Statements on Administrative Waste in the U.S. Health Care System in 2003

"Administrative Waste in the U.S. Health Care System in 2003: The Cost to the Nation, the States and the District of Columbia, With State-Specific Estimates of Potential Savings" — a Report by David U. Himmelstein, M.D., Steffie Woolhandler, M.D., M.P.H. and Sidney M. Wolfe, M.D.

August 27, 2003

Statement by David U. Himmelstein, M.D.
Associate Professor of Medicine, Harvard Medical School

My name is David Himmelstein. I am an author of both the Special Article in the New England Journal of Medicine and of the Harvard/Public Citizen Report released today. I am a primary care doctor practicing in Cambridge, Massachusetts and an Associate Professor of Medicine at Harvard Medical School. I am also a founder of Physicians for a National Health Program.

Our studies document the enormous administrative waste in U.S. health care. In 1999, our nation spent at least $294 billion on health care bureaucracy. This year, health care bureaucracy will cost at least $399 billion, nearly one out of three health care dollars. On a per capita basis, Canada spends only one-third as much as we do on health care paperwork, and the difference between the U.S. and Canada is widening.

Our research analyzed detailed cost reports submitted by thousands of hospitals, home care agencies and nursing homes in the U.S. and Canada. We analyzed data on practitioners’ overhead from surveys of physicians in the two nations. For figures on insurance overhead we relied on the insurance industry’s own reports of their costs. Finally, we used detailed labor force data from the U.S. and Canadian Census Bureaus to compare the numbers of administrative workers in health institutions and offices over the past 3 decades

Our estimates of administrative costs are conservative. We excluded the administrative costs of health businesses for which reliable administrative cost data were unavailable – for instance, drug firms, pharmacies, and ambulance companies.

Our data are the most detailed and comprehensive analysis of administrative costs ever undertaken. They underwent painstaking review during the editorial process at the New England Journal of Medicine. The Harvard/Public Citizen report updates the analysis presented in the New England Journal of Medicine to 2003, based on government estimates of health spending this year, and provides state-by-state estimates.

The huge gap in administrative costs between the U.S. and Canada arises from the differences in the ways we pay for health care. While Canada has a single insurance plan, or "single-payer", in each province that pays the bills for everyone, the U.S. has a complex and fragmented payment structure built around thousands of different insurance plans. My small group practice must deal with dozens of different plans, each with its own regulations on coverage, eligibility, and documentation. This wastes my time – and the time of my colleagues – looking up which drugs and specialists each plan will pay for. And it forces us to employ extra clerical staff to deal with the insurance paperwork - to play man-on-man defense against the insurance bureaucrats. In contrast, Canadian colleagues bill by checking one of ten boxes on a simple form, and send all their bills to one agency. They can refer any patient to any specialist they want.

By implementing a single payer national health insurance program we could save $286 billion this year on paperwork, $6,940 for each of the 41.2 million Americans who were uninsured as of 2001. That’s more than enough to cover the uninsured, with money left over to upgrade coverage for the millions of others who are under-insured.

Our nation already spends enough to provide every American with superb medical care - 42% more per capita than in Switzerland, which has the world’s second most expensive health care system, and 83% more than in Canada. On a per capita basis, our government spends more on health care than any nation with national health insurance – if we include the costs of care for our President and other government workers, and the huge tax subsidies to private health insurance (subsidies that go mainly to the wealthy). But we don’t get what we pay for because we waste a fortune on useless medical paperwork – at least $286 billion this year. Even greater savings would be available if we curtailed the profiteering of the drug industry and for-profit hospitals.

In essence, National Health Insurance would pay for itself through administrative savings. No other reform can slash administrative costs. Senator Kerry, and some others who have proposed patchwork reforms, assert that they could cut administration through computerization. Such assertions are not credible. Most health insurance claims are already computerized. Extensive research demonstrates that as long as private insurance firms are in, administrative costs are high.

While Republicans are trying gut Medicare with proposals for privatization, and offering a pitifully inadequate drug benefit, our health care system is rapidly failing. Unfortunately, the Democratic presidential contenders – except for Dennis Kucinich - are pushing reforms that are tired retreads of policies that have already failed. They have no hope of covering the uninsured, but are sure to protect insurance companies.

Two weeks ago 7,784 physicians called for National Health Insurance in the Journal of the American Medical Association. How many Americans must die from lack of coverage? How many seniors must choose between medicines and food? How bad does it have to get before politicians are willing to stand up to the drug and insurance industries and pass the National Health Insurance our nation needs?

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Statement of Sidney M. Wolfe, M.D., Director, Public Citizen’s Health Research Group, on

My name is Sidney Wolfe. I am a co-author of the second of the two papers being released today, the Harvard/Public Citizen report, and I am the director of Public Citizen’s Health Research Group.

This study documents the state-by-state potential administrative savings achievable with national health insurance. I will go through examples from several states, but first will illustrate how these calculations were made. As discussed in more detail by Dr. David Himmelstein, we used projections by the government to adjust the 1999 health expenditures to 2003. We assumed that administration would consume the same percentage of each type of spending in each state in 2003 as it did in the nation in 1999: 100 percent of insurance overhead and employers’ costs to administer health benefits; 24.3 percent of expenditures for hospital care; 19.2 percent of expenditures for nursing home care; 35 percent of homecare expenditures; and 26.9 percent of spending on physicians’ services. These data comprise the column "Administrative Expenses in 2003" in the table in the Harvard/Public Citizen paper.

The "Potential Administrative Savings" for each state in the next column were derived by subtracting from the administrative expenses in 2003 the administrative costs that would be encountered were there the simplified amount of administration that exists in the Canadian system. (For further details on the 1999 national estimates of administrative spending in each category, see: Woolhandler S, Campbell T, Himmelstein DU, being published in tomorrow’s issue of The New England Journal of Medicine).

As mentioned by Dr. Himmelstein, for the entire country, the potential administrative savings in 2003 will be $286 billion – $6,940 for each of the 41.2 million Americans who were uninsured as of 2001. This is more than enough to provide them with insurance coverage and fund a Medicare drug benefit.

New York state, for example, with 2.9 million uninsured residents, could save $23.4 billion a year ($8,037 per uninsured resident of the state) if it streamlined administration to Canadian levels. Massachusetts, with 560,000 uninsured state residents, could save about $8.6 billion in 2003 ($16,453 per uninsured resident of that state). New Mexico, with 373,000 uninsured, could save $1.5 billion on health bureaucracy ($4,022 per uninsured resident). California, with 6.7 million uninsured, could save $33.7 billion a year ($5,650 per uninsured resident).

As can be seen in the table in our paper, administrative savings available per uninsured resident in other states include: Pennsylvania, $12,559 per uninsured resident; Illinois, $7,362; Michigan, $9,375; Ohio, $9,330; Georgia, $5,672; Florida, $5,977; Virginia, $7,920; Colorado, $5,534 and Washington, $6,735.

These data should awaken governors and legislators to a fiscally sound and humane way to deal with ballooning budget deficits. Instead of cutting Medicaid and other vital services, officials could expand services by freeing up the $286 billion a year wasted on administrative expenses. In the current economic climate, with unemployment rising, we can ill afford massive waste in health care. Radical surgery to cure our failing health insurance system is sorely needed.