and we mapped those categories to the US ones. In most cases, this mapping
was straightforward, because the available documentation provided sufficiently detailed descriptions or lists of items subsumed under each
category to resolve ambiguities.When uncertainties remained, we obtained additional specific
descriptions of the items included in the category from national experts and officials. In some
cases, we also consulted Medicare auditors to
ascertain where such items would be classified
in the US cost reporting scheme.
The online Appendix summarizes the data
sources and classification schemes employed
for each nation.14 However, the voluminous documentation of the cost reporting schemes for
several nations precluded listing all of the available details even in the Appendix. For instance,
the instruction manual for Medicare Cost Reports is over 500 pages long.
To generate per capita cost estimates, we assumed that the administration share of costs at
hospitals for which we lacked data (for example,
those in Quebec and private hospitals in England) was the same as the administration share
at other hospitals in that nation. All figures were
adjusted to US dollars using purchasing power
parities for the appropriate year.
Time trend data on administrative costs were
available only for the United States and Canada.
However, time trend data on administrative fulltime equivalents (FTEs) as a share of total FTEs
(which likely tracks trends in the administration
share of costs) in the hospital and community
health sectors were available for the United Kingdom. This allowed us to assess precise time
trends for administrative costs in the United
States and Canada and approximate time trends
in the United Kingdom.
Limitations Several caveats apply to our findings. First, nations differ in many ways besides
health care financing. The mix of services provided by hospitals, especially their role in ambulatory care, varies across nations. Many US hospitals operate outpatient clinics that provide
both specialty and primary care. In contrast, hospitals in most other nations provide only specialty outpatient services.
Similarly, our figures for US, Canadian, and
Dutch hospitals excluded most physician compensation. In contrast, the hospital spending
figures in the other nations included substantial
physician compensation for care delivered on
the premises. For instance, German hospitals
employ large numbers of physicians whose average pay is relatively low.
Sarah Thomson is an
associate professor in the
Department of Social Policy,
London School of Economics,
and a senior research
associate at the European
Observatory on Health
Systems and Policies, in
London, England.
Marie-Amelie Vinet is a
health economist at the Paris
Health Services and Health
Economics Research Unit at
the Assistance Publique
Hpitaux de Paris and also a
member of the ECEVE team
(UMR 1123) of the French
National Institute of Medical
Research.
Steffie Woolhandler is an
internist; a professor at the
School of Public Health and
Hunter College, CUNY; and a
lecturer at Harvard Medical
School.
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Even the definition of hospital may vary somewhat both within and across nations. For instance, in some nations, hospital accounts include the costs of ambulance services. Some
US hospitals Medicare Cost Reports include
some services that are provided by affiliated
home care agencies, while others reports cover
only those activities carried out within the hospitals wallsas is generally the case with financial figures for hospitals in some other nations.
However, these differences across nations
should not have greatly distorted our estimates.
In all nations, the core inpatient services account
for the bulk of budgets.
Moreover, previous studies have found that at
least for the United States and Canada, administrative costs associated with physician compensation (equivalent to 26.9 percent of physicians
gross incomes in the United States versus
16.1 percent in Canada) were similar, in percentage terms, to hospital administrative costs.9 In
contrast, Dutch hospital expenditures include
some costs of administering reimbursements
for physicians not employed by the hospitals,
which would have led us to slightly overstate
hospital administrative costs.
A further limitation is that our data sources
excluded some hospitals in most of the nations
we studied (notably, eight university centers in
the Netherlands) and a larger number of institutions (NHS Foundation Trust and private hospitals) in England. However, limited data from
NHS Foundation Trusts audited year-end accounts for 201011 indicate that their administrative staffing levels are similar to those of the
NHS hospitals in England that we studied. UK
private hospitals administrative costs may be
higher than those of NHS hospitals, but they
account for a small proportion of expenditures.
Furthermore, the omission of a few large Dutch
university hospitals is unlikely to distort our estimates, since size was not related to administrative costs among the hospitals in the Netherlands for which we had data.
