U.S. healthcare could save more than $600 billion in administrative costs by adopting a single-payer system like neighboring Canada, a new study suggests.
The U.S.’s current multi-payer system cost the country $812 billion in administrative costs in 2017—four times more than Canada, which has a single-payer system—mostly due to the increasing overhead of private insurers, according to a study in the Annals of Internal Medicine.
The study concluded that cutting U.S. administrative costs to Canadian levels by adopting single-payer health financing would have saved more than $600 billion.
The study could provide ammunition to proponents who are advocating for a change to a single-payer system, such as so-called "Medicare For All," which is being touted by some Democratic presidential candidates, including senators Elizabeth Warren of Massachusetts and Bernie Sanders of Vermont.
The idea is controversial, and some candidates have now backed away from Medicare for All and are advocating for a public option plan that keeps the current system of private insurers and makes Medicare available to those who want it.
But one of the study researchers said that option won’t cut costs the way a single-payer system would.
“The U.S. can afford a Medicare-for-All program that would cover everyone and eliminate copayments and deductibles, but only if we transfer the $600 billion now wasted on excess administration to clinical care,” said study author Steffie Woolhandler, M.D., a practicing primary care doctor, a professor at City University of New York at Hunter College and a lecturer at Harvard Medical School, in an email to FierceHealthcare.
“Proposed reforms like public option that leave private insurers in place would continue to waste almost all of the $600 billion annually that Medicare For All could save. As a result, they would cost much more or cover much less than an efficient single payer reform,” said Woolhandler, who co-founded and remains active in the professional organization Physicians for a National Health Program and disclosed in the study that she has served as an unpaid policy adviser to Sanders and has co-authored research-related manuscripts with Warren.
The study found that compared to Canada, which has implemented a single-payer system, the U.S. spends four times more on healthcare administration, calculated at $551 versus $2,479 per person. That amounts to 34.2% of national health expenditures in the U.S. versus 17% in Canada.
“The gap in health administrative spending between the United States and Canada is large and widening, and it apparently reflects the inefficiencies of the U.S. private insurance-based, multi-payer system. The prices that U.S. medical providers charge incorporate a hidden surcharge to cover their costly administrative burden,” said the study by researchers from Harvard Medical School, the City University of New York at Hunter College and the University of Ottawa.
The researchers compared administrative costs in a variety of settings including hospitals, physician practices, nursing homes, home care agencies and hospices. They analyzed thousands of accounting reports that hospitals and other healthcare providers filed with regulators, as well as surveys of physicians and census data on employment and wages in the health sector to quantify 2017 spending for administration by insurers and providers.
The $812 billion in administrative costs in 2017 represented more than one-third of total expenditures for doctor visits, hospitals, long-term care and health insurance. Americans spent $844 per person on insurers’ overhead, while Canadians spent $146, according to the analysis.
Due to the complexity of billing multiple payers and dealing with insurers’ bureaucratic hurdles, hospital administration costs Americans $933 per capita versus $196 in Canada. Physician billing costs were also much higher in the U.S., $465 per capita versus $87 per capita in Canada.
The researchers said most of the increase in administration costs was because of growth in private insurers’ overhead, mostly because of high overhead in their Medicare and Medicaid managed-care plans.
“The $600 billion wasted on excess health administration is an astonishing amount of money,” said Woolhandler. “It means that for the average American, $2,000 that they think they are paying for healthcare each year is instead going for bureaucracy and profits.”
“The biggest surprise was the huge growth in private insurance firms’ overhead, which pushed up administration’s share of total U.S. health spending from 31% to 34.2% between 1999 and 2017—equivalent to an increase of $100 billion per year,” she added. “Most of the increase is because private, mostly for-profit insurers have taken over administration of a big chunk of the Medicare and Medicaid programs.”
For instance, Medicare Advantage plans’ overhead averages 12% or more, sixfold higher than the 2% overhead of traditional Medicare, she said.
The study also noted that Canada saves money by funding its hospitals through annual lump-sum “global budgets” paid by the single government payer.
The authors cautioned that their estimates probably understate administrative costs and particularly the growth since 1999, when they conducted a similar study.
In a statement, America's Health Insurance Plans touted the value of health plans in the system, and said that free-market ideas are critical to effectively managing health costs. Private payers are innovative and drive to greater value, the group said.
"Americans deserve affordable, high-quality health care, and health insurance providers deliver on that commitment," AHIP said. "Health insurance providers are driven to provide the greatest possible value at the lowest possible cost – this is how we compete in a market that offers consumers many coverage choices."