Your Practice Administrative Costs: What’s Your Cost of Getting Paid? Part I

By Bhagwan Satiani  |  April 16, 2012

One of the reasons for the higher cost of healthcare in the U.S is the rise in practice administrative costsPhysician practices define administrative costs differently. A good definition is that they are those “costs which comprise transaction-related costs, benefits management, selling and marketing costs (to allow consumers specific choices regarding the level of risk they bear), and regulatory/compliance costs.”

One of the reasons for the higher cost of healthcare in the U.S is the practice administrative costs. Experts estimate that the approximate administrative cost is $293 billion each year in the U.S., or $1,059 per capita. In another study by The McKinsey Global Institute on excess spending on healthcare, administration and insurance together were estimated by to be 21% of the total excess spending. This would translate to about $160-180 billion in 2012.

The “macro” picture is not easily grasped until we start looking at each practice and determine what it costs to run a practice. Whereas economies of scale work for large health systems or insurance companies, small and medium sized practices are at a disadvantage.

How big is the problem? The median overhead for primary care practices is 59.5%, according to the 2010 MGMA report based upon 2009 data. Other than staff salaries and benefits, which take the largest bite, it is estimated that medical practices spend up to 27% of their revenue on administrative costs. Although medical practices decreased operating expenses 2.2% in 2010, general operating costs since 2001 have increased almost 53% to $252,629, far above any gains in revenue over the ten year period.

Third parties in healthcare exist to handle the payment transaction between the patient and the entity providing healthcare. Unfortunately, the costs associated with these transactions have increasingly hurt the physician practice. On 2006-7, the 6.6% rate of growth in resources dedicated to administrative activities was much higher than professional services and matched the 7.5% growth rate in hospital spending and the 6.7% for prescription drugs. 

The largest share of the administrative burden was attributed to the costs of dealing with insurers

So, what exactly makes up the “administrative” part of the cost for practices? A major cause of higher practice costs is the expense of dealing with insurers. It is estimated that the approximate cost of the time spent by physicians and their staff in interacting with insurers is about $31 billion each year. This represents about 6.9% of all U.S. expenditures for physician and clinical services. In another study, the largest share of the administrative burden (74%) was attributed to the time costs incurred by practicing physicians and their staffs in dealing with insurers about everything from preparing paperwork and contacting payers about prescriptions to providing diagnoses and treatment plans or referrals. It is not hard to find data to support these findings, considering that on average 12-15% of charges submitted to non-Medicare payers are denied on the first pass even though over 80% of these initial denials are eventually paid.

The average time physicians spend dealing with insurance companies is reported at 43 minutes per weekday, or three hours a week, or 3 weeks per year. This report by Casalino translated physician time into dollars and on average this cost a practice $68,274 per physician annually interacting with insurers. Primary care physicians spent even more time (3.5 hours per week). Physicians in smaller practices spent more time than physician in large practices. The waste may be even worse than the data indicate, since this time does not include time spent on recording billing or diagnosis or procedure codes. And how much time was spent on something that really matters, which is providing quality data to insurance companies? Two hours per physician per year by the office staff.

Tomorrow we’ll examine five ways to reduce your cost of getting paid in Part II of this blog post.

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