For the United States, we lacked data on military hospitals and those in the Department of
Veterans Affairs, which do not file Medicare Cost
Reports. The exclusion of these federal hospitals
with global budgets, which probably have low
administrative costs, might have caused us to
slightly overestimate US administrative costs.
However, Medicare Cost Reports omit profits
and most advertising, which cannot be billed
to Medicare. This would have caused us to underestimate US overhead costs.
Other limitations are that there is no international standard for hospital cost accounting, and
that our alignment of categories was imperfect.
Our analysis allocated some capital costs to administration, based on the administration share
of operating expenses. Our analysis handled capital costs uniformly across the eight nations.
However, it should be noted that Dutch hospitals capital costs are higher than those in the
United States, and about double those of the
other European nations.
Our data do not address the question of which
components of administrative spending drive
international differences. However, fragmentary
data from other sources suggest that a larger
number of managers and clerical workersnot
differences in wage levels, benefit costs, or nonwage costsexplains much or all of the higher
administrative costs in US hospitals compared to
hospitals in the other nations we studied.8,11,15,16
Finally, our study did not include the administrative costs of insurers and regulators who deal
with hospital payments.
Study Results
Exhibit 1 presents an overview of the health systems and hospital funding mechanisms of the
eight nations. For additional details on coverage
and hospital payment in the eight nations, see
Appendix Exhibit A1.14
Canada, Scotland, and Wales pay hospitals
global operating budgets (similar to the way in
which a US firehouse is funded), with separate
grants for capital needs such as new buildings
and expensive new equipment. France and Germany use tightly regulated all-payer diagnosisrelated group (DRG) payment systems, with separate public grants for most capital needs.
England also , but hospitals negotiate contracts for some services with
local agencies. The Netherlands combines elements of DRG-like payment with market-based
pricing (for example, pricing based on bargaining between individual hospitals and individual
insurers). In both England and the Netherlands,
hospitals increasingly depend on operating surpluses or profits to meet their capital needs.17,18
Health care spending in 2010 ranged from
The proportion of
hospital costs devoted
to administration was
highest in the United
States, at 25.3 percent.
Hospital Costs
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9.6 percent of GDP in the United Kingdom to
17.6 percent in the United States (Exhibit 2).
Germany had the largest supply of both hospital
beds and physicians per 1,000 population, while
the United States had the most specialists, measured as a percentage of all physicians.
The US population had smaller percentages of
elderly people and smokers, compared to the
populations of other countries, but its percentage of obese people was second only to Scotlands (Exhibit 2). Life expectancy was similar
in the United States and Scotland, trailing that in
the other nations by about two years.
Hospitals Total Administrative Costs
The proportion of hospital costs devoted to administration was highest in the United States, at
25.3 percent (Exhibit 3). This was more than
twice the percentages for Canada and Scotland,
which spent the least on administration. Hospitals administrative costs were notably higher in
the Netherlands than in other European nations.
Differences were more marked when expressed as a percentage of GDP or in dollars
per capita. For example, hospital administration
costs ranged from 1.43 percent of GDP in the
United States ($667 per capita) to 0.41 percent
of GDP ($158 per capita) in Canada (Exhibit 3).
Among the UK nations, Scotlands administrative costs were lowest, Englands were highest,
and Waless were in between (Exhibit 3). This
ranking correlates roughly with the role of market mechanisms in those nations health care
systems. The NHS internal market reforms introduced throughout the United Kingdom during the 1990s separated the commissioning
and provision of care, with price-based competition among hospitals. Scotland reversed these
market-based reforms soon after devolution in
1999; Wales did so somewhat later, in 2009.
In the United States, for-profit hospitals had
higher administrative costs (27.2 percent) than
did nonprofit (25.0 percent) or public (22.8 percent) institutions. Teaching hospitals, few of
which are for-profit, had (23.6 percent), as did rural
facilities (24.7 percent, compared to 25.5 percent
for urban hospitals).
