The graph above, linked from Fiscal Times but from Uwe Reinhardt’s last book, illustrates the steep growth in administrators in health care over the last 25 years. It is an illustration of the working of Gammon’s Law AKA the Theory of Bureaucratic Displacement. As stated by Max Gammon
In a bureaucratic system, an increase in expenditure will be matched by a fall in production. Such systems act rather like “black holes” in the economic universe, simultaneously sucking in resources and shrinking in terms of “emitted production”.
The only point I’m making with this is that bringing health care spending more into line with “emitted production”, however measured, is the sine qua non of health care reform. No reform, whether “market-based”, whatever that may mean in a health care context, or single-payer or Medicare for All or any other reform, can control health care spending without reducing the bureaucratization of medicine.
I have a question attendant to that chart, however. Obviously, something happened in the early 1990s that impelled that growth in the number of administrators. What was it?
As a side note education has precisely the same problem.
Yes, something dramatic happened in the early 90’s, but I think that ignores history and the rise you see beforehand. In short, I suspect it was the managed care system.
Managed care has existed since the 60’s and 70’s, perhaps earlier. But on a large scale it was first applied to Medicare and Medicaid. It ultimately dominated by 1990. Why is that? Capped reimbursement rates (price controls – Econ 101) drove outpatient services away from inpatient hospitals, and to physician or investor owned outpatient services of numerous types. Then consumer outcry over service and reimbursement denials, and doctors complaining about reimbursement and denying service, resulted in politically icky results, reaching a crescendo for sure in the early 1990s when things like women’s gynecological exams and emergency care were exempted from the Medixxx caps. The flood gates were opened for the outpatient industry. The consumer became completely disconnected from price exposure. Those facilities grew in number. Each of those facilities has bureaucrats; all that real estate footprint; all that insurance negotiating. Numerous government “fixes” were tried. None have worked.
Why haven’t they worked? Because a) they have been designed by academics, politicians and industry insiders and b) politics.
I’m always told consumer price exposure won’t work in health care. Its “different” you see, and after all, we don’t have a market system. But we used to. But when health insurance and doctor-patient fee arrangements became health maintenance, on someone else’s dime, the trouble really began. I’m shocked. Shocked!!
I can think of someone who claims to be a free trader, but since we don’t currently have free trade is willing to intervene to create free trade or punish non-free traders. The same principle does not appear to hold for health care. More Rube Goldberg schemes are apparently the answer.
You ask about education and bureaucrats. Well, we dictate curriculum now, and hire people to enforce that. The government, er, taxpayers, gives out loans to enable consumers to avoid price exposure, especially for silly majors. Who wins? Some professors. Education bureaucrats. Contractors who build those shiny new buildings. Who loses? Taxpayers and students. I’m shocked. Shocked !!
I would bet the artificial constraint on the supply of Doctors is also a factor in generating more administrators.
There have been any number of studies and pilot programs. What they have uniformly found is that, yes, people make economic decisions about health care when exposed to prices. But they don’t make prudent choices about health care. They put off care that could have saved them money in the long run.
The difference between buying health care and buying socks is that there isn’t that much to know about socks when making a decision. You either like the pair of socks or you don’t, they’re comfortable or they’re not and there isn’t a great deal of downside risk.
I remember the first time I saw this and the first thing I thought was something is wrong with this. Those are huge jumps and dont represent anything I have seen (I have been involved continuously with health care since 1973, though 8 plus years of that was in the military). No way we have 35 times more administrators than we did in the 70s. Fortunately Drum did the legwork on the numbers and it is pretty clear these numbers are not real.
https://www.motherjones.com/kevin-drum/2019/06/join-me-on-a-dive-down-the-rabbit-hole-of-health-care-admin-costs/
Which is not to say that we dont have more admin people. I think that health care has caught on that sometimes, just like the business world, you can make people happy with a new title rather than a big raise. We also do a lot more than we did in the past. I have an IT guy in the group. Didnt need that in the past. Billing is a lot more work than it used to be with the private insurers as they all insist that all of my people re-credential every 2 years, so now I have a full time admin person whose only job is keeping everyone credentialed. Marketing is much more important now, even at my level. Also, JCAHO and the state DOH, especially the state, have become much more intrusive. They are starting to ask us to do stuff that is actually dangerous, mostly centered around concerns over the opioid crisis.
