Administrative Overload

‘Greedy” and “expensive,” “money” and “profit”—these were the dominant answers when researchers hired by the public policy website The Morning Call asked average Americans what words come to mind when they thought about health insurance companies. While insurers are likely to treat this outcome as a public relations problem, more evidence that U.S. consumers simply have it right was included in a recent investigation of rising health care costs. The New York Times reported in May that, public perceptions of high-salaried physicians notwithstanding, the most over-rewarded players in American health care were actually paper pushers, not the pill prescribers.

While some medical specialists certainly earn eye-popping salaries, the true high earners in American health care are most often found in the beige back offices that never feature in television medical dramas. According to the Times report, the base pay of insurance and hospital executives and administrators far outstrips most doctors’ salaries. The average insurance chief executive officer earns $584,000, hospital C.E.O. $386,000 and hospital administrator $237,000. Those figures compare with the $306,000 most surgeons can expect to earn and the $185,000 earned by most physicians.

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Individual cases cited by the Times are disheartening. While families struggle to pay for adequate care, insurance company executives are raking in millions each year in salaries and stock options. In a deal the Times characterized as “not unusual in the industry,” Mark T. Bertolini, chief executive of Aetna, earned $977,000 in 2012; that year he took home a total compensation package, with stocks and options, that was worth over $36 million.

Despite some success in decelerating costs achieved by the Affordable Care Act, U.S. health care’s overall price-tag—projected to be $3 trillion in 2014—remains startling, especially compared with peer states. Few advanced economies devote more than 11 percent of their gross domestic product to health care. In the United States, health care claims 18 percent of all annual economic output, and its per capita cost, $8,500, is more than double that of many other Western nations.

While tort-reform resisting attorneys, outright fraud, over-billing and unnecessary procedures are typically blamed for the vast difference in costs—and not coincidentally outcomes—between the United States and its industrialized peers, U.S. overspending on health care administration is a robust contributor to the problem. The Commonwealth Fund reports that the United States spends $606 per capita on it. That compares with $277 spent in the next most bureaucracy-burdened state, France, and a low of just $35 per capita in Norway.

Why are U.S. administrative costs so extravagant? Because of the system’s reliance on for-profit entities and its unique complexity, there are administrative positions that do not exist anywhere else in the industrialized West.

The nation’s so-called reform debate sacrificed common sense for political expediency and the larger goal of expanded coverage. The single-payer option, which would have eliminated layers of bureaucracy, was never a serious contender in reform negotiations. It should have been, and at a more opportune political moment it should be honestly revisited. The problem now is how to locate cost-saving opportunities in a system that remains overloaded with expensive and exasperating bureaucracy. Inefficiencies in personnel policies and record-keeping need to be tracked down, and employer-buyers of insurance plans need to scrutinize their insurer’s compensation policies carefully to turn back a proliferation of too-richly rewarded managers. The A.C.A. has set minimum standards for care versus administrative costs, the Medical Loss Ratio, and requires insurers to issue rebates to enrollees if these minimums are not met. Those standards should be tightened and scrupulously policed.

Pope Francis has emphasized the problems of economic inequality. In his 2014 World Day of Peace Message, he worried over the contemporary tendency to seek “happiness and security in consumption and earnings out of all proportion to the principles of a sound economy.” He called for a social order that guarantees basic rights, including access to education and adequate health care. Discouraging excessive compensation will preserve revenue that can be directed to expanding health care access, answering both social concerns in one stroke.

Health care costs have also been at the heart of the budget paralysis in Washington. That spending cannot be contained without addressing the preposterous costs of health care administration. The needs of the nation’s taxpayers and its sick, injured and indigent must be placed above the interests of health industry shareholders, executives and bureaucrats.