Administrative costs for hospitals in Maryland
Exhibit 1
Principal Hospital Financing Characteristics Of Eight Nations, 2011
Nation Insurance coverage Funding for hospital operating budgets Primary source of capital funds
US Multipayer; loosely regulated; substantial OOP;
many people uninsured
Per patient payments; mechanisms (such
as DRGs, per diem, and FFS),
regulations, and rates differ by payer
Operating surpluses or profits
Canada Single public payer in each province; universal
coverage for hospital and physician care;
minimal OOP; private coverage only for items
not covered by public plan
Global, lump-sum budgets Funds allocated directly by the
provincial government
France Universal social insurance; minimal OOP; optional
private coverage reimburses patients cost
sharing
DRGs, uniform for all patients Lump-sum payments for capital
and other public missions
Germany Tightly regulated, multipayer social insurance;
minimal OOP; higher-income people may opt
for private insurance with enhanced services
and higher premiums
DRGs, uniform for all patients Lump-sum payments from the
states
Netherlands Regulated, multipayer, private insurance;
compulsory basic benefit package; optional
supplementary coverage; minimal OOP
DBCs (DRG-like system): about 30,000
DBCs; rates uniform for 2/3 of DBCs,
negotiated between hospital and
insurer for 1/3
Operating surpluses and capital
add-ons included in the uniform
DBC rates, but not in negotiated
DBCs rates
England Universal NHS coverage; prominent market
features; most services purchased at local
level by groups of GPs; minimal OOP; private
coverage for care outside the NHS
60% from DRGs with uniform rates; 40%
from
with local agencies
Operating surpluses, with a central
review of planned major
investments
Scotland Universal NHS coverage with few market features;
virtually no OOP; private coverage for care
outside the NHS
Global, lump-sum budgets Funds allocated directly by the
government
Wales Universal NHS coverage with decreasing market
features since 1999; virtually no OOP; private
coverage for care outside the NHS
Global, lump-sum budgets Funds allocated directly by the
government
SOURCE Authors analysis. NOTES OOP is out-of-pocket, or patients spending. DRG is diagnosis-related group. FFS is fee-for-service. DBC is diagnostic-treatmentcombination. NHS is National Health Service. GP is general or family practitioner.
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Exhibit 2
Demographic Characteristics And Health Expenditures, Resources, And Indicators For Eight Nations
UK
US Canada France Germany Netherlands England Scotland Wales
Demographic characteristics
Population older than 64 (%) 13.1 14.4 17.3 20.7 15.6 16.2 16.8 18.6
GDP per capita (PPP-adjusted US $) 46,747 39,070 34,136 37,402 42,166 35,687 32,215a 32,239b
Smokers (percent of population older than 14)c 15.1 16.3 23.3 21.9d 20.9 21.5d 24.0 23.0
Obese people (percent of population older than 14)c 28.1 17.5 12.9 17.3d 11.6 26.1 28.2 22.0
People with insurance (percent of population) 81.3d 100.0d 99.9d 100.0d 98.8d 100.0d 100.0d 100.0d
Expenditures
Health care spending
Per capita (PPP-adjusted US $) 8,233 4,445 3,974 4,338 5,056 3,433e
Percent of GDP 17.6 11.4 11.6 11.6 12.0 9.6e
Health insurance overhead and government health
administration per capita (PPP-adjusted US $) 587 147 274 233 183 f f f
Resources
Physicians
Number (per 1,000 population) 2.6 2.4 3.3 4.1 2.9d 2.7 2.3b 2.5
Percent specialists 87.7 53.0 51.3 58.0 57.7 70.9e
Hospital beds (per 1,000 population) 3.1d 3.2d 6.4 8.3 4.7d 3.0 3.3 4.0
Average length of acute care hospital stay (days) 5.4 7.7 5.2 7.3 5.6 6.6 4.8 6.2
Health indicators
Life expectancy (years)
Females 81.1 83.1g 84.7 83.0 82.7 82.6 80.6d 81.8
Males 76.2 78.5g 78.0 78.0 78.8 78.6 76.0d 77.6
Infant mortality (per 1,000 live births) 6.1 5.1g 3.6 3.4 3.8 4.2 3.7 4.0
SOURCE Authors analysis of health data from the following sources: (1) Organization for Economic Cooperation and Development. OECD health statistics (see Note 1 in
text). (2) Scottish Government. Health and community care [Internet]. Edinburgh: Scottish Government; [cited 2014 May 7]. Available from: http://www.scotland.gov.uk/
Topics/Statistics/Browse/Health. (3) Welsh Government. Health statistics Wales [Internet]. Cardiff: Welsh Government; 2012 [cited 2014 May 20]. Available from: http://
wales.gov.uk/docs/statistics/2012/120927hsw12en.pdf. NOTES Data are for 2010 except where otherwise indicated. PPP is purchasing power parity. a
Excludes costs for
care outside of Scotland. b
Data are for 2011. c
Older than fifteen for Scotland and Wales. d
Data are for 2009. e
Data are for England, Scotland, Wales, and Northern Ireland. f
Not available. g
Data are for 2008.
