Healthcare Administrative Costs and Competition Policy

Even though the U.S. healthcare system exhibits higher administrative costs than any other OECD nation, they have not received substantial attention from policymakers despite their enormous cost and impact on the market. We argue that competition policy could meaningfully reduce these administrative costs. We first describe how efforts to deploy electronic health records departed from pro-competition principles by failing to understand how healthcare firms would direct business processes exploit their incumbent positions in the market. We then argue that there is an urgent need to reduce costs and increase competition by standardizing and digitizing business processes across the health sector. High administrative costs in the health sector is not an inevitable consequence of a private payer system. To the contrary, it is a product of poorly conceived policies and a lack of competition and innovation.

By Barak D. Richman, JD, PhD & Kevin A. Schulman, MD^[1]

Administrative costs in the U.S. healthcare sector represent between 25 percent to 31 percent of total expenditures,^[2] a proportion twice that in Canada and significantly greater than in all other Organization for Economic Cooperation and Development member nations.^[3] Moreover, the rate of growth in administrative costs in the United States has outpaced that of overall health care expenditures and is projected to continue to increase without reforms to reduce administrative complexity.^[4]

The primary culprit