A few weeks ago, economist Arthur Laffer published an article in the Wall Street Journal called “The 30-Cent Tax Premium.” In it he lamented the fact that Americans must spend significantly more than $1 in order to provide $1 of income-tax revenue to the federal government. The direct result of a convoluted tax code riddled with loopholes and complexity, tax-compliance costs alone consume some $431 billion annually. Even more is wasted as a result of people changing their economic behavior to fit the tax code.
That’s a lot of money, but it pales before what we’ve done to undermine the affordability of our own health care system. If this were a game of poker, health care’s administrative overhead expense could see the tax code’s wasted $431 billion and raise it another $320 billion. That’s right, the U.S. will spend nearly three-quarters of a trillion dollars on health care paperwork in 2011. The cost will consume one-third of every single dollar that Americans will spend, tax, or borrow to pay for health care. If health care administration expense were its own country it would be the 18th largest economy in the world. And not one penny of that vast sum will be spent on caring for patients or preventing disease.
Like the tax compliance industry, the health care administration business has grown so large that it has become one of the country’s largest employers. The number of non-clinical health care personnel has skyrocketed over the past 40 years. In 1970, there were 1.5 managers and support staff per physician; there are now about 5.7 administrators for every doctor. While tax compliance employs “more workers than are employed at the five biggest employers among the Fortune 500,” medical paperwork employs as many workers as the top ten. That’s nearly five million people. In health care, the bureaucracy really is expanding to meet the needs of the expanding bureaucracy.
All of these administrators and the rules they promulgate pose an ever-growing burden on the rest of the system. Physicians now spend up to 15% of their gross income on billing and insurance-related expenses, compared with only 1% spent by lawyers and accountants. The average clinician now spends over five full work-weeks per year doing nothing but paperwork. This will increase to nearly six weeks in 2011 as a result of new Medicare rules that require doctors to personally sign the paper requisition forms for every lab test they order. The stated reason? To make complying with Medicare’s own rules “a less confusing process.”
The growth in these costs explains many of the trends that we see in medical practice today. Inflation-adjusted physician income has been declining since 1995, even as the number of hours spent in “patient-care activities” has risen by 20%. Most of those additional hours are spent complying with rules and regulations. Fewer and fewer clinicians can afford to see Medicare and Medicaid patients, whose insurance offers a perfect storm of low reimbursement and high regulatory compliance costs. Patients increasingly feel as if their doctors are spending more time with their computers and electronic medical records than they are with them. And a recent survey conducted by Merritt Hawkins found that 40% of physicians intend to drop out of patient care in the next three years — largely as a result of new economic and administrative burdens created by the 2010 health care reform law.
Why have we gotten to this point, and what can we do about it? In health care as in the tax code, the clear culprit is creeping complexity. Just as lawmakers try to “optimize” the tax code with carve-outs and loopholes, governments and private insurers have been trying to micromanage the cost and quality of health care for decades. In the process they now involve themselves in the smallest details of medical practice; from requiring pre-authorization for drugs and tests to dictating which electronic medical records systems clinics and hospitals must buy. There are now 11 separate decisions a physician must make just to classify a routine Medicare office visit for billing purposes. Patients and clinicians now spend as much time worrying about rules and documenting things than they do actually solving problems.
The irony, of course, is that all of this extra complexity and expense ends up costing far more than it saves. Over $500 billion each year in health care administration expense could be eliminated while actually improving care and reducing costs. Scrapping the government-mandated “RBRVS” payment system and simply paying health care providers hourly for their time would save over $50 billion per year. Covering all Americans under a system that utilizes health savings accounts, transparent pricing, and free market forces would save hundreds of billions more. Because excess administration costs produce no health care benefits, every dollar saved will directly reduce health insurance premiums and taxes.
Just as Mr. Laffer argues convincingly for simplifying the tax code, simplifying health care must be a top priority if we’re to have any hope of balancing our nation’s various health care budgets. A massive cut in administrative overhead is something that we have yet to see as a major health care policy goal of either party. It’s time that it got the attention that it deserves.