Exhibit 3
Total Hospital Administrative Costs And Spending In Eight Nations, 2010
UK
US Canada France Germany Netherlands England Scotland Wales
Total hospital expenditures
Per capita, (PPP-adjusted US $) 2,634 1,271 1,357 1,245 1,631 1,458a 1,416 1,482
Share of GDP (%) 5.63 3.25 3.98 3.33 3.87 4.09a 4.39 4.60
Central administrationb
Share of hospital costs (%) 15.51 7.40 8.77 9.00 10.85 c c c
Hospital administration
Share of hospital costs (%) 25.32 12.42 c c 19.79 15.45 11.59 14.27
Share of GDP (%) 1.43 0.41 c c 0.77 0.63a 0.51 0.66
Expenditures per capita (PPP-adjusted US $) 667 158 c c 323 225a 164 211
SOURCE Authors analysis of data from the following sources: (1) Organization for Economic Cooperation and Development. OECD health statistics 2014 (see Note 1 in
text). (2) Information Services Division, NHS National Services Scotland. Net expenditure, by board of treatment, by care type [Internet]. Edinburgh: NHS National Services
Scotland; 2012 [cited 2014 Jul 23]. Available from: http://www.isdscotland.org/Health-Topics/Finance/Publications/2011-11-29/Costs_R300s_2011.xls. (3) Welsh
Government. Health statistics Wales. Cardiff: Welsh Government; 2012. (4) Form TFR3E, the Final Accounts NHS Trusts TFR (Treasury Financial Reports) for 2011.
(5) Monitorindependent regulator of NHS foundation trusts. NHS foundation trusts: consolidated accounts 201/11 [Internet]. London: Stationery Office; 2011 Jul 14
[cited 2014 May 7]. Available from: http://www.monitor-nhsft.gov.uk/sites/default/files/NHS%20Foundation%20Trusts%20Consolidated%20Accounts%201011
%20website%20file.pdf. NOTES Data for the Netherlands are for 2011. Data for England, Scotland, and Wales are for April 1, 2010March 31, 2011. Figures for
Scotland and Wales are for National Health Service (NHS) hospitals only. PPP is purchasing power parity. GDP is gross domestic product. a
Includes NHS Trusts and
Acute NHS Foundation Trusts. b
Central administration costs exclude costs of information technology and of administrative or clerical work on wards and at other
clinical locations. c
Not available.
Hospital Costs
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(the only state with all-payer hospital rate setting, the type of reform that some policy experts
suggest might reduce administrative costs)19
were 25.2 percent of total hospital costs. This did
not differ from the national average (p 0:94).
Despite Marylands all-payer rate-setting system, copayments, deductibles, documentation
requirements, clinical guidelines, and so forth
differ across payers.20
Hospitals Central Administration Costs
Hospitals central administration costs followed
a pattern similar to that for total administrative
costs. Central administration costs were highest
in the United States, followed by the Netherlands
(Exhibit 3).
Time Trends US hospital administrative costs
rose from 23.5 percent of total hospital costs
($97.816 billion) in 2000 to 25.3 percent
($215.369 billion) in 2011. In the same period,
the hospital administration share of GDP rose
from 0.98 percent to 1.43 percent (Exhibit 4).
The proportion spent on administration by
Canadian hospitals fell slightly from 1999
(12.9 percent)9 to 2011 (12.4 percent).
