What Health Premiums Pay For
David Lazarus
Friday, January 16, 2004

The United States squanders more money every year on health care bureaucracy than it would cost to provide medical coverage for the 43 million Americans now lacking insurance. That's the finding of two respected Harvard Medical School researchers, David Himmelstein and Steffie Woolhandler, in a study appearing this week in the International Journal of Health Services.

They determined that of $1.6 trillion in total health care spending last year, at least $399 billion was eaten up by administrative costs such as clerical work in hospitals and processing a vast array of insurance forms. But if a national health care plan like Canada's were implemented in this country, the researchers found, administrative overhead would be slashed by about $286 billion. This amount, in turn, would be sufficient to not only provide health coverage for every uninsured American nationwide but also allow millions of underinsured people to improve their quality of care.

Himmelstein, who is also a physician, said in an interview that 10 percent of revenue at his Cambridge practice now goes to an outside billing firm that handles much of his insurance work. "That amount could be used instead to care for more patients," he observed. "It could be used to hire additional people and fund a huge expansion of care."

Similarly, Himmelstein estimated that at least 15 percent of his time every day is spent dealing with paperwork. "That's 15 percent of my time that I'd much rather spend on patients or learning more about medicine," he said. Private health insurers, who would be decimated by taxpayer-funded universal coverage, oppose creation of a Canadian-style system in the United States. Instead, they prefer adjusting the existing system to expand the number of people covered.

But Himmelstein and Woolhandler argue that the existing system is grossly inefficient and needs to be completely overhauled. The findings of their research may be speculative, but they say it points the way toward legitimate cost reductions. In California, they found, nearly $163 billion was spent last year on health care. Of that total, $45 billion, or about 28 percent, went to administrative costs. With Canadian-style universal coverage, the researchers concluded, Californians would save almost $34 billion annually on administrative overhead. This would provide more than $5,000 for each of the state's nearly 7 million uninsured.

"As it stands," Himmelstein said, "you could insure all uninsured people for about $1,500 per person. The administrative savings would thus leave plenty of money to upgrade coverage for others." The Canadian single-payer system is frequently cited as a model for how the United States might go about offering health coverage to all citizens. The Canadian system, begun nationally in 1971, guarantees all citizens access to essential medical services regardless of employment, income or health. The system is administered regionally but overseen at the federal level. It's not perfect. A 2001 study found that patients requiring elective surgery wait an average of 16 weeks before reaching the operating table. Investment is slow in new technologies and equipment.

On the other hand, Canadian hospitals and physicians spend substantially less time on administrative chores because the single-payer system is relatively streamlined. Hospitals receive lump-sum payments each year from local authorities but have wide discretion as to how their resources are used. Paperwork is minimal. Would Canada's system work in the United States? Probably not without some tweaking. Experts say a U.S. universal health care system probably would require strong regulatory oversight to ensure cost controls and quality (and such oversight likely would cut into at least some of the projected savings).

Government authorities might also need more say over distribution of medical resources. Just as few communities would want or need two fire stations within a block of each other, regulators would help decide where hospitals are built to avoid wasteful duplication of expensive technologies. "Health care shares many of the same characteristics of fire departments and police departments," Himmelstein said. "Hospitals should be treated the same way." Karen Ignagni, president of AAHP-HIAA, the leading trade group for health insurers, challenged the methodology of Himmelstein and Woolhandler's study, and said administrative costs in the report "are wildly inflated."

Many of the expenses included in the study, she said, "actually involve activities that improve the quality of health care. It's not just paper pushing." U.S. health insurers support extending coverage to all Americans, Ignagni stressed, but are "against a one-size-fits-all approach." For its part, the drug industry's leading trade group, Pharmaceutical Research and Manufacturers of America, also opposes creation of a single-payer health care system. Jeff Trewhitt, a spokesman for the association, said private insurance plans offer consumers more choice and "allow pharmaceutical and biotechnology research companies to avoid innovation-stifling, government-mandated price controls." Harvard researcher Woolhandler responded in an interview that the insurance and drug industries have resisted change for years. "They're extremely happy with how things are now," she said. "For them, it's a life-or- death struggle."

Yet in the face of such politically powerful opposition, most experts agree it's unlikely nationwide universal coverage will be adopted in the United States anytime soon. Then again, Canada began its system more than half a century ago on a province-by-province basis. That may bode well for Californians. More on Sunday.

David Lazarus' column appears Wednesdays, Fridays and Sundays. He also can be seen regularly on KTVU's "Mornings on 2."
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