Why Administrative Costs are Rising More Rapidly than the Cost of Health Care

Excess health spending is the difference between what a country spends per person on health care and what the country's gross domestic product per person predicts that the country "should" spend, according to the Organization for Economic Cooperation and Development (OECD). The OECD has documented that the United States spends nearly 40 percent more on health care than it should.

Major Contributing Factors to Rising Shared Costs

• The American health care system is burdened with excessive administrative expenses, including poor management and inappropriate care, according to the National Coalition on Health Care. The waste significantly increases the cost of care and insurance for employers and workers and affects family security. Paper-based medical records systems are not only time-consuming, but prone to error and a lack of internal revenue accountability. This results in overpayments, fraud and waste, which in turn bloat the cost of health care premium payments, even when the cost of health care itself remains constant.

Pricing: The Actual Cost of Health Care

• The price of health care varies considerably depending on who is paying for the service and where the service is obtained. Different insurers pay different amounts to the same hospital and the same physicians for the same procedure, depending on their negotiated discounts. It works the same way with those who are covered by Medicare and Medicaid. Over the years, the actual cost of health care seems to have been driven up not by doctors and facilities arbitrarily raising prices, but because of the effect of rising malpractice insurance premiums and skyrocketing administrative costs.

Why so Much?

• The McKinsey Global Institute estimated that excess spending on health care administrative costs in the United States is the cost of rising health care premiums. The total estimated spending was $2.4 trillion as of 2007; which is $650 billion more than Americans should be spending, by all estimates. The institute states that about 85 percent of this is due to excessive administrative overhead, which should be no more than in the neighborhood of about 16 percent. Rising health care costs are mostly attributable to administrative costs. Two-thirds of insurance premiums go to pay for product design, underwriting, sales and marketing costs, according to McKinsey Global Institute. In dollars, it means that out of an average of $1,366 a year spent on insurance costs, about $1,059 goes to administrative expenses, which contribute heavily to the rising costs of health care insurance.

Too Much Time at the Doctor's Office

• A McKinsey Global Institute report notes that another reason for excessive health care costs is that Americans are getting too much unnecessary care. More than $500 billion was spent on treatments, tests and hospitalizations that did nothing to improve patients' health. According to the AMA, paperwork and documentation on these unnecessary treatments costs more than the actual treatment itself. Too much health care may be the cause of unnecessary deaths. The trade-off, however, may be the number of people who should get treatment and don't---which can also cost them their lives.

Behind the Rising Costs

• Health care "bureaucracy" consists of medical technology, new medical devices and the latest pharmaceuticals, medical malpractice litigation and liability insurance; the uninsured, and administrative costs. The United States spends more on bureaucratic red tape than it would cost to provide full coverage health care coverage to all of the uninsured in America. Administrative expenses consumed no less than $400 billion in 2003. Private insurers raise administrative costs annually at least 10 to 15 percent more than is necessary. These increases, which usually exceed the cost of health care itself, include the cost of underwriting paper, corporate services and marketing; as well as motivational incentives to sales staff for meeting and/or exceeding sales quotas, like luxury vacations and cruises, spa and resort treatments, extra bonuses, jewelry, furs and cars.