September 2006

Grant Results

SUMMARY

From 2000 to 2002, researchers at the Cambridge Medical Care Foundation examined trends in health care administrative costs. Their major focus was a comparison of costs in the United States and Canada for 1999. They also compared trends over time and addressed the relationship of administrative spending to quality and overall costs.

The Cambridge Medical Care Foundation, part of the Cambridge Health Alliance, is a nonprofit organization dedicated to community health.

Key Findings

  • Administrative costs per capita were $1,059 in the U.S. and $307 in Canada; these costs accounted for 31 percent of health care spending in the U.S. versus 16.7 percent in Canada.
  • Between 1965 and 1999, direct government health spending, public employers' benefit spending, and tax subsidies all rose more rapidly than did overall health care costs.
  • From 1997 to 2000, higher administrative costs at HMOs were consistently associated with lower quality.

Funding
The Robert Wood Johnson Foundation (RWJF) supported this project through a grant of $139,381.

 See Grant Detail & Contact Information
 Back to the Table of Contents


THE PROBLEM

Substantial resources are devoted to administering health care in the United States. Documenting recent trends in administrative costs is important in understanding the shift of the U.S. health care system to market-based care. The Cambridge Medical Care Foundation, part of the Cambridge Health Alliance, is a nonprofit organization dedicated to community health. The researchers are on staff at Cambridge Hospital (part of the alliance) and are members of the faculty of Harvard Medical School.

 Back to the Table of Contents


THE PROJECT

From 2000 to 2002, the researchers examined trends in health care administrative costs. Their major focus was a comparison of costs in the United States and Canada for 1999; they also compared trends over time and addressed the relationship of administrative spending to quality and overall costs. Appendix 1 shows the methods and data sources used.

 Back to the Table of Contents


FINDINGS

As reported in the New England Journal of Medicine (August 21, 2003):

  • "U.S. administrative costs totaled at least $294.3 billion in 1999, $1,059 per capita, versus $9.4 billion, $307 per capita, in Canada."
  • "Health administration accounted for 31 percent of U.S. health expenditures versus 16.7 percent in Canada."
  • Canada's national health insurance program had overhead of 1.3 percent. Canada's private insurers had higher overhead (13.2 percent) than U.S. insurers (11.7 percent) did. Overhead of U.S. insurers was higher than that of Medicare (3.6 percent) and Medicaid (6.8 percent). Overall, public (Medicare and Medicaid) and private insurance overhead in the United States totaled $72 billion, 5.9 percent of total U.S. health spending, $259 per capita. Insurance overhead in Canada was 1.9 percent of health spending, $47 per capita.
  • "Providers' administrative costs were far lower in Canada." Overall administrative costs totaled $89.9 billion, $324 per capita, in the United States, versus $3,258 million, $107 per capita, in Canada.
  • "Between 1969 and 1999, administrative workers' share of the U.S. health labor force grew from 18.2 percent to 27.3 percent. In Canada, it grew from 16.0 percent in 1971 to 19.1 percent in 1996." (These figures exclude insurance industry personnel.)

As reported in Health Affairs (July/August 2002):

  • "U.S. tax-financed health spending is now the highest in the world." Tax-financed health expenditures totaled $723.8 billion in 1999, $2,604 per capita, or 59.8 percent of total health spending (including health care-related subsidies and public employees' health benefits).
  • "Between 1965 and 1999, direct government health spending, public employers' benefit spending, and tax subsidies all rose more rapidly than did overall health care costs." From 1965–1999, direct federal spending rose from 11.4 percent to 31.8 percent; public employee benefits rose from 1.2 percent to 5.4 percent; and tax subsidies grew from 4.6 percent to 9.1 percent.
  • "In 1965, U.S. tax-financed health expenditures per capita were well below total spending levels in most other developed nations and similar to government spending in other wealthy nations. By 1999, tax-financed health expenditures per capita in the U.S. exceeded total health spending per capita in every other nation but Switzerland and dwarfed government spending in any other nation."

As reported in the International Journal of Health Services (Winter 2002):

  • From 1997 to 2000, higher administrative costs at HMOs were consistently associated with lower quality. Of 65 quality measures studied, 53 showed a significant correlation and nine showed a non-significant correlation between higher administrative costs and lower quality. Quality measures included immunization, mammography and diabetic eye exams.

The researchers published articles summarizing their findings in the New England Journal of Medicine, Health Affairs, and the International Journal of Health Services. They plan to continue their work monitoring and researching health care administrative costs.

 Back to the Table of Contents


GRANT DETAILS & CONTACT INFORMATION

Project

Studying Recent Trends in Healthcare Administration Costs

Grantee

Cambridge Medical Care Foundation (Cambridge,  MA)

  • Amount: $ 139,381
    Dates: July 2000 to December 2002
    ID#:  036617

Contact

Steffie Woolhandler, M.D., M.P.H.
(617) 665-1032
himmelhandler@attbi.com

 Back to the Table of Contents


APPENDICES


Appendix 1

(Current as of the time of the grant; provided by the grantee organization; not verified by RWJF.)

Methods and Data Sources

Administrative costs in the U.S. and Canada:

  • Researchers analyzed 1999 data on insurance overhead, employers' costs to manage benefits, and administrative costs of hospitals, practitioners' offices, nursing homes and home care from the Centers for Medicare & Medicaid Services, the Canadian Institute for Health Information, the American Medical Association, the Canadian Medical Association, the Current Population Survey, the Canadian Census and other sources. They worked closely with colleagues at the Canadian Institute for Health Information.

Tax-financed health spending:

  • Researchers analyzed U.S. public spending and tax subsidies for health care for selected years between 1965 and 1999 by totaling: direct government payments for health-related activities, government spending for health benefits for public employees and tax subsidies to buy health insurance and health care. Data sources included the Centers for Medicare & Medicaid Services, the Medical Expenditure Panel Survey and the Office of Management and Budget.

HMO administrative costs and quality:

  • Researchers analyzed data on plan quality and performance from the National Committee for Quality Assurance's Quality Compass database from 1997–2000.

 Back to the Table of Contents


BIBLIOGRAPHY

(Current as of date of this report; as provided by grantee organization; not verified by RWJF; items not available from RWJF.)

Articles

Himmelstein DU and Woolhandler S. "Taking Care of Business: HMOs That Spend More on Administration Deliver Lower-Quality Care." International Journal of Health Services, 32(4): 657–667, 2002. Also available online (registration required).

Woolhandler S, Campbell T and Himmelstein DU. "Health Care Administration Costs in the U.S. and Canada." New England Journal of Medicine, 349(8): 768–775, 2003. Also available online.

Woolhandler S, Campbell T and Himmelstein DU. "Costs of Health Administration in the United States and Canada." New England Journal of Medicine, 349(8): 768–775, August 21, 2003. Also available online.

Woolhandler S, Campbell T and Himmelstein DU. "Health Care Administration in the United States and Canada: Micromanagement, Macro Costs." International Journal of Health Services, 34(1): 65–78, 2004. Also available online.

Woolhandler S and Himmelstein DU. "Paying for National Health Insurance — And Not Getting It." Health Affairs, 21(4): 88–98, 2002. Also available online.

 Back to the Table of Contents


Report prepared by: Mary B. Geisz
Reviewed by: Lori De Milto
Reviewed by: Molly McKaughan
Program Officer: Nancy Barrand