No. 44: Comparison of Hospital Administrative Costs in Eight Nations

Comparison of Hospital Administrative Costs in Eight Nations

Himmelstein DU, Jun M, Busse R, Chevreul K, Geissler A, Jeurissen P Thomson S, Vinet AM, Woolhandler S. A Comparison of Hospital Administrative Costs in Eight Nations: US Costs Exceed All Others By Far, Health Affairs, vol. 33, no. 9 (2014) 1586-1594
http://content.healthaffairs.org/content/33/9/1586.full.html

Background

Hospital administrative costs contribute to the rising costs of health care worldwide. This study is the first to compare the administrative costs of hospitals across nations and health care systems.

Methods

Cross-national comparisons of any kind are difficult, and comparing hospital administrative costs is no exception. Different currencies and accounting systems make comparisons challenging. This study assembled an international team of health policy experts to analyze hospital administrative costs in eight nations: Canada, England, Scotland, Wales, France, Germany, the Netherlands, and the United States.

For each country, researchers obtained official hospital cost accounting data from 2010 or 2011 for most or all hospitals. They developed a classification scheme for apportioning costs between clinical and administrative functions, consulting with national experts, officials, and auditors to ascertain the appropriate distribution.   All figures were adjusted to US dollars using purchasing power parities for the appropriate year.

Limitations

As is commonly the case with cross-national comparisons, several caveats apply to the findings. The definition of “hospital” varies, and this affects what counts as hospital funding. The mix of services delivered in hospital vs. ambulatory settings varies across nations, affecting what counts as administrative costs. There are no international standards for hospital accounting, so alignment of categories was imperfect. Despite these differences across nations, the core inpatient services delivered in hospitals account for the majority share of their budgets, making the estimates as comparable as possible.

Results

Hospital administrative costs were highest in the US, at 25.3 percent of total hospital costs. This was more than double the administrative costs in Canada (12.42 percent) and Scotland (11.59 percent), the two countries with the lowest administrative costs among the eight nations. Expressed as a percent of GDP, hospital administrative costs in the US were more than 3 times that of Canada, at 1.43 percent of GDP in the US vs 0.41 percent in Canada. For-profit hospitals in the US had higher administrative costs (27.2 percent) than did not-for-profit hospitals (25 percent) or public hospitals (22.8).

The Netherlands has the highest administrative costs among European nations. Among the UK nations, Scotland’s administrative costs were lowest and England’s highest, with Wales in between.

Comment

What accounts for these differences in hospital administrative cost? Primarily the complexity of the hospital payment system and the mode of capital funding.

First, the level of administrative costs correlates roughly with the extent to which market mechanisms play a role in each of the health care systems studied.   Scotland, which approximately tied with Canada for the lowest administrative costs, reversed market-based reforms soon after the 1999 devolution settlement, reorganizing its NHS in 2004.

Second, in countries where the responsibilities of administrators are limited to traditional logistical matters, such as procuring and coordinating facilities, supplies, and personnel, administrative costs run about 12 percent of total hospital costs. The additional task of garnering operating funds is relatively simple in Canada, Scotland, and Wales, where hospitals receive lump-sum, or global, annual budgets. Where revenues are generated, in part or whole, through per patient or per episode billing (e.g. activity-based funding, ABF, or other diagnosis-based group, DRG, funding systems) as in France, Germany, and the US, more clerical, managerial, and IT personnel are required, driving up administrative costs. Billing is even more administratively complex in multi-payer systems, such as in the US and the Netherlands, where paperwork processing and billing procedures drive costs upward.

Third, the different ways in which hospitals garner capital funds also appears to affect administrative costs. Countries with global budgets and direct government grants funding most hospital capital projects — Canada and Scotland — have the lowest administrative costs. In countries with DRG-based billing and direct government grants for much of hospital capital funding — Germany and France — administrative costs are also relatively low. In countries where surpluses from per patient or per episode billings are the main source of hospital capital funds, administrative costs are highest, such as the United States, and increasingly the Netherlands (since 2006 when mandatory universal coverage was combined with competing private insurance plans) and England (since the introduction of a DRG-like billing system in 2003).

Hospital administrative costs in Canada remain among the lowest in the world, which this study attributes to the combination of global hospital budgets coupled with direct government grants for most hospital capital costs. Some Canadian provinces are considering ABF for hospitals instead of global budgets, which may result in higher administrative costs. If higher administrative costs were accompanied by greater efficiency and lower total costs, the benefits might outweigh the harms. This study found the opposite: total costs were highest in nations with the most administratively expensive hospital funding systems.

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