Special Article
Administrative Costs in U.S. Hospitals
N Engl J Med 1993; 329:400-403August 5, 1993
- Abstract
Background
Previous estimates of administrative costs in U.S. hospitals have been based on figures for California, and nationwide extrapolation has been controversial. If the costs of bureaucracy are high, major policy reforms may yield substantial savings.
Methods
We obtained detailed data on hospital expenses for fiscal year 1990 from reports submitted to Medicare by 6400 hospitals. We calculated each hospital's administrative costs by summing expenses in the following Medicare cost-accounting categories: administrative and general, nursing administration, central services and supply (excluding the purchase cost of supplies), medical records and library, utilization review, and the salary costs of the employee benefits department. We classified costs in most other categories as clinical. Some small categories of expenses (e.g., gift shop) were excluded from both our clinical and administrative groupings, and for others (e.g., plant operations), a proportional share was allocated between the two groupings.
Results
Nationwide, administration accounted for an average of 24.8 percent of each hospital's spending in fiscal 1990. Average hospital administrative costs ranged from 20.5 percent in Minnesota to 30.6 percent in Hawaii. Administrative salaries accounted for 22.4 percent of the average hospital's salary costs. Administrative costs were similar in states with high and low rates of enrollment in health maintenance organizations (HMOs).
Conclusions
Hospital administrative costs in the United States are higher than previous estimates and more than twice as high as those in Canada. Greater enrollment in HMOs, with more competitive bidding by hospitals for managed-care contracts, an important element of proposed managed-competition health care reforms, does not seem to lower hospital administrative costs.
Media in This Article
Table 1
Distribution of Hospital Costs According to the Categories of the Medicare Cost Report.Table 2
Hospital Administrative Costs as a Percentage of Total Hospital Spending.Article Activity
- Article
How much does it cost to administer America's hospitals? This seemingly arcane matter divides health care reformers. Some see an obese bureaucracy gobbling billions of dollars; to others, administrative costs appear not unreasonable. If administrative costs are high, much may be saved by fundamental reforms that move toward a Canadian-type system. If they are low, more limited changes would suffice.
Previous estimates have relied on a few published figures from California, where one in five hospital dollars went for administration in 19871-5. But nationwide extrapolation from these data has been controversial6-8. This paper presents data on the administrative costs of virtually all acute care hospitals in the United States.
Methods
Medicare requires that participating hospitals file detailed reports classifying all their expenses into standard categories. In response to a request under the Freedom of Information Act, the Health Care Financing Administration supplied us with a computerized copy of the data from Worksheet A of the Medicare Cost Report for each of 6400 hospitals. Each hospital reported expenses for the fiscal year that began in calendar year 1989.
Table 1Table 1
Distribution of Hospital Costs According to the Categories of the Medicare Cost Report. shows the major categories used to classify expenses in the Medicare Cost Report. For most categories, hospitals report total expenses as well as salary expenses. However, Medicare requires hospitals to adjust the total cost figures (but not the salary figures) to reflect true hospital costs more accurately. For our municipal hospital, for instance, city hall rather than a hospital department manages parking and pensions. The parking and pension costs attributable to hospital operations would appear in the adjusted total cost figures on the Medicare Cost Report, but would be excluded from the salary figures. Hence, our analyses of the overall cost of administration are more reliable than those based solely on salary figures.We considered the following Medicare categories to represent administration: administrative and general, nursing administration, central services and supply (excluding the purchase cost of supplies), medical records and library, skilled nursing facility, utilization review, and the salary costs of the employee benefits department. The category of administrative and general subsumes most financial functions (e.g., chief financial officer, fiscal department, financial management and planning, accounts payable, patient billing, payroll, and cashier), as well as administrative services not attributable to an individual clinical unit (e.g., chief executive officer, patient registration, purchasing, data processing, mail room, communications, professional services administration, hospital utilization review, quality assurance, risk management, and the portion of marketing and public-relations expenses allowed under Medicare). We classified most other categories as clinical (Table 1). We considered the following categories neither clinical nor administrative and excluded them from our analysis: nursing school, intern and resident programs (except salaries and benefits), paramedical-education programs, and five nonreimbursable-cost centers (gift, flower, and coffee shops and canteens; research; physicians' private offices; nonpaid workers; and other).
The costs of the hospital's physical plant are not allocated to individual services or hospital functions in the Medicare Cost Report. For example, the reported costs of a coronary care unit or billing department would include salaries and supplies but not the costs of building, maintaining, and equipping the unit. We assumed that the proportion of the hospital's physical plant that houses administration is the same as administration's share of overall costs (excluding the costs of the physical plant). In our analysis of total administrative costs we therefore allocated 24.8 percent of the costs for capital, plant operations, and maintenance and repairs to administration. In analyzing salary costs, we allocated 22.4 percent of the salaries for plant operations and maintenance and repairs to administration (the Medicare Cost Report attributes no salary costs to capital).
