Billing and other insurance-related paperwork consumes 21 cents of every dollar spent on healthcare by privately insured Californians--and contrary to common belief, providers may be as much to blame as insurers, according to a new study released by the California HealthCare Foundation.
The study, published in the November issue of the policy journal Health Affairs, found that health insurers, hospitals and medical groups in the Golden State spend a total of 34% of their revenue on administration, or all business tasks not directly related to hands-on patient care. That includes such things as general office management, medical recordkeeping, information technology, quality measurement and reporting.
But the largest--and potentially most wasteful--portion of these administrative costs comes from billing, collections and other activities whose main purpose is to move money between payers and providers, researchers said. According to the study, these "insurance-related" tasks account for a full fifth of the state's private healthcare spending, or $26 billion per year-divided almost equally between insurers and providers (See chart).
The findings came as a vindication for California health insurers, which have long borne the brunt of criticism over administrative waste. The California Medical Association, for example, in March released its 12th annual report scrutinizing what it called the "staggering" administrative expenses of the state's health plans.
The study "contradicts the not-so-subtle accusation that health plans are spending wastefully and needlessly," said Bobby Pe?a, spokesman for the California Association of Health Plans. "We've managed to keep efficiencies at a higher level than many others in the healthcare sector."
Among commercial health plans, administrative costs and insurance-related costs represented just 9.9% and 8.4% of their premium revenue, respectively, the study found. The fact that insurance-related costs account for a full 85% of health plans' total administrative costs is consistent with their insurance function, researchers concluded.
Total administrative costs and insurance-related costs were highest among physician groups, consuming an average of 26.7% and 13.9% of their total revenue, respectively, the study found. Acute-care hospitals spent somewhat less on administration, or 20.9% of their revenue. Insurance-related functions alone consumed 6.6% to 10.8% of hospitals' revenue, and accounted for 31% to 51% of their total administrative costs. That compares with 52% to 61% of total administrative costs for medical groups.
Nileen Verbeten, vice president of the CMA's Center for Economic Policy, said physicians' administrative-cost ratios tend to run fairly high because even claims for the lowest amounts require significant elbow grease to process. "Although each individual claim is not very big--it may only be $70 to $150--a lot of staff time gets burned up determining which (insurer) to bill, tracking denials, following up on dropped claims and so on," she said.
While billing may be equally labor-intensive for hospitals, the amount of money generated per average claim is much higher. "The per-patient cost (of billing) relative to the revenue coming in is typically much lower for hospitals, so their administrative costs as a percentage will be significantly smaller," Verbeten said.
The study used data collected by actuarial firm Milliman USA on 63 commercial health plans from 1996 to 2001. Researchers derived the physician data from a survey conducted by the Medical Group Management Association in 2000 and subsequent interviews with practice managers. Hospitals' administrative costs were derived from fiscal 1999 data reported to the California Office of Statewide Health Planning and Development.
Verbeten and others said some progress has been made in more recent years as insurers have made their eligibility information available to providers online, and as more physicians have adopted paperless billing systems.
"It's better than it used to be ... but the system is still far from perfect," Verbeten said.