≡ Menu

#10 CLAIM: Administrative costs are a huge drain on the system (see CLAIMs #6-9!).


Administrative costs for insurance companies, drug companies, and medical providers are driving up the costs of the entire health care system.

In recent years, administrative costs have been the fastest-rising component of health care spending, with a 16.8% increase for private insurers in 2002, up from a 12.5% increase in 2001. The latest estimate shows private insurance administrative costs account for 7% of total U.S. health care spending (compared with less than 2% for the Medicare program.

What is an administrative cost?

  • It’s the difference between what an insurance company collects from enrollees in premiums and what it pays for their health service claims.
  • It pays for claims processing, underwriting, marketing, utilization review, building up reserves, general management, staff salaries and profit.
  • It is often shown as a percentage of the premium, and ranges from 5% to 50% or more. For example, if an insurance company pays 20 cents for administrative costs for every dollar it collects in premiums, then its administrative cost is 20%.

The cost of private health insurance administrative expenses per enrollee has been rising at an increasing rate, from $85 in 1986 to $421 in 2003.


Research and Development:
Varying reports on how much the top 10 American drug companies spend on product R&D range from an average of 12.5% of sales revenue to 17.7% of sales revenue. This neared $30 billion in 2004. We should certainly applaud US drug companies’ innovation: 8 of the world’s 10 most popular drugs were made in this country. Often they were made using research derived from tax-dollars: yours.

That said, in the last 25 years, funding of biomedical research rose from $1.5 billion to $55 billion among drug companies, outpacing the federal government’s expenditure of $36 billion in 2007. Most of this funding goes to university-based researchers and physicians who then advise the Food and Drug Administration on drug approvals and write treatment guidelines and standards. The New England Journal of Medicine found that these developers of clinical guidelines were 41% more likely to have received drug company payments for their research activities than physicians not involved in guideline development. Drug companies want this research subsidy to extend to the classroom: medical school physician professors were 67% more likely to have received drug company payments than those who did not teach.

Thus the line between R&D and marketing is blurred. Drug companies are desperately spending money on marketing to make the drugs they sell more commonplace or desirable, rather than rely on innovative research to create new and improved drugs.

Marketing and Administration:
Marketing and administration costs are nearly double what’s spent on R&D: $57.5 billion on promotional activities in 2004 as compared to $31.5 billion . Researchers at Boston University found that from 1995 to 2000 drug industry research staff declined slightly from 49,000 to 48,000 whereas sales staff grew from 55,000 to 88,000.

Getting provider bills collected – managing the patient, doctor and insurer payments and reimbursements – cost more than $350 billion in 2007. That makes up 15% of all U.S. health care spending. *One in every 5 dollars spent on providing medical treatment goes towards bill collection.

The denial management industry:The Wall Street Journal reports that the “denial-management industry’s rise shows how much of medical spending is consumed by propping up and doing battle over an arcane patchwork of claims systems.” But the costs to those who have their claims denied cannot be calculated, particularly as denied treatment can result in death. These administrative costs are a huge burden for our health care providers.

  • U.S. hospitals spend almost a quarter of their budgets on billing and administration.
  • Because our system gives insurers with no medical training the right of final approval on every prescription, procedure and treatment that a provider recommends, hospitals and physician practices must employ people whose sole job it is to deal with insurers and processing claims denials.
  • These payment disputes are costing medical providers and insurers about $10 billion each in unnecessary administrative expenses.

Meanwhile, more and more doctors are being driven from geriatric and primary care. Why are these doctors hit harder than specialists? Primary and geriatric doctors rely on preventive care, which requires exhaustive and time-consuming evaluations that these doctors can’t bill for, rather than the clear-cut procedures insurers favor in our pay-for-service (rather than pay-for-health) system. And who pays when people cannot get the primary preventive care they need? We all do.

Insurance and drug companies spend a lot on lobbying each year to maintain their power and profits. Supposedly there are two health care lobbyists for every US Senator and Representative! All that lobbying is an administrative expense that these companies have to make up for in revenues. Think about how much this must contribute to health care costs.

Pharmaceutical companies and their trade associations have a long history of lobbying Congress for many of the laws that shape the drug market today. Recently, they spent a record $155 million lobbying Congress from January 2005 through June 2006. Over 1,000 agents have scurried to lobby congressional committees and administration offices on behalf of drugmakers during each of the last two years. (These lobbyists outnumber Federal members of Congress two to one.) What did they get for their efforts? Success in 2 major goals:

  • a government ban on the reimportation of cheaper prescription drugs from other countries;
  • the blocking of legislation that would have allowed the federal government to negotiate cheaper prescription drug prices for Medicare.

Insurance and drug companies spending millions of dollars to protect their ability to make billions of dollars is clearly a simple business decision for them. The irony is that if these industries eliminated the administrative costs of paying for a huge full-time staff of professional lobbyists they could lower drug and premium prices while preserving their profits.

Low overhead – low administrative costs – generally means that an insurance or drug company is efficient: consumers get more coverage or prescriptions for their buck. But do we want more or better? How much of what we’re paying for actually makes us healthy?

The right administrative costs can improve your health, for example, by negotiating lower treatment prices or developing patient education programs.

  • What if insurance companies spent money on developing the technology that so many other countries already use to track patient records, prescriptions, and care so that no matter where you are or what condition you’re in, the doctor knows your health history?
  • What if drug companies spent administrative costs on determining how to find market incentives to make AIDS drugs affordable for victims?
  • How much of administrative costs are just waste?