The rubric “employee benefits” on the Medicare Cost Report subsumes the expense of administering benefits as well as actual disbursements for health insurance and other fringe benefits. We classified the salary costs of the employee benefits department as entirely administrative. All other employee benefits costs were allocated between the administrative and clinical categories in the same manner as the physical-plant costs.
We calculated the proportion of costs attributable to administration in each hospital by summing the total costs in the administrative categories plus the allocated share of the physical-plant and employee benefits costs and dividing the result by total hospital costs less excluded categories. We then calculated the mean share spent for administration by hospitals in each state, in the District of Columbia and Puerto Rico, and nationwide.
Results
Table 1 shows the major categories used to classify expenses in the Medicare Cost Report and our designation of each cost category as administrative, clinical, mixed administrative and clinical (allocated proportionally as described above), or neither administrative nor clinical (excluded from both numerator and denominator in the analysis). Table 1 also shows the proportion of the average hospital's costs reported within each category.
Administration accounted for an average of 24.8 percent of hospitals' spending nationwide in fiscal 1990. Average hospital administrative costs ranged from 20.5 percent in Minnesota to 30.6 percent in Hawaii (Table 2Table 2
Hospital Administrative Costs as a Percentage of Total Hospital Spending.).Administrative salaries accounted for 22.4 percent of the average hospital's salary costs. Table 3Table 3
Salary Costs for Hospital Administration as a Percentage of Total Hospital Salary Costs. shows the average share of salary costs devoted to administration, ranging from 18.6 percent in New Jersey to 27.6 percent in Puerto Rico.To assess the effect of the market share of health maintenance organizations (HMOs) on hospital administrative costs, we analyzed states where HMOs enroll more than 25 percent of the population (California, Massachusetts, Minnesota, and Oregon). In these states, administration accounted for 25.6 percent of the average hospital's total costs and 22.6 percent of salary costs, as compared with 24.6 percent of total costs and 22.3 percent of salary costs in states with lower HMO enrollment. When we repeated this analysis using an HMO-enrollment rate of 20 percent as the dividing line (thus adding Arizona, Colorado, Connecticut, Hawaii, Maryland, and Wisconsin to the list of high-enrollment states), we again found similar hospital administrative costs in the high- and low-enrollment states -- 25.4 percent of total costs, as compared with 24.6 percent, and 22.4 percent of salary costs, as compared with 22.3 percent.
Discussion
In fiscal 1990 administration accounted for nearly one quarter of U.S. hospital spending, more than the highest previous estimates. In many hospitals, as the number of patients declined, the number of bureaucrats increased to battle with competing hospitals over market share and with insurers over payment. On an average day in 1968, U.S. hospitals employed 435,100 managers and clerks (unpublished data) to assist in the care of 1,378,000 inpatients9. By 1990, the average daily number of patients had fallen to 853,00010; the number of administrators and clerks had risen to 1,221,600 (unpublished data).
Our state-level findings yield no evidence that managed care and competitive bidding, as envisioned under a managed-competition strategy,11 will prune hospital administration. Indeed, hospitals in states with higher HMO enrollments had higher administrative costs, as did those in the two states (California and Arizona) that have experimented most extensively with competitive bidding for hospital services. Although local administrative savings attributable to HMOs or competition might be obscured in statewide figures, this seems unlikely in California, where 80 percent of employees are insured through managed-care plans and where hospital markets in much of the state are fiercely competitive. Moreover, hospital administrative costs in the Boston area, which has a very high level of HMO enrollment and competition for managed-care contracts, are comparable to those in other U.S. hospitals.
Other regulatory reforms have not significantly streamlined hospital administration. Maryland and New Jersey, states with all-payer rate-setting systems, had administrative costs that were somewhat lower than average. But New York, which operated an all-payer system during the 1980s, did not. We found evidence against the claim that Hawaii's hospitals have strikingly low administrative costs12. Certainly, no state had administrative costs nearly as low as those at most Canadian hospitals -- on average between 9 and 11 percent of total hospital expenditures3,13 (and Fortin G and Rehmer LW, Health Information Division, Health and Welfare Canada: personal communication). (The Canadian estimates are based on cost categories similar, although not identical, to those in our analysis3.)