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Robert O'Connell
3 years 6 months ago
After 39 years with Aetna as my insurer -- years in which my wife had two biopsies and successful chemo for leukemia, and our daughter had thyroid cancer and now has a brain tumor -- I wholeheartedly respect the compensation earned by Mr. Bertolini. It certainly warrants more respect than the bonuses paid in connection with the fraud the Veterans Administration has suffered. Why not demonize the NFL for concussions, Dr. Gosnell or the State of Illinois that just realized it paid $ 12,000,000 for medical care billed to people who were dead before allegedly treated?
Mike Van Vranken
3 years 6 months ago
You say the Aetna CEO made $36 million last year. Their website indicates they have 22 million members (health policy customers?). So, if we made the CEO work for free, the $36 million savings would be about $1.63 per policy per year. That's about 14 cents per month per customer. As far as Aetna stockholders, you do understand that most IRA's, 401K's and pension plans in this country are probably invested in Aetna stock. So, some of the real stockholders are the retirement plans of teachers, factory workers, city sanitation workers, magazine editors, and - well, you get the picture. If you want to attack the stock performance of a company like Aetna, remember, you are attacking probably most of the retirement plans of any citizen in our country. Is there too much expense in the system? Absolutely. Do we spend a lot of money top executive payroll? Sure we do. But, for those in our country who need help with health care, it is up to the Church to help them. It would be great to see an editorial discussing the obligation of Catholics and all Christians to generously give our resources to solve the health care problem we have in our country. It seems we don't talk about individual giving very much. I pray that changes.
Joseph J Dunn
3 years 6 months ago
"Health care costs…cannot be contained without addressing the preposterous costs of health care administration…Inefficiencies in personnel policies and record-keeping need to be tracked down, and employer-buyers of insurance plans need to scrutinize their insurer's compensation policies carefully to turn back a proliferation of too-richly rewarded managers." The Editors emphasize administrative costs in the U.S. health care system, which would include not only insurance company execs and employees, but many employed in doctors' offices, hospitals and clinics. We do indeed have an administratively complex system. The Editors also point to competition among providers as one means of controlling these costs, and it should be noted that "employer-buyers" (who buy insurance on behalf of millions of American employees) not only require competitive bids, and use professional advisors, to obtain the best value for their premium dollars, but the largest corporations insist on programs known as Administrative Services Only (ASO), wherein the insurance company is paid strictly for its administrative work--in other words, the competitive process is aimed directly at controlling administration costs (costs of executives and bureaucrats). Not-for-profit insurers such as Blue Cross in many states are involved in the competition against for-profit insurers. With the ACA's new website, individuals can easily employ the same competitive forces. But if we eliminate ALL of the $606 per capita administrative costs from the U.S. health care system, that equals less than 7 percent of total U.S. health care costs. Every American adult and child could receive a rebate check of $606. The Editors give very short attention to health care fraud, and that is unfortunate. Some estimates indicate that fraud (not medical mistakes or defensive medical tests, but real intentional fraud) account for 10 percent of America's $2.7 trillion in health care costs. Eliminating that expense would let every American adult and child get a rebate of $830. Without dismissing either the need for administrative cost control or fraud prevention (which is an administrative expense) we might look to available analyses of why our health care costs are higher than other countries, and why our life expectancy is not advancing as quickly, and why our mortality rate from amenable diseases (deaths from selected diseases which are considered to be either treatable or preventable through health care services) is high compared to other OECD countries. The big items that are driving America's health care costs, and health, are--according to the OECD, and our own Centers for Disease Control--obesity and related health conditions. We have the highest adult obesity rate in the OECD by a large margin. The reports are readily available online. These are the costs that offer the biggest premium-savings opportunities, and we get to live longer. These are costs that no one but ourselves can influence. Sadly, this editorial appears while we are watching the scandal unfolding at the Bureau of Veterans Affairs, which has responsibility for 20 million living vets, 5 million of whom rely on the VA for health care, or disability payments, or both. Most of those vets have no other place to get those services--a single payer, single provider system. Perhaps the administrative costs are low, but I see no bargain here. Aetna, by comparison, has 22 million customers--all of whom have a choice to go elsewhere. America does a service by pointing to opportunities to help the poor, or even the not-so-poor, improve their situation. Let us look at all the opportunities, and work as effectively as possible in that direction.
Tim O'Leary
3 years 6 months ago
Particularly unfortunate timing for this editorial, given the scandal in the VA hospitals, the nearest thing to a single-payor system in the US. Similar shocking reports have come out of the UK's NHS only a few months ago. It has been known for years that more people die on Canadian waiting lists for heart surgery than from the surgery itself. And Obamacare, so far, has had a terrible roll-out, with so many people losing their insurance while IT companies with government contracts made millions for software systems that don't work. There is also the case of Senator Menendes's Dermatology friend who made $22 million last year. We really do have a broken system, but I hardly think going after insurance CEO's compensation packages will do anything to really fix the cost-overruns. One other note - 80 to 90% investment in R&D for new medicines is spent in the US, even by Swiss and other Foreign Pharma companies. The rest of the world relies on the new treatments that Americans fund by being willing to pay a premium for the new medicines. So, lookout for unintended consequences. For most disease, the medicines not yet invented are far more important than the medicines we have. The news from this week's ASCO (cancer) meeting is very promising, and almost all the research is being done by private companies.
