Billing-related functions consume much health care revenue

A single-payer system has the potential to bring large savings, authors say.

A study on health insurance administration costs in California estimates that 19.7% to 21.8% of private insurers, physician offices and hospital services spending gets consumed by billing and insurance-related functions.

The researchers suggested that a single-payer health system could eliminate a big portion of billing and non-medical insurance-related (BIR) functions. “Single-payer could reduce most of the BIR component, perhaps [by 75%],” James G. Kahn, MD, MPH, a professor at the University of California, San Francisco, and lead researcher, told Orthopedics Today. “This is accomplished by eliminating those BIR functions that consume BIR resources, [for example] insurance marketing, eligibility determinations, complex billing forms and appeals.”

Published in Health Affairs, the study results showed that California private insurers spent 9.9% of revenue on administration and 8% on BIR. California physician offices spent 27% on administration and 14% on BIR, and the hospitals spent 21% on administration and 7% to 11% on BIR.

The researchers determined these estimates by separating administrative cost elements from collected data and calculated the overhead attributable to each cost. In some cases, they then used their own judgment to estimate the BIR percentage of each cost element.

Private insurer estimates

To estimate private insurers’ BIR costs, the researchers used data from Milliman USA collected during 1996 to 2001 at 73 insurers for 63 commercial, 43 Medicare and 23 Medicaid insurance plans. They used the median premium per member per month to calculate BIR percentages: $177 for commercial, $153 for Medicaid and $650 for Medicare.

Administrative costs represented about 9.9% of commercial plan premiums, 11.4% of Medicaid premiums and 4.5% of Medicare premiums. BIR administration represented 8.4%, 9.4% and 3.8%, respectively. The researchers found that BIR accounted for 85% of commercial and Medicare administrative costs and 81% of Medicaid costs.

For the physician offices’ BIR estimates, the study used data from the 2000 Medical Group Management Association (MGMA) annual survey, in which medical groups reported spending 20% to 27% of revenue on administration. The researchers assigned BIR to multi-specialty, single-specialty primary care and single-specialty surgery categories, using data from 11 California medical groups in a convenience sample. BIR administration took up 13.9% of multispecialty revenues, 14.5% of single-specialty primary care revenues and 12.4% for single-specialty surgery revenues, and made up 52% to 61% of overall practice administrative costs.

Using the American Medical Association (AMA) national survey, researchers estimated that physician time spent on administration averaged five hours per week, or 8% of their time, concluding that physicians spent an average 4.9% of time, or 2.1% of revenue, on BIR.

For hospitals, the researchers used FY1999 hospital financial data from the California Office of Statewide Health Planning and Development. The California acute care hospitals reported spending 20.9% of revenue on administration.

The authors noted several limitations in their study as follows:

The diverse data sources were not ideal for estimating BIR as a percentage of total costs.
Estimates for the hospitals and insurers categories relied on two researchers’ judgment, which likely contained error.
Estimates for physician practices were based on respondent judgment in a convenience sample, also subject to error.
The study authors limited the BIR estimates to insurers, hospitals and physicians to simplify the analysis. A more complete analysis would include pharmacy and other insured services.

Kahn said the authors are conducting another study on a large multigroup, multispecialty practice to address the limitation of cost data classified by department rather than BIR function.

“However, we have no plans to examine other services — in part because the subjects, [for example] pharmacy benefit management companies, appear unlikely to agree to this kind of academic study,” Kahn said.

For more information:
Kahn J, Kronick R, Kreger M, Gans D. The cost of health insurance administration in California: Estimates for insurers, physicians and hospitals. Health Aff (Millwood). 2005;24:1629-1639.