Center for Healthcare Finance Information

       PROVIDING INSIGHT AND UNDERSTANDING

The cost of administrating the healthcare system is huge and accounts for about 30% of the entire national expenditure. This amounts to about $700 billion or in excess of $2,000 per person per year. A landmark study from Harvard, defined administrative costs as those occurring from private insurance overhead, employers’ costs to manage health benefits, hospital, nursing home and home care administration, and administrative costs to practitioners. The vast majority of expenditures relates to the costs incurred from having a multi-payer private insurance system. By contrast, the Canadian healthcare system (a single payer system) has administrative expenses of about 16%, accounting for about $600 per person per year. The difference, in US dollars per person per year, between us and the Canadians is about $1,400 and the aggregate amount is in excess of $400 billion annually.

Things to consider:

• Insurance overhead is $400 per person greater in the US compared to Canada. (See above chart) These numbers assumed only 11.7% overhead in 1999 compared to 20% now. As a result, the $400 per person is likely underestimated.

• Private insurance companies have, on average, 23 employees per 10,000 enrollees compared to 1.3 in the Canadian system.
• Overhead for private insurers is about 20% of premiums compared to 1.8% for Medicare, which is our “single payer” system.
• If private insurers had a similar overhead compared to the Medicare system, the savings would be about $120 billion per year or $800 per year per insured person.
• Each insurer has its own series of buildings, computers, CEO and senior management salaries, accountants, lawyers, actuaries, marketing, underwriting, and profits to shareholders. A single-payer system, like in Canada and like our Medicare system, does not have this duplication of overhead and does not pay out profits to shareholders.
• Administrative costs for physicians in the US are about $400 per person higher than in Canada. (See above chart) Much of the cost differential is also as a result of our multi-payer system. Each insurance company has its own rules, contracts, billing and payment methods, computer connection costs, patient eligibility procedures, care certification and denial procedures, and others. Physicians spend large sums of money on staff to keep up with the multiplicity of these rules and to adhere to them. Hospitals, nursing homes and home care organizations have a similar set of problems.
• Employers incur the costs of consultants to determine which insurance plan to purchase. They also must provide for the accounting and office staff to administer the benefit package.
• Using federal government estimated numbers for 2007 expenditures, private insurance premiums will be about $800 billion. The excess overhead expense compared to Medicare will be about $148 billion or $988 per person purchasing private insurance.