We did not perform statistical tests on our data and we omit confidence intervals, since the figures reflect the costs of virtually all U.S. hospitals rather than a sample. Medicare Cost Reports surely include some inaccuracies, but we see no reason to believe that hospitals systematically overstate their administrative expenses. Although a few clinical nurses may be included in the category of nursing administration, thus falsely inflating our figures for administration, most other Medicare reporting conventions tend to understate the costs of administration. Salary and other expenses for clerical personnel in clinical units (e.g., ward clerks, receptionists, and secretaries) are attributed to the clinical unit and would be counted as clinical costs in our analysis. In addition, most advertising and marketing costs (about 1 percent of total hospital spending14) are not included in the categories we classified as administrative.
Our allocation of capital, interest, and plant-maintenance costs may slightly overstate the share of these items attributable to administration. However, even under the extreme assumption that all costs for physical plant are clinical (i.e., that administration occupies no space and uses no capital equipment), 20.8 percent of total hospital expenses would still be attributable to administration.
In summary, administrative costs account for 24.8 percent of the average hospital's budget in the United States. State reforms, even those incorporating elements of a managed-competition strategy, have not lowered hospital administrative costs. Trimming the hospital bureaucracy to the Canadian level would save about $50 billion annually. A similar amount could be saved on insurance overhead and physicians' paperwork3.
Supported in part by a grant from the Robert Wood Johnson Foundation.
We are indebted to Ms. Lynn Levecque, M.B.A., for assistance in interpreting the accounting categories in the Medicare Cost Report.
Source Information
From the Center for National Health Program Studies, Cambridge Hospital and Harvard Medical School, 1493 Cambridge St., Cambridge, MA 02139, where reprint requests should be addressed to Dr. Himmelstein.
- References
References
1
Aggregate hospital financial data for California. Sacramento, Calif.: Office of Statewide Health Planning and Development, 1989.
2
Himmelstein DU ,Woolhandler S . Cost without benefit: administrative waste in U.S. health care. N Engl J Med 1986;314:441-445
Full Text | Web of Science | Medline3
Woolhandler S ,Himmelstein DU . The deteriorating administrative efficiency of the U.S. health care system. N Engl J Med 1991;324:1253-1258
Full Text | Web of Science | Medline4
Canadian health insurance: lessons for the United States. Washington, D.C.: General Accounting Office, 1991. (GAO/HRD-91-90.)
5
Congress of the United States Congressional Budget Office. Universal health insurance coverage using Medicare's payment rates. Washington, D.C.: Government Printing Office, 1991.
6
Administrative costs statement. Washington, D.C.: Health Insurance Association of America, 1991.
7
Archer B . Administrative efficiency of the U.S. health care system. N Engl J Med 1991;325:1316-1317
Web of Science8
Sheils JF ,Young GJ ,Rubin RJ . O Canada: do we expect too much from its health system? Health Aff (Millwood) 1992;11:7-20
CrossRef | Web of Science | Medline9
AHA hospital statistics: 1975 edition. Chicago: American Hospital Association, 1975.
10
AHA hospital statistics: 1990-91 edition. Chicago: American Hospital Association, 1990.
11
Enthoven A ,Kronick R . A consumer-choice health plan for the 1990s: universal health insurance in a system designed to promote quality and economy. N Engl J Med 1989;320:29-37, 94
Full Text | Web of Science | Medline12
Dukakis MS . The states and health care reform. N Engl J Med 1992;327:1090-1092
Full Text | Web of Science | Medline13
Ontario Ministry of Health. Hospital statistics, 1988/1989. Toronto: Government of Ontario, 1991.
