Is managed care diverting money for patient care?
Administrative costs rising rapidly
Rather than streamlining the American health care system, managed care has led to sharp increases in the amount of money hospitals must spend on administration, according to a national study by Massachusetts researchers.
The study has sparked debate over whether "market medicine" is forcing hospitals to spend more on administrative matters at the expense of clinical operations.
The study was conducted by David U. Himmelstein, MD, and Steffie Woolhandler, MD, MPH, both of the Harvard Medical School in Boston and the Center for National Health Program Studies at Cambridge (MA) Hospital. The study was published in the March 13 issue of the New England Journal of Medicine.
Records from 6,000 hospitals studied
Woolhandler and Himmelstein used Medicare records of more than 6,000 non-federal hospitals to calculate administrative costs as a percentage of total hospital costs for the years 1990 and 1994. The following are some of their findings:
• Administrative costs accounted for 26% of all hospital costs, an increase of 1.2% from 1990.
• For private for-profit hospitals, administrative costs rose by 2.2%, accounting for 34% of total costs.
• For not-for-profit hospitals, administrative costs rose by 1.2%, accounting for 24.5% of total costs.
• For public hospitals, the administrative cost increase was 0.6%, accounting for 22.9% of total hospital costs.
• Administrative costs represented the largest slice of total costs at psychiatric hospitals (37.5% overall, 44% at for-profit hospitals).
• At rehabilitation hospitals, administrative costs accounted for 33% of total costs overall and 37.7% at for-profits.
• At for-profit hospitals, the annual rate of increase of administrative costs has been 50% greater than at not-for-profits.
• For-profit hospitals spend an average of 23% more on administration than not-for-profit hospitals and 34% more than public hospitals.
The researchers also found that, between 1990 and 1994, administrative staffing at hospitals ballooned from 613,000 to 819,000 full-time equivalents.
With administrative costs consuming an ever larger portion of hospital budgets, daily patient care may suffer, the researchers warn. "The shorter stays and lower occupancy rates [especially] at for-profit hospitals may increase the share of costs devoted to administration if clinical staffing is cut more than administration when beds are empty," Himmelstein and Woolhandler write.
Some critics, however, are less convinced that rising administrative costs signal bad news for clinical care. David Schactman, MPA, MBA, an analyst of national health policy at the Brandeis University’s Institute for Health Policy in Waltham, MA, criticizes the study for "missing the point." He notes that over the same period of time Woolhandler and Himmelstein studied, the rate of increase in total hospital spending was consistently below the rate of inflation. He adds that, administrative costs notwithstanding, a large body of evidence suggests that managed care has in fact succeeded in "reigning in" the skyrocketing rates of increase that occurred in the late 1980s.
"These results lead us to question whether the level of administrative costs tells us anything about overall health spending or cost efficiency," says Schactman in an editorial accompanying the report. "Why should we disparage a different mix of spending if it produces similar but lower-cost services? Perhaps better administration has increased efficiency."
Schactman co-authored the editorial with Stuart H. Altman, PhD.
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