The administration share of hospital FTEs in
the United Kingdom rose from 13.8 percent in
1980 to 23.9 percent in 2009.21 This change reflectsmostly trends in England, where84 percent
of the UK population lives, and coincided with
market-oriented reforms. The UK time trends
are shown in Appendix Exhibit A2.14
Discussion
Hospitals administrative overhead varied more
than twofold across the nations we studied as a
share of total hospital costs and more than fourfold in absolute terms. These costs were far
higher in the United States than elsewhere.
What Lies Behind These Differences? In all
nations, hospital administrators must procure
and coordinate the facilities, supplies, and personnel needed for good care. In nations where
administrators have few responsibilities beyond
these logistical matters, administration seems to
require about 12 percent of hospital expenditures.
Modes of hospital payment can increase the
complexity and costs associated with two additional management tasks: garnering operating
funds and securing capital funds for modernization and expansion.
Garnering operating funds requires little administrative work in nations such as Canada,
Scotland, and Wales, where hospitals receive
global, lump-sum budgets. In contrast, per patient billing (for example, using DRGs) requires
additional clerical and management personnel
and special-purpose IT systems. This is true even
in countriessuch as France and Germany
where payment rates, documentation, and billing procedures are uniform.
Billing is even more complex in nations where
each hospital must bargain over payment rates
with multiple payers, whose documentation requirements and billing procedures often vary, as
is the case in the United States and the Netherlands.
Differences in how hospitals obtain capital
funds also appear to affect administrative costs.
The combination of direct government grants for
capital with separate global operating budgets
as in Scotland and Canadawas associated with
the lowest administrative costs. (Wales has recently transitioned to such a system, reversing
previous market reforms.) Hospitals in France
Exhibit 4
US Hospital Administration Costs As A Percentage Of Gross Domestic Product (GDP), 200011
SOURCE Authors analysis of data from Medicare Hospital Cost Reports.
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and Germany, where direct government grants
account for a substantial share of hospital capital
funding, have relatively low administrative costs
despite per patient, DRG-based billing.
Administration is costliest in nations where
surpluses from day-to-day operations are the
main source of hospital capital funds: the United
States and, increasingly, the Netherlands and
England. In such health care systems, the need
to accumulate capital funds for modernization
and expansion stimulates administrators to undertake the additional work that is needed to
identify and pursue profit opportunities.
This entrepreneurial incentive rewards hospitals that cut unnecessary operating costs and
thereby improves efficiency. However, it can also
reward hospitals for devoting resources to activities that decrease efficiency, such as advertising;
upcoding billsthat is, exaggerating the severity
of patients illnesses in order to bill for higher
DRGs;22 and cherry-picking profitable patients,
physicians and services while avoiding unprofitable ones.
The performance of US for-profit hospitals
whose explicit goal is profitability and whose
administrative costs are highhelps clarify
whether, on balance, entrepreneurial incentives
improve efficiency. Compared to other US hospitals, for-profit institutions spend less on clinical personnel such as nurses23 but provide costlier care.24,25 Similarly, in Germany for-profit
hospitals dont appear to be more efficient than
other hospitals.26
The divergence between Scotland and England
is also instructive. Administrative costs are low
in Scotland, where hospitals dont bill for individual patients and capital projects are funded by
direct government grantswhich leaves administrators little leeway for financial entrepreneurship. In contrast, the administration share of
costs is higher (and apparently rising) in England, where per patient billing has largely replaced global hospital budgets and recent
market-based reforms encourage entrepreneurialism.
Hospital administrative costs appear to be
driven by the complexity of the reimbursement
system and the mode of capital funding. However, other factors could explain our findings.
The greater intensity of care in US hospitals
might explain why administrative costs are
higher in that country than elsewhere. But the
relatively low administrative costs of US teaching hospitals (which have high care intensity)
argues against this explanation.
A heavier regulatory burden in the United
States and the Netherlands than elsewhere
might also impose administrative costs on hospitals. Some of this burdenfor example, regulations regarding privacy and translators in the
United Statesis unrelated to payment. Nonetheless, much of it reflects the tussle over reimbursement.