Joe Kash
3 years 6 months ago
If my company is losing money and I hire a CEO who makes changes which leads to 10 million in profits then what is the CEO worth to retain him? If another company sees the value of this inovative CEO and makes a counter offer because the board of directors see the potential benefit that he can make to the compainy then is he worth it? If I have a CEO under a multi-year contract and his perfomance starts to fall. If I buy out his contract and hire a new CEO who turns things around making enough to cover the buyout and then some, then wasn't it worth it? This "CEO makes to much money" is more emotional than rational. Kind of like being upset that Lebron James makes too much money for playing a game or George Clooney makes too much money for acting or as Mark Knopfler said: "That ain't workin, money for nothin, chicks for free".
Charles Erlinger
3 years 5 months ago
I would like to discuss part of an assertion made some months ago in a comment by a reader on an article in America, which is generally related to the current topic : “The fundamental problem with it is that this (healthcare) is a plumbing problem (local) not an electrical problem (federal). It is a problem of private goods, not common goods. The only reason to make it federal is to increase crony capitalism - which never helps the poor. There are arguments that can be made that some problems need to be dealt with on the federal level, but folks from the left don't want to engage in them - they think they can just force everyone to agree with them.” The urge towards healthcare legislation by almost anyone in the last fifteen years or so has arisen from the general idea that healthcare is, if not an inalienable natural right, then a moral human right, which inevitably is followed by consideration of universal health care. That, in general, was even the force behind the expansion of Medicare to include some form of prescription insurance. In other words, the general urge has been to expand, not contract, some kind of financial assistance to ease the expense of health care. The whole rights idea automatically brings in the idea of justice, which, of course, is social by definition, so that the idea of expanding financial assistance to improve the access to health care takes on the mantle of social justice. Social justice is a moral virtue, a habitual way of behaving towards others, whether the other is an individual, a group or a society. Attempts to practice social justice without considering structural factors in society seem fated to be frustrated. The general urge towards expansion of applicability that is inherent in attempts to be virtuous in terms of justice cannot proceed to its logical conclusion, which would be a single payer health care system, for many practical reasons, not the least of which is that single payer systems have enough of a track record to reveal that there are undesirable practical aspects to it, from the point of view of people of many political persuasions, including liberals. So the typically advanced alternative is to somehow expand access to health care by making the expansion mechanism fit into the private commercial market place, and the private industry group with most experience in this area is the insurance industry. The insurance business model is a very well developed model. It has an especially well developed theoretical underpinning in actuarial science and risk underwriting best practices. It also has a well developed set of claims settlement best practices and premium or pricing best practices, both of which are intensely scrutinized by insurance commissioners in all states and territories. All of this theory and best practice lore is continually changing with a view towards refinement and improvement, both because of the insistence of regulators and the insistence of management and/or stockholders, depending on the business form of the insurer. But the concept of universal coverage and insurance best practices as they have been developed to date are essentially incompatible. While actuarial science can, with enough data, pretty confidently forecast the financial risks entailed in extending coverage to wider health risks, insurers have essentially had to throw out the selectivity guidelines and pricing schedules developed by underwriters. So the joining of universal (or even near universal) coverage requirements to the insurance business model, while interesting to the insurance industry as a potential source of millions of additional customers, has not been a meshing but a collision. As in any collision, parts of the machinery get damaged. The insurance industry gives the impression publicly that it can respond and adjust to the new circumstances and make the now deformed business model work. Scale of operations will have to be adjusted to make it work. While public optimism about the resilience of the insurance model gives a certain amount of confidence that the new law will work at least as far as the insurance industry is concerned, it is important to remember that health insurance is not the same as health care. But the impulse inherent in the practice of the virtue of justice is to improve the access to health care, not access to an insurance policy. Now the one noticeable thing about these various approaches to the expansion of health care accessibility to universal or near universal scope is the pervasive necessity to consider problems of scale. Scale is a factor in business and industry everywhere you look. There are mergers and acquisitions (some spectacular in size) going on every day. Business leaders have come to the conclusion for centuries that certain business problems can best be handled by expanding scale. Scale is a practical consideration, not a philosophical or idealogical consideration. Please compare what has just been described with the assertion that “The fundamental problem with it is that this (healthcare) is a plumbing problem (local) not an electrical problem (federal). It is a problem of private goods, not common goods. The only reason to make it federal is to increase crony capitalism - which never helps the poor.”

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