WASHINGTON -- A few simple steps could cut way down on the administrative costs involved in healthcare, several experts said Tuesday at a Senate hearing on reducing healthcare costs.
"There is a good deal that can be done on standardization," said David Cutler, PhD, professor of applied economics at Harvard University in Boston. "The ... complexity of coding is a clear example of this, where an insurer will require additional codes before they'll pay a higher amount, and that requires additional people to code those additional codes, and then seeing codes going up, insurers will put in more requirements, so standardizing this will make a lot of sense because you don't have to get into an arms race over that."
Additionally, standardizing preauthorization requirements (which can vary among insurers), and integrating billing and medical records systems could reduce costs, he continued. By law, the federal government is responsible for standardization but has not done so, Cutler said. "I think that's been a lost opportunity so far."
High Administrative Costs
Cutler spoke at hearing called by the Senate Health, Education, Labor, and Pensions (HELP) Committee, the third in a series of hearings on cutting healthcare costs. "Administrative costs are much higher in the United States than in other countries," noted Sen. Lamar Alexander (R-Tenn.), HELP committee chairman, in his opening statement. "According to Dr. Ashish Jha, a witness at our first hearing, administrative costs accounted for 8% of all healthcare spending in the U.S. -- roughly $264 billion -- compared to only 1% to 3% for other countries."
Sen. Patty Murray (D-Wash.), the committee's ranking member, took the opportunity to slam the Trump administration for selling what she called "junk" health plans with skimpy benefits and lots of paperwork.
"An analysis from the National Association of Insurance Commissioners shows the most popular short-term junk plans -- like the ones President Trump wants to expand -- spend, on average, half of their revenue on things that have nothing to do with customers' healthcare needs," she said. "I think we can all agree we should be looking for steps to reduce administrative costs to make healthcare more affordable -- and this idea from President Trump I believe moves us in exactly the wrong direction."
Cost Estimates Vary
Matt Eyles, president and CEO of America's Health Insurance Plans (AHIP), a trade group here for health insurers, defended the progress his industry was making in this area. "The vast majority of every healthcare dollar goes to pay for medical treatment and services," he said. "With prior authorization, our members analyze whether a treatment is safe and effective for the patient based on the best available clinical evidence ... AHIP is working with many others ... to improve prior authorization by making it fully electronic so we can improve efficiency."
One witness whose testimony engendered some controversy was Robert Book, PhD, an advisor to the American Action Forum, a right-leaning think tank here. He took issue with many cost estimates that examine administrative costs as a percentage of total healthcare spending. Looked at in that light, several studies have estimated that Medicare spends much less on administrative costs -- around 2% to 5% -- compared with private health plans, which spend 10% to 20%.
However, Medicare has patients who are ages ≥65, are disabled, or have end-stage renal disease, while private insurance mostly covers those age <65 and not disabled, so they require less healthcare. "The result is that Medicare spends a lot more per patient on direct healthcare, which means administrative costs as a percent of healthcare costs is almost guaranteed to be lower," he said.
But Book looked at administrative costs on a per-beneficiary basis, and found that they averaged $509 per beneficiary compared with $453 for those in private health plans.
Sen. Elizabeth Warren (D-Mass.) disagreed with Book's reasoning, noting that he included in his cost estimate the cost of running the government such as electricity and security costs. "I'm all for trying to use the best data possible, but this approach doesn't have any credibility at all; this is just a game to inflate the numbers."
Warren also noted that private insurers reported profits of $20 billion last year, while Medicare is obviously a not-for-profit entity. "I think it's time to crack down on shady practices insurers use to juice their profits and time to ramp up [calls for] 'Medicare for All,'" she said.
But Sen. Bill Cassidy, MD, (R-La.) had the opposite take. "Dr. Book, your analysis has total credibility to me!" he said.
Health Records a "Hindrance"
Electronic health records (EHR) came in for heavy criticism at the hearing. "Technology can be a help, but right now it sometimes is a hindrance," said Becky Hultberg, president and CEO of the Alaska State Hospital and Nursing Home Association. She mentioned one small Alaska medical center that is going to need to spend $65,000 to upgrade its EHR system to comply with requirements of the federal Meaningful Use program. "They are not going to see a patient benefit, and they are purchasing software that has functionality they don't need," she said.
Cassidy also sang the praises of "reference pricing" -- a system used by the CalPERS, the pension system for state employees in California. Under that system, the state establishes a set price that it will pay for a particular procedure and gives patients price and quality information for each facility that performs it; if patients want to use a facility that charges more, they will have to pay the difference.
"Turns out everybody lowers their prices and we end up paying the same across the board; it seems to have worked," Cassidy said. "Can we have more of it?"
"I think there is interest in using innovative pricing models to make sure we're getting the most value," said Eyles. "But anything providing greater transparency to the patient is a good thing."
Hultberg reminded Cassidy that California is dealing with a large market in terms of covered lives, but "as we look at competition and price transparency, we need to [make sure] we don't lose our safety net."