karl-henrik pettersson


Filosofiska tankar om företagande och ekonomi

Vilket samhälle vill vi ha? Hur mycket marknad? Hur mycket politik? Varför dessa ekonomiska orättvisor?

U.S. Health Care (1): Health care administration costs in the U.S. is on a par with Sweden’s entire GDP

untitled-2In the coming months I will occasionally comment on the ongoing U.S. healthcare debate. The reason is simple. The Americans have created a healthcare system that, year after year, generates 50% higher costs than comparable systems in other Western countries without the result, the health care and health situation, being significantly better. Surprisingly, the Americans also seem to be more than reluctant to change this system. It’s a memento for all who are interested in the interplay between economics and politics.
This is the first article under this heading. It has been published in Swedish (here)


It’s not easy to define  the operating, or administrative costs of a health care system. But in simple terms, we will here by administration costs  mean all costs not related to the treatment itself – and there are basically two types. First, costs for control & management, IT, personnel, training, etc. in all enterprises and organizations, public or private, which constitute the health care system. Second, all costs connected with negotiations. For speaking of the health care system, there’s a lot of negotiations going on.
There are several explanations for that. Most important is that health care is a so-called third party-market. Health care is not like a normal market with a buyer (the patient) and a seller (the health care providers). There’s also a third party who pays for the care, the insurer. That there are three parties involved simply leads to higher operating costs of “negotiation-type”. And of course, if there are – a  in the U.S. – many, competing insurance companies, it will, ceteris paribus, raise the operating costs further, at least compared to single payer systems like in Canada or Sweden.

The New England Journal of Medicine published a few years ago, an acclaimed study comparing the operating costs of U.S. and Canadian health care (Woolhandler, S. et al, 2003, “Cost of Health Care Administration in the United States and Canada“).
The overall results of the study, which are based on data from 1999, is that administration costs in the U.S. healthcare system is roughly twice as high as in the Canadian system. (31% vs. 17% of total healthcare costs). It’s in itself surprising, and quite thought-provoking that the administration costs account for almost one third of total health care costs in the U.S. In absolute terms, it’s an incredible amount of money that goes to administration in the U.S. system – for the year 1999, $ 294 billion. The amount is so big that it’s difficult to relate to it. But roughly speaking, the administrative costs in the U.S. was in 1999 on par with Sweden’s entire GDP (2 000 billion SEK that year)!
Looking closer at the figures one can see that the costs of dealing with the regionalized Canadian, financing (relatively similar to the Swedish county-based system) was 1.3% of the total public health care costs. This compares with the Canadian private insurers who used 13% of their health care costs for administration. On the other hand, privately insured health care in Canada account for less than 5% of total health care costs. One can roughly say that about 2% of health costs in Canada can be attributed to what it costs to manage the financing of health care.
That figure should be contrasted to the U.S. system of financing with administrative expenses of approximately 6% of total costs (which includes public Medicaid and Medicare with much lower administrative costs than private insurance companies). In addition to the 6% come the costs for the business sector to manage health-care plans for their employees which in the U.S. are significant. Overall, this study suggests that U.S. costs to administer the financing of health care are roughly four times higher than in Canada (8% vs. 2%).

The administration expenses in the second stage, with the health care providers, were roughly twice as high in the USA as in Canada (calculated as a percentage of total costs). For example, the operating expenditures in 1999 for the average U.S. hospital was 24% of total costs, in Canada the corresponding figure was 13%. Is this surprising numbers? No, I’m not surprised at all. Obviously, it’s cheaper to deal with an essentially tax-funded health care system as in Canada than with the fragmented U.S. system for financing. To portion health care financing on a large number of insurers, it has been said that there are 450 private insurance companies operating in the U.S. healthcare system, will relative a single payer system cost a lot of money. But that’s only half the problem. A split in many hands on the financing side also leads to higher costs of the counterparty, with the health care providers. Hospitals and other health care providers must constantly negotiate with insurance companies, largely on the patient level, and that means high contract and control costs, the mirror image of the high contract and control costs of the insurers. It is easy to see why the operating costs of U.S. hospitals have become much higher than those of the Canadian.

Moral 1: We shall be glad, and defend, the tax-funded, single payer system that have in Sweden.
Moral 2: Diversity in health care, and especially in the financing of health care, will be very costly for the economy. It’s a myth that the administration cost of private care is lower than in public care.

PS Can we say anything about how high the operating costs are in Swedish health care system? I’s not easy. I have not seen any comprehensive, timely study of the administrative costs in the Swedish system. Judging by the US/Canadian study, it would be reasonable to expect that the administrative cost of the financing stage, in other  words what it costs the county councils to manage the tax funding, may lie in the range of 1-2% of total health care costs, let us for simplicity say 1.5%.
Administration expenses in the provider part of the system should be significantly lower than in Canada (not to mention the U.S.) because health care in Canada is largely produced by a relatively small number of county-run administrations. It should mean that both types of administrative expenses, and in particular the negotiation-related costs, should be relatively very low in Sweden. I guess, and it is only a guess, that the Swedish administrative costs in healthcare provider stage is half of the Canadian (13%), this would mean that the Swedish health care administration costs would be (1.5 +6.5 =) 8% . It does not sound entirely implausible. For example, Professor Karl Lauterbach, a German medical researcher, indicates that the administrative costs of the German healthcare system is around 6%. And the administrative costs are still somewhat lower than in the highly efficient Japanese healthcare system.

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