Administrative costs of private health insurance consume 40% of premiums Author: Samuel Metz  Date: 08/25/2011

The excess administrative costs saved by using a single payer system represent 40% of the money passing through private health insurance companies. This is based on a 2003 study by Woolhandler et al.[1] Here is how that number is derived.

A. What are the primary figures and definitions used by Woolhandler et al.?

Woolhandler et al. used a limited definition of health care costs which excluded medications and other factors. They do not state the figure for limited health care expenditures but we can calculate the figure using data from the study:

Limited spending: ($294 billion overhead / 31% of limited health care) = $948 billion

They state in that the excluded costs are $261 billion. We can calculate total health care spending.

• Total spending: $261 billion + $948 billion = $1,210 billion [$1.21 trillion]

Woolhandler did not specify the US population in 1999, but we can calculate it using their data.

• US population: ($294 billion total overhead/$1,059 per capita) = 278 million

Thus we have the following figures for 1999:

Overhead	$294 billion
Population	278 million
Overhead per capita	$1,059
Limited health care costs	$948 billion
Overhead as % of limited costs	31%

Thus we have the origin of the 31% administrative overhead number.

B. But wait – In their discussion (not in methods or results) Woolhandler et al. revised their estimate of total overhead with a new undocumented figure of $320 billion. This new $320 billion included pharmaceutical industry marketing, value of patient time spent on paperwork, advertising, lobbying by industry, and revised estimates for physician costs. This gives new numbers.

Overhead (revised)	$320 billion
Population	278 million
Overhead per capita	$1,151
Limited health care costs	$948 billion
Overhead as % of limited costs	34%

C. We’re not done yet. If we also revise the health care expenditures to reflect total health care costs, not just the limited health care costs, the number changes again.

Overhead (revised)	$320 billion
Population	278 million
Overhead per capita	$1,151
Total health care costs	$1,210 billion
Overhead as % of total costs	26%

We now have three different percent figures for overhead costs compared to total health care costs, varying depending upon whether one chooses limited health care costs or total health care costs, and whether one chooses the overhead costs from the results section or from the discussion section.

What about 2010? A. What figures should we use? Here is what I prefer.

• The per capita overhead costs used by Woolhandler et al. in their discussion, $320 billion (or $1,151 per capita).
• The 2010 US population estimated by the Census of 309 million.
• Total health care expenditures in 2009 estimated by the Kaiser Family Foundation of $2.5 trillion
•  

Let us now recalculate the numbers for 2010.

This is the source of the 14% figure used in my PowerPoint presentation. But that is the percent of total health care spending. The $356 billion is generated only by the $875 billion that passes through private health insurance companies, not through government, philanthropic organizations, or out of pocket payments.

Total overhead	$356 billion
Private insurance funds	$875 billion
Overhead as % of PI costs	40.6%

This is the source of the 40% overhead figure for private health insurance.

Reference:

Woolhandler S, Himmelstein DU. Costs of health care administration in the United States and Canada, NEJM 2003;349:768-772. http://www.nejm.org/doi/full/10.1056/NEJMsa022033 http://www.pnhp.org/publications/nejmadmin.pdf