Administrative Costs to Blame for Health Care Expenses

The health care crisis in America continues. The industry struggles to find ways to fund technology, access and infrastructure while charging the American consumer for much of the cost.
In 1960, health care was 5.3 percent of gross domestic product. By 2003, that number jumped to 14 percent.
We are now being told by experts to expect health care to surpass 20 percent of the gross domestic product in the near future.
This should come as no surprise to anyone who pays for health insurance these days. How did we get here, and how can we slow this trend?
One problem in today’s environment is the amount of administrative work required in health care.
It is reported that 26 cents of every dollar spent on health care is for administration, and much of this is for maintaining physician and hospital networks.
For a health plan to have negotiated discounts with health care providers, it requires someone to solicit the physicians and hospitals.
Both sides hire attorneys and consultants to further negotiate contracts. Both sides need robust billing and administrative capabilities for administration of those contracts, and in the end consumers generally have no idea what health care procedures might cost less than one network versus another.
Medicare fixed this problem a long time ago. The federal government essentially told health care providers what it would pay all providers in a particular geographic area for a particular procedure.
Regardless of where an MRI is performed, the allowed charge is the same in that area. Medicare avoided the administration required to maintain a “network” of physicians and hospitals and significantly reduced the administrative expense.
Think of a solution where health care on the private side worked in the same fashion — one where, regardless of the insurance company or which provider performed the MRI, it had the same price. If there was one fee schedule for all available health care services that all health care payers used, think of the efficiencies that would be gained.
Health insurance companies would no longer need entire departments to establish, maintain and apply contractual discounts. Claims processing systems could become as simple as an Excel spreadsheet, and larger employers could process and pay their own claims in house.
Physicians would not have to employ personnel to track what each insurance company will pay them for a certain service.
In this environment, it would be much easier for new insurance companies to get started. A huge amount of money is spent initially to develop networks. Even with the resources to build networks, it is a very difficult process.
Most physicians and hospitals will not agree to deep discounts unless there are a substantial number of patients involved. Obviously, a new insurance company does not have patient volume, which means it can’t get the discounts necessary to compete with the big companies that do. It is very much a chicken-or-egg scenario.
So if we did this for Medicare, why can’t we do it for private health insurance? The answer: The Medicare fee schedule is so low it forces doctors and hospitals to charge other patients more to subsidize the cost of providing care to Medicare patients.
If the federal government were to offer standardized fee schedules for private payers, the unknown and undisclosed tax that occurs from this cost shift would suddenly become very clear and quantifiable.
If the Medicare schedule were applied to everyone, huge numbers of doctors and hospitals would be forced to close up shop because they simply would not make enough to cover their overhead.
To avoid that, the government would have to allow health care providers to have two fee schedules, one for Medicare and a second, much higher, one for everyone else. In doing so, lawmakers would admit to the general public a tax that has occurred for years with little disclosure.
Since few in government want to tell those paying for health insurance just how much they are paying to subsidize the Medicare system, our health care woes are likely to continue.
(Joe Carter is president of Cornerstone Financial Group, an insurance agency and benefits consulting firm in Little Rock.)