Wasteful administrative spending costs US healthcare up to $570B a year, research finds

Administrative spending makes up 15% to 30% of all U.S. medical spending—multiple times as much as other comparable countries—and “at least half” of that spending “does not contribute to health outcomes in any discernable way,” according to estimates cited in a new Health Affairs research brief.

So-called wasteful administrative spending is estimated to comprise 7.5% to 15% of the nation’s total healthcare spending, translating to anywhere from $285 billion to $570 billion in 2019, the journal’s researchers wrote.

Those totals could reach even higher in recent years due pandemic-driven spending increases, as reports from the Centers for Medicare and Medicaid Services showed health spending increased from 17.7% of gross domestic product in 2019 to 19.7% in 2020.

Health Affairs calculated its estimates based on a review of seven published administrative spending analyses. These estimates largely varied due to what their authors defined as administrative costs.

“Some of these estimates encompass only billing- and insurance-related expenses and, as a result, are lower than those that include both billing- and insurance-related and non–billing- and insurance-related costs,” Health Affairs staff wrote in the brief.

“Even at the lower end of estimates, U.S. spending on administrative costs annually accounts for twice the spending on care for cardiovascular disease and three times the spending for cancer care.”

The journal contextualized the country’s spending with a Peterson Foundation analysis of 2021 data that estimated the U.S. spends $1,055 per capita on healthcare administrative costs. The next highest per capita administrative spending among wealthy Organisation for Economic Co-operation and Development members was Germany with $306.

Still, Health Affairs noted that it’s important to distinguish between overall administrative spend and administrative waste when weighing any systemic or targeted interventions.

“Not all administrative spending is wasteful. Much of it is necessary and efficient, facilitating coordination among multiple actors and allowing for a level of choice in insurers, benefits, plans, providers and procedures,” Health Affairs staff wrote in the brief.

The journal’s review highlighted three often-posed systemic reforms—all-payer rate setting, a single-payer system and capitated payments—as having “the potential to not only reduce administrative waste but also offer other benefits to the healthcare system.”

However, the review acknowledged that more targeted proposals are “more realistic and actionable in the U.S. in the near future” and could still bring hundreds of millions to billions in potential annual administrative waste savings. These proposed policies could include a centralized claims clearinghouse ($300 million estimated annual waste savings), a fully electronic prior authorization system ($417 million savings), harmonized quality reporting ($7 billion savings) and standardization of provider directories ($1.1 billion savings).

Regardless of the specific intervention, direction from the federal government will likely be most effective in corralling the industry’s diverse actors toward change, analyses cited by the journal agreed.

“It is notable that much of the literature on solutions to administrative waste proposes action by either the federal government or an agency created by the same, perhaps because of a glaring market failure inherent to administrative costs: they are not generally borne by those imposing them,” Health Affairs staff wrote.