Your Practice Administrative Costs: What’s Your Cost of Getting Paid? Part II

Major practice administrative costs for all practices (especially in dealing with tightly managed care plans) include additional staff salaries and benefits, prior authorizations, multiple plans, billing forms, policies, claims procedures and adjudication rules offered by each insurer.As mentioned in yesterday’s post, Your Practice Administrative Costs: What’s Your Cost of Getting Paid? Part I, major expenses for all practices (especially in dealing with tightly managed care plans) are additional staff salaries and benefits for dealing with the prior authorizations, multiple plans, billing forms, policies, claims procedures and adjudication rules offered by each insurer.

In general, reports indicate that on average 0.67 non-clinical full time employees (FTEs) are dedicated to billing and insurance related matters (Woolhandler). Recent reports suggest that medical staff including medical assistants spend 20.6 hours per physician a week interacting with payers in the U.S. Prior authorizations alone consumed about 13 of these hours. This is in comparison to a total of 2.5 hours in Canada, mainly because they have a single payer system. In addition, clerical staff in a physician office spent over 53 hours a week per physician compared to 15.9 hours in Canada. When converted to U.S dollars this was calculated at $82,975 per year per physician in the U.S compared to $20,410 in Canada.

The time spent on administrative issues is not restricted to outpatients. In inpatients, a 1993 study of nurses at a hospital in Illinois found the staff spent about 40 percent of their time on patient care; the rest was consumed by administrative issues and communication and coordination.

Administrative costs are also a problem for insurance companies. Supporters of “Medicare for all” like to point to the absence of marketing, sales or commission costs and economies of scale and hence the often quoted figure of 2-3% administrative costs associated with Medicare. The problem with that number is that it does not include the cost of collecting premiums (done through the Internal Revenue Service), Medicare billing (outsourced to private insurance carriers) or even legal costs of defending legal actions by providers and others (done through the Attorney General’s Office). The rough guess is that true expenses, if spending by other government agencies is included, are between 6-8%.

What about the administrative costs of private insurance carriers? The Congressional Budget Office estimated that about 12% of the average insurer’s dollar is spent on administrative costs, although they ranged from 7-23%. Others have quoted a 14-22% figure. The stated reason for higher costs for private insurers is marketing costs, profits, executive salaries etc. These figures seem stacked against private insurers. However, if costs per beneficiary are calculated, Medicare costs were $509 and private insurer costs were $453/beneficiary in 2005. In fact, the McKinsey Global Institute reporting CMS data contends that Medicare per enrollee annual cost have risen 30% from 2003 to 2006 ($211 to $468). Therefore, some experts put Medicare administrative costs at 12.3% and therefore higher compared to private carriers.

Some argue that there are certain benefits to having multiple payers. Insurers get to compete in offering better products and at a lower price. Not that we have actually seen this yet! Then, another advantage is said to be curtailment of inappropriate care. We all know that inappropriate care still exists.

Some common sense steps

There are organizations such as the Healthcare Administrative Simplification Coalition trying to simplify the tortuous process. However, some common sense steps come to mind. These include:

  • Standardization of insurance, claim and other forms, billing and prior authorization procedures should be required.
  • Credentialing should be done through a single agency for all insurers.
  • Have a uniform formulary framework.
  • All communications must be electronic.
  • Verification of patient eligibility must be instantaneous, electronically available and uniform for all insurers.

It is not just the economic consequences that have physicians struggling to stay afloat. The emotional costs of dealing with the increasing complexities of administration and the world of insurance and billing are impossible to ascertain. Undoubtedly, this effect shows up in the dissatisfaction score on most physician surveys. Although electronic medical records should alleviate some of the difficulties outlined, the data confirming the beneficial effects is mixed. All physicians, their staff and their professional organizations should impress on their local politicians the tremendous burden administrative costs place on their practices.

About the Author

Bhagwan Satiani, MD, MBA, FACS, FACHE, is President of Savvy-Medicine (, a business education...

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