High Administrative Cost is a Symptom, not the Driver of High Healthcare Costs

I see this chart presented time and again as the reason for our high healthcare costs.


Usually, it is shown by a well-meaning physician who implies “see, it’s all those damn greedy non-doctors taking all of our money!”

However, I would argue that high administrative cost is a symptom, not the driver of high healthcare costs.


First, let me debunk that administrative cost is a driver of overall healthcare cost before turning to why it is a symptom, and not the cause.


Administrative cost is not the driver of overall healthcare costs

Evidence #1:

Despite the growth in administrative costs, their share as a percentage of overall healthcare costs has been relatively low, between 5 and 7%, since 1980.


Evidence #2:

Optimized-SelfFunded vs Fully Insured Premiums

Many US employers are self-insured or partake in Multi-Employer Welfare Arrangements (MEWAs).  Among other benefits of self-insuring, employers hope to strip-out the high administrative costs found in “off-the-shelf”, community-rated health insurance plans.  Yet, since 1999, insurance premiums for employees of self-insured or self-funded employers have grown in lock-step with that of fully-insured employers (according to the Kaiser Family Foundation 2013 Employer Health Benefits Survey).







Evidence #3:

Optimized-Growth of Medicare Costs


Supporters of Medicare point to its low administrative costs, which the Kaiser Family Foundation pegs at 2% of overall Medicare costs vs. upwards of 17% for private insurance.  Yet, since 2000, overall Medicare costs have risen at nearly the same rate as private health insurance on a per capita basis.


Based on this evidence, it is tough to conclude that healthcare administrative costs are THE driver of overall healthcare costs.

Instead, I would argue that administrative costs are simply a symptom of a larger problem and not the root cause of high healthcare costs.


The true driver of healthcare costsOptimized-Chronic_Disease

The true cause or driver of healthcare costs is chronic disease and a healthcare delivery system that ineffectively addresses, treats, manages, and cures such conditions.

As the respected November 2013 JAMA paper by Hamilton Moses III et al states: “Medical costs are driven overwhelmingly by chronic illness at every age.”  The paper bases its data on the 2010 report by the Robert Wood Johnson Foundation that states 84% of healthcare costs are due to chronic disease.



Furthermore, the future looks glum as the prevalence of chronic disease is projected to grow considerably as the US population ages.Optimized-Chronic_Disease_Growth (1)







Ineffective delivery system to tackle chronic disease

It is not simply chronic diseases by themselves that lead to high healthcare costs.  Chronic disease plus an ineffective healthcare delivery system are the two ingredients in the high healthcare cost recipe.

Throwing aside the lifestyle issues that often lead to chronic diseases, which part of the US healthcare delivery system is primarily tasked with addressing chronic diseases?

Answer: Primary care – Family medicine physicians, Pediatricians and Internists.

Cardiologists, endocrinologists and pulmonologists have a role as well.  However, in order to properly treat and manage chronic conditions, it takes care, coaching, and empathy – old-time relationship-based medicine.  That is primary care.

However, our current healthcare system does not support relationship-based medicine.  Instead, our system supports and compensates primary care physicians only for certain activities.

How so?

Let’s say a physician sees a patient face-to-face in a physician office, they then receive payment.  If a physician sees many patients face-to-face every 15 minutes, they receive a lot of payments.  Now, if a physician calls up a patient on the phone to check-in and see how she is doing, they receive no payment.  Or, say a physician counsels a patient’s spouse on the proper at-home treatment plan, again, no payment.

Therefore, primary care physicians have every incentive to see as many patients in the office as they can.  Primary care physicians have no financial incentive to create a strong relationship with a patient in order to adequately address, treat, manage and possibly even cure the patient’s chronic disease.

Thus, our chronic disease problem continues to grow unabated.


Why are administrative costs a symptom?

In order to receive payment for the in-office care of a patient, primary care physicians must meticulously document each visit.  Also, insurance companies can require prior authorization for certain treatments as well as outside referrals, which require further documentation.  Lastly, insurance companies, Medicare and Medicaid can deny payment based on inadequate documentation and authorization.

So, if you are a primary care physician, you know that in order to make money, you need to see as many patients face-to-face as possible.  Thus, what stands in your way from seeing more patients?  Answer: documentation, authorizations and all-around dealing with insurance, Medicare and Medicaid.

Plus, with a higher prevalence of chronic disease comes more documentation, authorizations and dealing with insurance.

What to do?  That answer is easy – hire non-physicians to take care of the documentation, authorizations and dealing with insurance, Medicare and Medicaid.

The result: primary care physicians now employ five non-physician full-time equivalents (FTEs) for every physician according to the Medical Group Management Association (MGMA).

Now a physician must generate enough revenue in order to cover those five FTE salaries, which means that a primary care physician needs to see even more patients.  Thus, the growing amount of chronic disease cases are jammed into smaller and smaller appointment windows in a physician’s day.


Trying to fix the problem makes it worse

Insurance companies, Medicare and Medicaid recognize the problem.  As a fix, they do what they do best: make new rules and programs.

They have come up with new “value-based” programs like PCMH and ACOs, and now require physicians to use Electronic Medical Records (EMRs) in order to receive maximum payment.

Inadvertently, these programs only make the problem worse; they require physicians to hire even more non-physicians.

In order to qualify for PCMH programs, physicians must go through a rigorous application process and then hire more non-physician FTEs in the form of “care coordinators”.  The PCMH application process takes further time away from patients and therefore physicians hire even more non-physicians to handle PCMH requirements.

Physicians have to cover the cost of PCMH implementation and ongoing support while also having to figure out how to implement and support an EMR system.  So what do physicians do?  They hire a non-physician to take care of that too.

Lastly, the Medicare ACO program measures participants on 33 quality measures.  33 measures!  How is a physician supposed to keep track of 33 measures?

The solution, hire a non-physician.

I think you get the point.


In conclusion

Administrative costs are not the driver of healthcare costs.  Instead, high healthcare costs are due to chronic disease and an ineffective healthcare delivery system.  High administrative costs are a symptom of a dysfunctional healthcare delivery model that routinely burdens the physicians on the front lines.  Finally, we will not control the US chronic disease problem until administrators, insurance companies, Medicare and Medicaid simply get out of the way of primary care physicians and trust such physicians to focus on old-time relationship-based medicine.


Tom Valenti is Founding Partner of Forthright Health (ForthrightHealth.com)  You can follow him here: @tjvalenti 

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  • Robert Nelson, MD

    This is one of the best critiques I read that documents logically and convincingly why our healthcare delivery system if so dysfunctional, yielding poor value and sub-optimal outcomes given the cost we pay.

    Thank you!

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