The Staggering Cost of US Health Care Bureaucracy

The Staggering Cost of US Health Care Bureaucracy

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Plus, why the IRS is struggling to do its job
Wednesday, January 8, 2020

The Staggering Cost of US Health Care Bureaucracy

Seemingly everyone has a horror story to tell about dealing with the bureaucracy of the U.S. health care system, from mundane matters like medical records to financial fights over surprise medical bills or insurance claims.

Those individual experiences come at a high collective cost, according to a new study published in the Annals of Internal Medicine: U.S. health insurers and providers spent $812 billion on administration in 2017, representing more than a third of national health expenditures, or double the 17% percent that Canada spends under its single-payer system. The U.S. administrative costs translate to nearly $2,500 per person — or almost five times as high as 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, multipayer system,” the study’s authors conclude. “The prices that U.S. medical providers charge incorporate a hidden surcharge to cover their costly administrative burden.”

The study finds that U.S. could have saved more than $600 billion in 2017 if it were able to cut its administrative costs to match Canada’s. “The difference between Canada and the U.S. is enough to not only cover all the uninsured but also to eliminate all the copayments and deductibles, and to amp up home care for the elderly and disabled,” Dr. David Himmelstein, a professor at the CUNY School of Public Health at Hunter College and co-author of the study, told Time. “And frankly to have money left over.”

Why it matters: This isn’t the first study to show that the U.S. system has higher administrative costs than other countries, but it is the first major study calculating those system-wide costs in almost two decades. The spending disparity detailed in the study “could challenge some assumptions about the relative efficiency of public and private healthcare programs,” writes Melissa Healy of the Los Angeles Times. “It could also become a hot political talking point on the American campaign trail as presidential candidates debate the pros and cons of government-funded universal health insurance.”

A steep rise in U.S. costs: Administrative costs have grown in both the U.S. and Canada over the last 20 years, but the increase in the United States has been much higher, mostly as the result of insurance overhead. “The study showed that private insurers contributed to most of the increase in administrative costs between 1999 and 2017,” Modern Healthcare’s Rachel Cohrs reports. “Of the 3.2 percentage point increase in administrative costs as a share of overall health spending, 2.4 percentage points were due to the expanding role that private insurers have assumed in Medicare and Medicaid.”

The insurance industry response: America’s Health Insurance Plans, a group representing private health insurance companies, told the Los Angeles Times that government-run systems aren’t as efficient as private ones, citing a recent report by the Medicare Payment Advisory Commission, an independent body that advises Congress, that found that private Medicare Advantage plans deliver benefits at 88% of the cost of traditional Medicare. “Study after study continues to demonstrate the value of innovative solutions brought by the free market,” AHIP said in its statement. “In head-to-head comparisons, the free market continues to be more efficient than government-run systems.”

The researchers are single-payer advocates: Himmelstein and one of his co-authors, Dr. Steffie Woolhandler, also of the CUNY School of Public Health at Hunter College, have long advocated for a single-payer health-care system in the United States. They co-founded the group Physicians for a National Health Program and have been unpaid policy advisors to Sen. Bernie Sanders and have coauthored research manuscripts with Sen. Elizabeth Warren. Both senators are calling for a transition to a single-payer Medicare-for-All system. But the researchers say that their conclusions in the new study are based on the data — and that their estimates of U.S. administrative costs are likely conservative.

"It's actually the data that guided us to the solution, the solution didn't give rise to the data," Himmelstein said, according to Modern Healthcare.

Himmelstein also says that, while it may be possible to reduce administrative costs without switching to a single-payer system, the benefits would be much smaller. “We could streamline the bureaucracy to some extent with other approaches, but you can’t get nearly the magnitude of savings that we could get with a single payer,” he told Time.

First-Quarter Deficit Grew by 12%, CBO Projects

The federal deficit for the first three months of fiscal year 2020 grew by $39 billion, or 12%, the Congressional Budget Office estimated on Wednesday. The deficit for October through December totaled $358 billion, though it would have been about $20 billion smaller if not for holiday-related shifts in the timing of certain payments. Spending over the quarter grew by 7% while revenues grew by 5%.

The deficit is expected to top $1 trillion this year for the first time since 2012.