14
Burns J . Advertising down, but marketing spending climbs; survey says focus is on targeting, not overviews. Modern Healthcare 1992;22:44-44
Medline
- Citing Articles (29)
Citing Articles
1
David U. Himmelstein, Adam Wright, Steffie Woolhandler. (2010) Hospital Computing and the Costs and Quality of Care: A National Study. The American Journal of Medicine 123:1, 40-46
CrossRef2
KEVIN R. LOUGHLIN. (2003) Urologists on a Tightrope—Do We Have a Net?. The Journal of Urology 170:6, 2173-2180
CrossRef3
Woolhandler, Steffie, Campbell, Terry, Himmelstein, David U., . (2003) Costs of Health Care Administration in the United States and Canada. New England Journal of Medicine 349:8, 768-775
Full Text4
Aaron, Henry J., . (2003) The Costs of Health Care Administration in the United States and Canada — Questionable Answers to a Questionable Question. New England Journal of Medicine 349:8, 801-803
Full Text5
Thomas W O’Rourke, Nicholas K Iammarino. (2002) Future of healthcare reform in the USA: lessons from abroad. Expert Review of Pharmacoeconomics & Outcomes Research 2:3, 279-291
CrossRef6
Jessica S Lester, Johanna L Bosch, John A Kaufman, Elkan F Halpern, G.Scott Gazelle. (2001) Inpatient Costs of Routine Endovascular Repair of Abdominal Aortic Aneurysm. Academic Radiology 8:7, 639-646
CrossRef7
Blumenthal, David, . (2001) Controlling Health Care Expenditures. New England Journal of Medicine 344:10, 766-769
Full Text8
F Sloan. (2001) Hospital ownership and cost and quality of care: is there a dime's worth of difference?. Journal of Health Economics 20:1, 1-21
CrossRef9
Carl M Kjellstrand, Carl Kovithavongs, Erika Szabo. (2000) International Comparison of the Success, Cost, and Efficiency of Modern Medicine. The Journal of Private Equity 3:3, 65-77
CrossRef10
(1999) The American Health Care System. New England Journal of Medicine 341:12, 917-921
Full Text11
Gerald B. Zelenock, James C. Stanley, Roy A. More, Lazar J. Greenfield, Charles J. Shanley, Lloyd A. Jacobs. (1997) Differential Clinical Workloads Among Faculty at a Major Academic Health Center. Annals of Surgery 226:3, 336-347
CrossRef12
John C. Hornberger,, Alan M. Garber,,, John R. Jeffery. (1997) Mortality, Hospital Admissions, and Medical Costs of End-Stage Renal Disease in the United States and Manitoba, Canada. Medical Care 35:7, 686-700
CrossRef13
Woolhandler, Steffie, Himmelstein, David U., . (1997) Costs of Care and Administration at For-Profit and Other Hospitals in the United States. New England Journal of Medicine 336:11, 769-774
Full Text14
Michael McQuaide. (1996) The Internal Markets of the British National Health Service: Prospects and Problems. The American Journal of the Medical Sciences 311:3, 122-129
CrossRef15
Fred Rosner, Pieter Kark, Samuel Packer. (1996) Oregon’s health care rationing plan. Journal of General Internal Medicine 11:2, 104-108
CrossRef16
D. HUGHES, T. STOLZFUS, L. GRIFFITHS, J. V. McHALE. (1995) Health care contracts in Britain and the United States: a case for technology transfer?. Journal of Nursing Management 3:6, 287-293
CrossRef17
CYNTHIA R. PFEFFER, STEPHEN W. HURT, JOAN R. PESKIN, CAROL A. SIEFKER. (1995) Suicidal Children Grow Up. Journal of the American Academy of Child & Adolescent Psychiatry 34:10, 1318-1325
CrossRef18
AUDREY R. NEWELL, GREGORY M. SALTZMAN. (1995) Impact of Reimbursement Systems on Child Psychiatrists: A Comparison of Canada and the United States. Journal of the American Academy of Child & Adolescent Psychiatry 34:10, 1326-1335
CrossRef19
J.E. McGowan. (1995) Success, failures and costs of implementing standards in the USA—lessons for infection control. Journal of Hospital Infection 30, 76-87
CrossRef20
Rasell, M. Edith, . (1995) Cost Sharing in Health Insurance — A Reexamination. New England Journal of Medicine 332:17, 1164-1168
Full Text21
Robert G. Evans, Morris L. Barer, Greg L. Stoddart. (1995) User Fees for Health Care: Why a Bad Idea Keeps Coming Back (Or, What's Health Got to Do With It?). Canadian Journal on Aging / La Revue canadienne du vieillissement 14:02, 360-390
CrossRef22
Donald R. Kirks. (1994) The critical roles of research and education in health care system reform. Academic Radiology 1:3, 293-294
CrossRef23
JOHN M. CICCONE. (1994) Implications of Managed Care Networks for Invasive and Interventional Cardiology. Journal of Interventional Cardiology 7:4, 385-388
CrossRef24
Robert S. Woodward, Stuart B. Boxerman. (1994) The value of risk-reducing information. Journal of Medical Systems 18:3, 111-116
CrossRef25
Wendy E. Parmet, Peter Enrich. (1994) Health and Education: A Tale of Two Crises. The Journal of Law, Medicine & Ethics 22:1, 53-62
CrossRef26
Steffie Woolhandler, David U. Himmelstein. (1994) Clinton's Health Plan: Prudential's Choice. International Journal of Health Services 24:4, 583-592
CrossRef27
Ida Hellander, David U. Himmelstein, Steffie Woolhandler, Sidney Wolfe. (1994) Health Care Paper Chase, 1993: The Cost to the Nation, the States, and the District of Columbia. International Journal of Health Services 24:1, 1-9
CrossRef28
(1993) Hospital Administrative Costs. New England Journal of Medicine 329:22, 1654-1656
Full Text29
Blumenthal, David, . (1993) Administrative Issues in Health Care Reform. New England Journal of Medicine 329:6, 428-429
Full Text
- Letters
