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As nonmedical staffers grow in number // and insurance bureaucracy sprawls // is the business of getting better // getting caught up in the overhead?

Trouble in Triplicate

By Linda Keslar // Photographs by Dwight Eschliman // Spring 2008
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Administrative costs: out of control?

Since his wife’s stroke nearly five years ago, Doug Garr has spent countless hours on the phone in a seemingly endless back-and-forth with physicians’ offices, hospitals and insurance companies. Often, he’s pointing out mistakes that inflate his wife’s already astronomical account balances. “We’ve received bills from doctors we’ve never heard of, for procedures that never took place,” says Garr, a writer in Manhattan. “Billing administrators seem unconcerned when I tell them I’ve been left on hold forever. Invoices are so dense with codes and abbreviations, it’s a wonder anyone can decipher them.”

What Garr and his wife, Meg Perlman, have encountered is familiar to anyone who has had to deal with serious illness. Aside from worries about treatment and recovery, there’s the crucial question of who will pay for care: Sorting out the typically messy details is largely left to harried medical consumers and claims administrators. But the way all this works is at least as frustrating to those sending out patient bills and trying to get insurance companies and HMOs to pay their share. A typical hospital or physician group contracts with dozens of health plans, each of which has its own forms for documenting the details of diagnosis and treatment, and the complexity of interactions with payers seems to grow exponentially.

At the Massachusetts General Physicians Organization in Boston, for example, the administrative staff has had to expand by a third in just six years, according to James Heffernan, the MGPO’s chief financial officer. Heffernan now needs more than 300 back-office staff members to bill for the services of the organization’s 900 physicians. Those administrative staffers operate in a theater of the absurd, in which insurance companies reject 15% of claims the first time they’re submitted (no matter what) and one payer can reimburse 17 different amounts for exactly the same service (every one of which is correct because of the payer’s myriad variations in its payment policies). “I printed out the payment policy manual just for radiology, with all of the codes and requirements for each payer, and it was seven inches thick,” says Heffernan. “I actually carried that around to professional meetings for a while just to make my point.”

His point, of course, is that the current system has become needlessly—and often ridiculously—complicated and costly. David Himmelstein of Harvard Medical School says more than 30 cents of every health care dollar is spent on the kinds of things Garr describes: administrative costs, mostly involving how care is financed by a dizzying array of public and private entities. (Those expenses are up from 25% of overall costs in 1990, says Himmelstein, a physician and one of the first researchers to investigate administrative costs.) In Perlman’s case, perhaps $90,000 of the $300,000 spent during the first year after her stroke went for billing, medical claims review and other related costs, rather than to pay her doctors, nurses and physical therapists.

Finding ways to limit administrative costs could make a huge dent in the $2 trillion spent annually (as of 2005) on health care in the United States. That sum amounts to 16% of the country’s gross domestic product, making the U.S. system by far the most expensive in the world. Yet in most debates about the rising cost of health care, it’s the aging population and the technology explosion that get most of the attention, with many experts admitting there are few good ways to control mushrooming clinical expenditures. Because tens of millions of baby boomers are entering their later years, total outlays for care are almost certain to go up, and patients will always want to benefit from advances—the latest drugs, diagnostic technologies and surgical breakthroughs. After all, when one’s health is at stake, money is no object.

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The ThedaCare Improvement System's boost to efficiency in primary care.


1.“Analyzing Administrative Costs in Hospitals,” by Niccie McKay and Christy Lemak, Health Care Management Review, 2006. This landmark study integrates costs accounting, finance and organizational theory to define health care administrative costs.

2. “Fixing Health Care From the Inside, Today,” by Steven J. Spear, Harvard Business Review, 2005. The author examines the new tactics health organizations have adopted to manage quality and efficiency.

3.“The State of Regional Health Information Organizations: Current Activities and Financing,” by Julia Adler-Milstein et al., Health Affairs online, 2007. This up-to-date look at the challenges confronting regional health information exchanges finds fewer than two dozen functioning at even a modest scale.

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