Study finds billions of health insurance dollars used for administrative costs

By Stephanie Levin

James G. Kahn, MD, MPH -----

Billing and insurance paperwork consume at least one out of every five dollars of private insurance health spending in California, according to a new study by health policy researchers.

The findings suggest that about $230 billion in health care spending nationally is devoted to insurance administration.

“Over the last decade, administrative costs have accounted for 25 percent of health care spending. Little has been known, however, about the portion attributable to billing and insurance-related functions,” said James G. Kahn, MD, MPH, principal study investigator and professor at the Institute for Health Policy Studies at the University of California, San Francisco.

In order to determine total expenses for these functions in California, Kahn and his research colleagues collected data from three settings: private insurers, physician offices, and hospitals. They focused on spending in doctor’s offices and hospitals, which represent 80 percent of all privately insured health spending.

From this data, the team estimated how much of each health care dollar was used to administer insurance in California. Insurance administration includes numerous activities, such as insurance marketing, plan enrollment, eligibility and benefits determination, referral requests, billing and appeals. 

The study analyzed these administrative expenses, separating out billing and insurance costs from other administrative tasks such as medical records and quality improvement efforts.

The findings are reported in the November/December issue of Health Affairs.

The researchers found that private insurers use about 10 percent of premiums for billing, marketing, financial activities and profit. Physician offices spend 14 percent of their income on insurance paperwork, and hospitals spend 9 percent on insurance paperwork. This financial cost to physicians for insurance paperwork is especially high, according to Kahn. 

Of the total insurance premiums used to cover hospital and physician care, this research showed that 21 percent is spent on insurance administration. Another 13 percent is used to cover other administrative tasks. Only 66 percent is used for patient care.

“The study points to the enormous waste in our health care system,” said Kahn’s colleague Thomas Bodenheimer, MD, MPH, a professor of family and community medicine at UCSF who was not involved in the study. “In 22 years as a private primary care physician, the financial and morale drain associated with billing multiple insurers has nearly sunk our practice.”

The study showed that the largest billing- and insurance-related categories for private insurers are claims, sales and marketing, finance and underwriting, and information systems, each accounting for 1.1 to 1.6 percent of premiums.

After reviewing the study findings, Kevin Grumbach, MD, professor and chair of the UCSF Department of Family and Community Medicine and an expert on health policy, commented, “Research conclusively demonstrates that public insurance systems in Canada and other nations have avoided the costly administrative inefficiencies that plague the market-oriented US health system. Reading this study, people may well ask why our nation tolerates such an inefficient system where 45 million Americans lack insurance coverage.”

Study co-investigators were Rick Kronick, University of California, San Diego; Mary Kreger, UCSF Institute for Health Policy Studies; and David Gans, Medical Group Management Association in Englewood, Calif.

The study was funded by the California Health Care Foundation.

UCSF is a leading university that consistently defines health care worldwide by conducting advanced biomedical research, educating graduate students in the life sciences, and proving complex patient care.