Our findings could also reflect a shift of responsibility (and costs) for some planning and
budgeting tasks out of hospital offices and into
the offices of government agencies and insurers
in nations that have more centrally directed hospital systems. Perhaps the use of global budgets,
regulated DRG pricing, and centralized capital
allocation increases out-of-hospital costs to administer hospital payments and to monitor hospitals activity and compliance. Our hospitalbased analysis would not capture such costs,
but they must be modest: Other nations spend
far less than the United States on administration
by government and insurers (Exhibit 2).
Do Higher Administrative Costs Yield Benefits? If more administration eliminated clinical waste or enhanced patients choices and market competition, administrations share might
rise, but total costs would fall.27 However, we
found the opposite pattern: Total hospital costs
were highest in the nations that had the highest
hospital administrative costs. Moreover, Americans enjoy the widest choice of insurers, but
patients in several nations with low administrative costs are free to choose to receive care at any
hospital.
Nor do higher administrative costs appear to
be associated with better care within the United
States. A comprehensive meta-analysis of fifteen
studies found that death rates at for-profit hospitals (adjusted for severity of illness, patients
socioeconomic status, and hospitals teaching
status) were 2 percent higher than those at nonprofit hospitals.28 For-profit hospitals also score
lower on Medicare quality measures,29 and their
patients perceive their care less favorably,30 compared to nonprofit institutions.
Hospital
administrative costs
appear to be driven by
the complexity of the
reimbursement system
and the mode of
capital funding.
Hospital Costs
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Overall, there is no evidence that the high administrative costs in the United States translate
into superior care.31
Policy Implications
Our data hold lessons for policy makers. Hospital payment strategies can shift vast sums from
care to administration, and vice versa. In the
United States, administration consumes an increasing share of hospital budgetsa share that
is far higher than in nations with simpler and
less market-oriented payment schemes. To put
the differences in perspective, in 2011 rolling
back US spending for hospital administration
to the 2000 level (adjusted for inflation and population growth) would have saved $74.4 billion.
Reducing US spending to Canadas or Scotlands
level on a per capita basis would have saved
$158 billion or $156 billion, respectivelyequivalent to 1 percent of the US GDP.
Reforming the US health care system so that it
operated on a single-payer basis could result in
large savings on administration. In contrast, current policy initiatives may boost administrative
costs. Pay-for-performance schemes add new
documentation requirements and incentives
for data mining of patients records to ferret
out exceptions (for example, finding the phrase
patient refused test in free-text entries). Similarly, DRGs have long given hospitals incentives
to find and document clinically insignificant comorbidities among inpatients, and the transition to accountable care organizations (ACOs)
adds incentives to extend upcoding to outpatients. The ACO 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.
In other nations, policy makers should take
into account the added administrative costs of
moving to activity-based funding (for example,
DRGs) and market-based allocation of new capital investments for hospital modernization and
expansion. The administrative burdens of promarket reforms should be weighed against their
putative benefits.
This research was supported by a grant
from the Commonwealth Fund to the
London School of Economics and
Political Science. The funder did not
play any role in the design and conduct
of the study; the collection,
management, analysis, and
interpretation of the data; the
preparation, review, or approval of the
manuscript; or the decision to submit
the manuscript for publication. David
Himmelstein and Steffie Woolhandler
founded and remain active in Physicians
for a National Health Program, which
advocates for single-payer health reform
in the United States. They have received
no financial compensation from that
organization. The authors are indebted
to Farhad Mehrtash for his assistance in
obtaining and interpreting official data
on Canadian hospital expenditures, to
John Evans for his assistance in
obtaining official data on Welsh hospital
expenditures, and to Douglas Cameron
for his assistance in obtaining and
interpreting official data on Scottish
hospital expenditures.
Reforming the US
health care system so
that it operated on a
single-payer basis
could result in large
savings on
administration.
September 2014 33:9 H ealth Affair s 1593
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NOTES
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Hospital Costs
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Copyright Project HOPEThe People-to-People Health Foundation, Inc.
For personal use only. All rights reserved. Reuse permissions at HealthAffairs.org.
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