The following testimony was given to the U.S. Senate Committee on the Budget on October 18, 2023. Video of the hearing is available here.
Chairman Whitehouse, Ranking Member Grassley, and members of the committee, thank you for inviting me here today. My name is Matthew Fiedler, and I am a health economist and the Joseph A. Pechman Senior Fellow in Economic Studies at the Brookings Institution, where I am affiliated with the Schaeffer Initiative on Health Policy. My research examines a range of topics in health care policy, including health care provider payment and health insurance regulation.
My testimony will examine the administrative costs generated by interactions between health care providers and payers (including both public programs and private insurers), as well as how changes in public policy might help to reduce those costs. I will make five main points:
- A reasonable estimate is that the administrative costs generated by provider-payer interactions amount to around half a trillion dollars per year or around 11% of annual health care spending. Most of these costs are incurred by providers while negotiating contracts, collecting information about patients’ coverage, obtaining prior authorization for care, submitting claims for payment, and reporting on quality performance. Payers incur additional costs to perform their part in these interactions.
- Administrative costs are ultimately borne by consumers and taxpayers. Costs incurred by providers are reflected in the prices that providers negotiate with private insurers; similarly, these costs require public programs like Medicare and Medicaid to pay higher prices to elicit adequate provider participation. Higher prices directly increase patient cost- sharing in many instances and, together with the administrative costs incurred directly by payers, increase premiums and program spending (as applicable).
- Many administrative processes serve valuable purposes, so efforts to reduce administrative costs can involve tradeoffs and should proceed thoughtfully. For example, it is essential to have some set of procedures for compensating providers. Similarly, payers’ prior authorization requirements can prevent delivery of inappropriate services, and audit processes can be effective tools for identifying and deterring fraud.
- Certain targeted reforms could reduce administrative costs with few substantive downsides. One is eliminating Medicare’s Merit-Based Incentive Payment System, which places large reporting burdens on clinicians with few benefits. Another is replacing the cumbersome arbitration process that determines payment rates for certain out-of-network services under the No Surprises Act with a simpler “benchmark” payment regime. A third is reforming Medicare Advantage’s risk adjustment system to reduce plans’ ability to increase payments by documenting additional diagnoses. More generally, policymakers should be attentive to how policy choices across many domains affect administrative costs.
- Standardizing billing, coverage, and quality reporting processes across payers could generate larger savings but could also present tradeoffs. The wide variation in rules across the menagerie of public and private payers that operate in the United States is likely one major reason that administrative costs are larger in the United States than in many other countries. Greater standardization could likely reduce these costs.One worthwhile goal is standardizing how providers and payers share claims information. One strategy policymakers could consider is creating a central clearinghouse that would accept claims from providers in a standardized format and route them to payers, an approach used in some other industries and in some other countries’ health care systems. This approach would likely more fully standardize claims transactions than past federal efforts that have established transaction standards to govern decentralized provider-payer interactions. However, it would be essential that a clearinghouse be well-run, as a poorly run clearinghouse would likely generate few benefits or even do harm.
Policymakers could also consider standardizing the substance of some payer rules related to billing, coverage, and quality reporting. This approach might generate larger administrative savings but would also limit payers’ ability to tailor rules to their circumstances or experiment with novel approaches. Setting rules through a centralized process might also produce rules that are systematically better or worse than existing rules. These factors could cause standardization to produce offsetting costs, like greater use of inappropriate services, that would need to be weighed against administrative savings. Thus, the desirability of this type of standardization is likely to be highly case-specific. Quality reporting may be a domain where standardization would be particularly attractive, as it could likely both reduce administrative costs and increase the utility of the resulting quality data by increasing provider-level sample sizes and easing cross-payer comparisons.
Acknowledgements and disclosures
The Brookings Institution is financed through the support of a diverse array of foundations, corporations, governments, individuals, as well as an endowment. A list of donors can be found in our annual reports published online here. The findings, interpretations, and conclusions in this report are solely those of its author(s) and are not influenced by any donation.
The author would like to thank Vani Agarwal for assistance with fact checking this piece.