American hospitals spend a huge and growing share of their revenue on overhead, a study published today in Health Affairs shows. Getting those costs down should be a national priority.
U.S. hospitals on average spend 25.3 cents out of each dollar of revenue on overhead, with for-profit hospitals spending 27 percent and nonprofits a bit below the average.
By contrast, the Netherlands and England, which have the next highest overhead costs, spend 19.8 percent and 15.5 percent, respectively. Both are moving toward market-based financial models, so, as with the U.S., overhead costs are likely to rise.
Compare Canada and Scotland, which have single-payer health care systems. Their hospital administrative costs are half those in the United States.
The new study helps explain why for every $1 the 33 other countries with advanced economies spend per person on universal health care, the United States spends $2.64 — and yet more than one-fifth of Americans have no or poor health insurance. A significant reason the U.S. health care system is so expensive and inefficient turns out to be those annoying co-pays.
Co-pays do harm
In theory, as taught by Chicago School free-market economists, co-pays are supposed to help patients develop awareness of the costs of their health care as a control on overuse. In reality, co-pays are just a make-work program that discourages many people from seeing their doctor or filling prescriptions.
Dr. Steffie Woolhandler, a co-author of the new hospital overhead study, said she would prefer to waive her patients’ co-pays but can’t.
“You don’t have a choice,” she said. “I used to have a blanket policy of not collecting co-pays from low-income people, but it turned out I could be prosecuted for insurance fraud because the insurers require you to collect them.”
Woolhandler and Dr. David U. Himmelstein, both professors at the City University of New York School of Public Health at Hunter College and lecturers at Harvard Medical School, say the co-pay system does much more harm than commonly believed and lacks evidence it does any good.
Himmelstein says the U.S. is “squandering $150 billion each year on hospital bureaucracy and $300 billion more is wasted each year on insurance companies’ overhead and the paperwork they inflict on doctors.”
That $450 billion amounts to about $1 in every $40 of GDP that is just waste, a drag on economic growth.
Woolhandler and Himmelstein are both leaders of Physicians for a National Health Program, a nonprofit research organization supported by more than 19,000 physicians who favor a single-payer system like those in Canada and Scotland.
Co-pays force many people to choose between eating and getting their meds or seeing their doctor, they wrote last year in the Journal of General Internal Medicine.
“Life or debt,” they wrote, is the choice facing millions of people.
Co-pays discourage people from seeing doctors and obtaining medications. That reduces immediate spending on doctor visits and drugs but not total costs over the longer term.
They showed that a third of the poor and those in fair to poor health spent more than 10 percent of their income on health care. Overall, among people with health insurance from their jobs, the share of workers spending more than a dime out of every dollar of income on health care rose from 14.2 percent of the population to 18.2 percent from 1996 to 2003. That figure has almost certainly risen since then.
The way co-pays discourage people from getting medications was examined two years ago in a journal for heart doctors. It compared 2,830 people with heart disease who get their health care from Pitney Bowes with 49,801 workers and family members covered by Horizon Blue Cross Blue Shield of New Jersey. A unique mix of factors allowed for this comparison — what economists call a natural experiment — in which they examined the data after changes insurers made.
The study found that eliminating co-pays resulted in filling more prescriptions for statins, which lower cholesterol, and drugs that prevent blood clots, which in turn meant fewer hospitalizations and trips to emergency rooms.
Jens Holst, a German researcher, took a very deep look at co-pays in countries with advanced economies and made
significant findings [that] contradict the accepted ideas of health economics and call into question widespread assumptions. Many social policy recommendations and decisions are based much more on subjective perceptions than on hard evidence. So in the interests of evidence-based health policy it would appear a matter of urgency to collect precise information about the complex and often underestimated social repercussions of direct cost sharing.
Although co-pays often cost $5, $10 or $20 — amounts that may seem trivial to many — they present real barriers for those getting by on meager incomes.
In addition, a host of software firms assert in marketing materials that it costs from $7 to more than $10 to mail an invoice and collect a payment. While collecting cash on the spot and processing it costs less, it is still an expense. My wife and I, for example, often get billed for $10 co-pays that are not accepted at our insurer’s hospital. We then get dunned to pay and then get a refund. This whole process is likely to cost more than $10. Even when the accounting is done right, processing co-pays can often exceed their value.
The processing estimates make sense, given that in 2012 the median pay of billing clerks was $35,170, the Bureau of Labor Statistics estimated. We could get rid of a fair number of the 1.8 million financial clerical jobs just by eliminating medical co-pays, at the same time reducing human suffering and perhaps lengthening lives. Job creation is no more a justification for co-pay paperwork than would be a law that banned earthmoving equipment and required construction sites to rely on manual laborers wielding shovels.
So why do insurance plans demand co-pays? According to free-market economic dogma, co-pays make people behave more rationally.
However — and this is the key point — instituting a policy that tries to make people behave in an economically rational way is not necessarily economically rational. In fact, the evidence demonstrates that co-pay policies are irrational.
In economics “rational” is a term of art. It means groups of people consistently making choices that maximize their benefits and minimize their costs.
By this definition, the promotion of co-pays by employers and insurers fails the rationality test. Why? Because co-pays discourage people, especially those with meager incomes, from seeing doctors and obtaining medications. That reduces immediate spending on doctor visits and drugs but not total costs over the longer term. Instead, when people who are squeezed financially do not pick up their medications, thus avoiding the co-pay, they later will need more intensive and costly care, which drives up total costs for health care as well as increasing human misery and shortening lives.
When co-pays discourage getting drugs and visiting doctors, which results in more costly medical problems later, the system is irrational. When those payments eat up as much as or even more than they bring in, the system is more so.
Here is a suggestion: Get rid of co-pays. Instead let’s just add a prominent line on paycheck stubs that reads, “Your health care is paid separately, and it cost X dollars this pay period.” That would help make the American economy more efficient and more humane.