The U.S. Spends $2,500 Per Person on Health Care Administrative Costs. Canada Spends $550. Here's Why
Whether it’s interpreting medical bills, struggling to get hospital records, or fighting with an insurance provider, Americans are accustomed to battling bureaucracy to access their health care. But patients’ time and effort are not the only price of this complexity. Administrative costs now make up about 34% of total health care expenditures in the United States—twice the percentage Canada spends, according to a new study published Monday in Annals of Internal Medicine.
These costs have increased over the last two decades, mostly due to the growth of private insurers’ overhead. The researchers examined 2017 costs and found that if the U.S. were to cut its administrative spending to match Canadian levels, the country could have saved more than $600 billion in just that one year.
“The difference [in administrative costs] between Canada and the U.S. is enough to not only cover all the uninsured but also to eliminate all the copayments and deductibles, and to amp up home care for the elderly and disabled,” says Dr. David Himmelstein, a professor at the CUNY School of Public Health at Hunter College and co-author of the study. “And frankly to have money left over.”
Research has long shown that the U.S., which uses a disparate system of private providers and insurers, has higher administrative costs than other developed countries that use single-payer systems. But the Annals study puts a finer point on it: as the first major effort to calculate administrative costs across the U.S. health system in nearly two decades, the researchers found that the gap between the U.S. and Canada has widened significantly.
The U.S. now spends nearly five times more per person on health care administration than Canada does. The U.S. administrative costs came out to $812 billion in 2017, or $2,497 per person in the U.S. compared with $551 per person in Canada, according to the Annals study.
Along with Himmelstein, co-authors Steffie Woolhandler and Terry Campbell examined administrative costs for insurance companies and government agencies that administer healthcare, as well as costs in four settings: hospitals, nursing homes, home care agencies and hospices and physician practices. For each category, the researchers determined which costs were administrative and conducted analyses to adjust comparisons between relative costs in the U.S. and Canada.
Insurers’ overhead, the largest category, totaled $275.4 billion in the U.S. in 2017, or 7.9% of all national health expenditures, compared with $5.36 billion in Canada, or 2.8% of national health expenditures. The American number included $45 billion in government spending to administer health care programs and $229.5 billion in private insurers’ overhead and profits, which covers employer plans and managed care plans funded by Medicare and Medicaid.
This insurance overhead accounted for most of the total increase in administrative spending in the U.S. since 1999, according to the study. While the share of Americans covered by commercial insurance plans has not changed much, private insurers have expanded their role as subcontractors handling what are known as “managed care” plans for Medicaid and Medicare. The study notes that most Medicaid recipients are now on private managed care plans and about one third of Medicare enrollees now have Medicare Advantage plans. Both of these types of plans have higher overhead costs than the publicly administered alternatives.
“We were struck, and frankly hadn’t expected it until we delved into the data, by the huge increase in insurance overhead,” Himmelstein told TIME.
Other reports, including one by the Center for American Progress published last April, have identified ways to reduce administrative costs without moving the U.S. to a single-payer health care system. But Himmelstein says his study shows that a public option that preserves private insurance wouldn’t provide the same savings as a traditional single-payer system. “We could streamline the bureaucracy to some extent with other approaches, but you can’t get nearly the magnitude of savings that we could get with a single payer,” Himmelstein says, adding, “If the Medicare public option includes the Medicare Advantage plans, it’s actually conceivable that the public option would increase the bureaucratic costs.”
Most of the public option plans proposed by Democratic presidential candidates are not detailed enough to determine exact costs, Himmelstein says. But overall, he believes they won’t result in significant cost savings.
In addition to their research, Himmelstein and Woolhandler have been longtime advocates for single-payer health care. They co-founded the group Physicians for a National Health Program, which advocates for a single-payer system. They also conducted the initial health administrative costs study on 1999 data and have published other studies comparing hospital administrative costs in the U.S. and other countries.
Himmelstein says his team’s estimates of total U.S. administrative costs in the Annals study are likely conservative. When estimating physicians’ administrative costs, the researchers relied on a 2011 study of time spent by physicians and their staffs interacting with insurers. And he notes that while 2017 data was often the latest available when they were conducting this study, 2018 health spending numbers have since come out showing further increases in insurance overhead.
“We can afford universal coverage with a single payer plan, not just universal coverage but first dollar coverage for everybody in our country if we adopted a single-payer Medicare for all approach,” Himmelstein says. “If you’re going to cover everybody without getting those savings you’re going to have to spend more or you’re going to have to have big co-payments and deductibles that deter people from getting the care that they actually need.”
Abigail Abrams is a politics writer for TIME.