Chart of the Day: Tax Rates for the Top 1%

In a new blog post, the Tax Policy Center’s Robert McClelland and Nikhita Airi break down how effective tax rates have fallen for the top 1% of income earners — and smaller slices of that elite group — over the past seven decades.

Why the IRS Is Struggling to Do its Job

The IRS doesn’t have enough funding or personnel to do its job properly, according to the 2019 annual report from the Taxpayer Advocate Service, an independent organization within the agency that assists taxpayers and recommends changes to improve the system.

In the first report released since long-serving leader Nina Olson stepped down, Acting National Taxpayer Advocate Bridget Roberts says that the agency is struggling to accomplish its stated mission: to provide “America's taxpayers top quality service by helping them understand and meet their tax responsibilities and enforce the law with integrity and fairness to all."

Referring to money spent on the IRS as an “extraordinary investment,” Roberts lays out the economic argument for providing more resources to the tax agency:

“In FY 2018, the IRS collected nearly $3.5 trillion on a budget of about $11.43 billion, producing a remarkable ROI of more than 300:1. It is economically irrational to underfund the IRS. If a company’s accounts receivable department could generate an ROI of 300:1 and the chief executive officer (CEO) failed to provide enough funding for it to do so, the CEO would be fired.”

One problem, Roberts goes on to say, is that federal budget rules do not take ROI of government spending into account, making it difficult to show the value of increased funding for the agency.

A big drop in employees: Adjusted for inflation, the IRS budget has been reduced by about 20% since 2010, and the number of employees has fallen by about 22%. “The IRS receives approximately 100 million telephone calls every year, and to provide ‘top quality service,’ as its mission statement commits it to do, it requires adequate funding to hire enough employees to answer those calls,” Roberts says.

A $3,000 surtax on taxpayers? Based on an estimated tax gap of $381 billion a year — the difference between what is owed and what is collected — the report says that U.S. households are effectively paying a $3,000 surtax each to cover the lost revenues of those who don’t pay all they owe. The estimate, which assumes the IRS is seeking to collect a fixed amount of revenue while assigning all uncollected funds to those who do pay, is a bit shaky, but it highlights the high price imposed by the failure to invest sufficiently in collection and enforcement efforts.

Plenty of other problems: Roberts cites a litany of issues at the tax agency, including:

  • Obsolete technology: “The two IRS systems containing the official records of individual and business taxpayer accounts are the oldest major technology systems in the federal government. The IRS also has about 60 case management systems that generally are not interconnected; each function’s employees must transcribe or import information from other electronic systems and mail or fax it to other functions. Obsolete IT systems limit the functionality of online taxpayer accounts, prevent taxpayers from obtaining full details about the status of their cases, and prevent the IRS from selecting the best cases for compliance actions.”
  • Free File flop: The free tax filing program is supposed to cover about 70% of individual taxpayers, but less than 2% actually use it. Based on several reviews of the program, “the National Taxpayer Advocate believes that the current program is not promoting the best interests of taxpayers,” Roberts says.
  • A lack of permanent leadership: Roberts, who is serving as a temporary leader, said that “the Office of the Taxpayer Advocate – and taxpayers – deserve a permanent appointee ... Given the current crossroads at which the IRS finds itself, it is critical that a permanent National Taxpayer Advocate be appointed as quickly as possible to help ensure the IRS protects taxpayer rights and meets its obligations to taxpayers.”
A long list of recommended improvements: In a separate “Purple Book,” the National Taxpayer Advocate listed 58 recommendations for improving the IRS. Some highlights, with links to more complete discussions:
  • Provide the IRS With Sufficient Funding to Meet Taxpayer Needs and Improve Federal Tax Compliance (pdf)
  • Codify the Taxpayer Bill of Rights, a Taxpayer Rights Training Requirement, and the IRS Mission Statement as Section 1 of the Internal Revenue Code (pdf)
  • Require the IRS to Provide Taxpayers with a “Receipt” Showing How Their Tax Dollars Are Being Spent (pdf)
  • Authorize the IRS to Establish Minimum Competency Standards for Federal Tax Return Preparers (pdf)
  • Protect Retirement Funds From IRS Levies, Including So-Called “Voluntary” Levies, in the Absence Of “Flagrant Conduct” by a Taxpayer (pdf).

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