Why U.S. hospital administrative costs are among the highest in the world: 7 things to know

An analysis of eight countries with various types of healthcare systems has found the U.S. has the highest hospital administrative costs, according to a study published in Health Affairs.

Researchers analyzed data from Canada, England, Scotland, Wales, France, Germany, the Netherlands and the U.S. Administrative costs made up 25.3 percent of total hospital spending in the U.S., more than any of the other countries studied and more than twice the percentages for Canada and Scotland, which had the lowest administrative expenditures. Here are seven things to know about hospital administrative costs in the U.S. and why they're significantly higher than other countries' spending.

1. Differences in hospital administrative spending become more pronounced when examined as a percentage of gross domestic product or dollars per capita. In that form, administration costs ranged from 0.41 percent of GDP or $158 per capita in Canada to 1.43 percent of GDP or $667 per capita in the U.S., according to the study.

2. Within the U.S., for-profit hospitals also had greater administrative costs (27.2 percent of hospital spending) compared with their nonprofit (25 percent) and public (22.8 percent) counterparts. Furthermore, teaching hospitals (which are rarely for-profit) and rural hospitals also had below average administrative costs, at 23.6 percent and 24.7 percent of spending respectively.

3. U.S. hospital administrative costs aren't just high; they're also increasing. Administrative spending rose from 23.5 percent of total hospital spending in 2000 to 25.3 percent in 2011. By contrast, hospital administrative costs in Canada fell from 12.9 percent in 1999 to 12.4 percent in 2011.

4. Various factors and differences between the healthcare systems in the countries studied contribute to administrative cost disparities, according to the study. For instance, in nations where hospital administrators have few responsibilities aside from procuring and coordinating the facilities, supplies and personnel necessary to deliver quality care, administration only takes up about 12 percent of total hospital spending.

5. Hospital payment, billing and financing have a significant influence on administrative costs. In Canada, Scotland and Wales, hospitals receive global, lump-sum budgets, which means procuring operating funds doesn't require much administrative work. By contrast, in countries where hospitals conduct per-patient (or diagnosis-related group-based) billing, hospitals need additional clerical and management workers, in addition to specialized IT systems, according to the study. Countries such as the U.S. and Netherlands must also negotiate payment rates with multiple payers with differing billing procedures and documentation requirements, driving up administrative spending.

6. Furthermore, the way hospitals get capital funding also impacts costs, according to the study. For example, hospitals in Scotland and Canada — with the lowest administrative costs — receive funding through a combination of direct government grants and separate global operating budgets. Despite more complicated per-patient billing, hospitals in France and Germany also have relatively low administrative costs because a large amount of their capital funding comes from direct government grants. Meanwhile, in countries like the U.S., surpluses from day-to-day operations account for most hospital capital funding. "In such healthcare 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," the researchers write.

7. The researchers concluded that reforming the U.S. healthcare system to a single-payer model would result in significant administrative savings. Reducing U.S. administrative spending to the level of Canada or Scotland per capita in 2011 would have saved $158 billion or $156 billion, respectively.


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