We spend HOW much on hospital bureaucracy? Why pay-for-performance will only make it worse

The United States spends $667 per person each year on healthcare's red tape and pay-for-performance will only make it worse.

Yesterday, Health Affairs published a study on the cost of healthcare bureaucracy, comparing the cost for hospital administrative costs in the U.S. to seven other countries.

Not surprisingly, the U.S. had the highest administrative costs, with 25.3 percent ($215.4 billion!) of hospital spending going toward red tape — more than any of the other countries studied and more than twice the percentages for Canada and Scotland, which had the lowest administrative expenditures.

Becker's Finance Editor Helen Adamopoulos reported on the study yesterday, and did a great job of breaking down its various findings in her article "Why U.S. hospital administrative costs are among the highest in the world: 7 things to know." One of the data points she highlighted from the study really struck me: The U.S. spends $667 per person each year, or 1.43 percent of GDP, on administrative costs.

We know our country's healthcare administrative costs are considerable. After all, with each provider contracting separately — at different rates — for 10 or more payers, streamlining is challenging. On top of that, electronic billing and records are relatively recent phenomenon.

Why P4P is NOT the answer
The researchers concluded that reforming the U.S. healthcare system to a single-payer model could have saved up to $158 billion in 2011, the year of data studied. While single-payer is unlikely (for a number of political and other reasons) to take hold anytime soon, we can at least take solace in the fact that our pay-for-performance/value-based initiatives will help alleviate this high level of bureaucratic spending….right?

Not so, say the researchers.

They write:

"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." (emphasis mine)

So while pay-for-performance and ACOs could reduce healthcare costs (assuming we are able to keep patients healthier, reduce unnecessary tests and use more appropriate but lower costs sites of care, drugs, treatments, etc.), they actually increase administrative costs and red tape. I wonder if the creators of these new models considered that.

Have you launched and ACO or P4P contract and experienced higher administrative costs/requirements? Email Lindsey Dunn at to share your story.

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