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Hospitals Got $100 Billion in the Stimulus Package. But A Lot of That Could Go Toward Administrative Costs

7 minute read

Hospitals have spent the past few weeks racing to respond to the growing COVID-19 crisis, supplementing shortages of equipment, calling back retired personnel, and transforming entire hospital wings to care for infected patients. So when Congress included $100 billion in the stimulus package passed last week to help hospitals and other health care providers address the pandemic, it was seen as much-needed assistance.

But that’s not the whole story, health care experts say. Due to the patchwork nature of the U.S. health care system, a huge chunk of those emergency funds likely won’t go to lifesaving care or equipment, but to underwriting the astronomical administrative costs of negotiating a complicated network of private insurance providers and other bureaucratic functions.

Advocates of single-payer government health care, like Medicare for All, say that’s yet another reason to support an overhaul of the U.S. health system. “We have a privatized and fragmented healthcare system and it makes administrative costs high and consumes a huge piece of our total health spending,” says Dr. Steffie Woolhandler, a professor of public health at CUNY’s Hunter College, who supports a single-payer system.

A study co-authored by Woolhandler published in the Annals of Internal Medicine earlier this year found that administrative costs now account for about 34% of U.S. health care expenditures. That’s twice the percentage Canada spends. For hospitals alone, the mean share of expenditures devoted to administrative costs in the U.S. was 26.6%.

Those percentages will likely be similar for this relief funding, Woolhandler says. If they are, that means that of the $100 billion hospital relief funds, hospitals would spend in the neighborhood of $26 billion on administrative overhead.

“All of the things that they need to do to administer in a non-crisis situation and collect money, they’re going to have to do with the bailout funds,” Woolhandler says. “I think the administrative costs for $100 billion dollars delivered in this way are going to be slightly lower than the average administrative costs. So at least by several percentage points. But still, the hospital runs the way it runs.”

The text of the stimulus bill says the money must be spent on health care expenses or lost revenues directly related to COVID-19 that will not otherwise be reimbursed.

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Of course, any hospital or health care system must spend on administrative costs to function. A dedicated staff must order supplies, do payroll and keep records. But, Woolhandler notes, U.S. hospital costs are exceptionally high. While the Annals study, which was co-authored by Woolhandler, Dr. David Himmelstein and Terry Campbell, was the first major effort to calculate spending across the whole U.S. health care system in nearly two decades, a 2018 study in JAMA looked at billing costs for different kinds of doctor’s visits. It found that billing and administrative costs made up 25.3% of revenue for emergency department visits. For primary care and surgery visits, a smaller portion of revenue went to billing costs.

The COVID-19 pandemic doesn’t change that underlying reality. Hospitals must still negotiate with insurance companies, attach proper codes to each procedure, and engage in a vast billing bureaucracy. Congress recently made COVID-19 testing ostensibly free with its Families First Coronavirus Response Act, and a growing number of private insurance companies have said they will waive prior authorization requirements and in some cases get rid of cost-sharing for coronavirus-related treatment. But the same is not true for all companies, and given the many ways that Americans pay for health care, there are still plenty of administrative tasks to be done, even for patients without any insurance or whose care is getting reimbursed by the federal government.

“There are just a lot of differences in the kind of policies. And so I think that can end up leading to some back and forth between the providers, consumers and the insurers in terms of getting those claims processed,” says Jodi Liu, a policy researcher who studies health care financing at the RAND Corporation. “That makes things more complicated and typically does add on more cost than it would if it was one uniform system.”

In other countries like Canada or the U.K., which have single-payer systems, Liu notes health care providers are not burdened with the task of determining which patient is covered by which company’s plan, which procedures or treatments are covered under what cost-sharing agreement, and which interventions require prior insurance approval.

“Normally at a hospital, when someone comes in, you take their insurance information, you keep track of every service they use individually, every band-aid, every penicillin shot,” Woolhandler says. If out-of-pocket costs have been waived for some people, or if federal stimulus money is reimbursing a hospital for some of its losses, staff might be able to skip a few steps by not sending a bill to an insurance company. “But all of the other steps involved that contribute to the administrative costs are really baked into the way hospitals run now,” she says.

The stimulus funding also comes with a new round of administrative tasks: reporting requirements. The law says that recipients must “submit reports and maintain documentation” to “ensure compliance with conditions that are imposed” by the bill, and that the Health and Human Services Secretary will determine the form of those reports. That means the federal government will still require hospitals to perform a series of administrative functions, and thus spend time and money, to document the emergency funding.

Woolhandler, who has been a long-time advocate for single-payer health care, said the patchwork nature of the U.S. health care system not only contributes to high administrative costs, but also to the competition that has broken out among hospitals and states for essential equipment such as ventilators and ICU beds amid the pandemic.

“I think that’s a terrible way to run a health care system in good times. Because I think the quality of care actually can go up if people develop best practices in their own hospital and share it with other people,” Woolhandler says. “But it’s a disaster right now with every hospital running out and trying to get their own supply chain of equipment, keep their own hospital staffed, even if the staff are needed across town or across the state line.”

Other advocates for health care reform have also noted the ways that the fragmented U.S. system is buckling under the current pandemic. From the beginning of the coronavirus outbreak, it was difficult for many Americans to get tested for the disease. And even as testing has become somewhat more widely available, millions of Americans still fear facing high bills from services related to testing or treatment.

Dr. Adam Gaffney, an instructor in medicine at Harvard Medical School and president of the advocacy group Physicians for a National Health Program, recently called the American system “atomized chaos” in a piece for The Guardian arguing that a single-payer system could help address both the problems patients see with high costs and the hospitals that are struggling to stay afloat while treating COVID-19.

“Of course single-payer can’t close the door to a novel virus, any more than it can forestall a deadly earthquake or fend off a zombie apocalypse,” Gaffney wrote. “Nonetheless, a national health program with unified financing and governance – basically the opposite of what we have in America today – is a powerful tool in a health crisis.”

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