Steve
That wouldn’t surprise me. The point remains: to reduce costs admin costs will need to be reduced. I doubt it will happen automatically.
UPDATE:
Unfortunately, Kevin’s post doesn’t actually address the issue, q.v.:
which is completely consistent with the graph. Most of the increase occurred between 1990 and 1999. This:
reflects a misunderstanding of the chart. It’s not illustrating numbers of physicians but the change in the number. I think the bottom line is that the underlying numbers are pretty opaque which also isn’t surprising. I still trust Uwe Reinhardt more than I do Kevin.
I maintain that increases in the cost of health care are not tethered to increases in “emitted production” however reckoned. I leave explaining that to people better informed than I and, additionally, I don’t see how changing that can be done without much more basic changes than changing who pays. The reason for that is the behavior of bureaucracies and I know something about that.
The graph shows a 3500% increase since 1970 not a 30%-40% increase.
“I still trust Uwe Reinhardt more than I do Kevin.”
Ahhh, but Tabarrok came to the same conclusion. I would bet that I have read a lot more Reinhardt than most people, but he was human. I would generally trust him on any given topic much more than Kevin (or Alex), but I have lived and worked in health care through that era. We dont have 35 times more admin people running around.
https://marginalrevolution.com/marginalrevolution/2019/08/are-health-administrators-to-blame.html
What we should really be looking at is administrative costs anyway. If we had increase our number of administrators by a factor of 35, but overall costs slowed or dropped, who would care?
Steve
Let me restate it. Look again. It is not illustrating numbers. It is illustrating changes, i.e. second derivative effects. What it shows is that the number of physicians is increasing very slowly which is true and that the number of administrators is increasing much more rapidly which is also true. It says between 3000% and 3500%. It tells you nothing about the absolute numbers of either physicians or administrators.
If there were 1 health care administrator in 1970, that means there would be 35 today. I don’t find that as hard to believe as you do. I’m not a physician but I have seen the books of multiple hospitals, major pharmaceutical companies, medical equipment manufacturers, individual practices, group practices, and labs over a period of nearly 50 years.
It’s obvious that they’re adding to costs. They must be unless there are savings elsewhere. They may be contributing to additional revenue. The question is where are they concentrated? I don’t know the answer to that but I’d be interested in finding out. Sadly, advocates pushing their point of view (whatever it may be) don’t contribute much to understanding.
How long have you been practicing? Since 1990? If that’s the case, you would have seen the number of administrators increase about six fold. You don’t believe that’s the case? I do. If you had a receptionist in 1990 and added an IT guy, that would be a 100% increase. If the next year you added a billing specialist, that would be a 50% increase. Little by little the staff add up.
If Alex Tabarrok interpreted it the same way as Kevin did, it just tells us he has problems with reading comprehension.
I have been working in hospitals since 1973, as a doctor since 1985. You dont have to be a doctor when working in a hospital to be aware of how many administrators are around. In some ways it is worse when you are at the bottom of the totem pole. Note that Tabarrok and Drum look at administrative costs. They have not gone up by a factor of 35.
Receptionists? Almost none of our admin people have receptionists anymore. Those are pretty much limited to physician offices and clinics.
Here is a big part of what I think you are missing. These are, AFAICT, contemporaneous studies and they are from the same source.
“Finally, however, I did find a number for health administrators in an earlier edition of the SA. In the 1980 edition in Table 165, Employed Persons in Selected Health Occupations, there is a number for “Health administrators,†which says 118 thousand in 1972. Aha! Now things are beginning to make sense because from that same table there were at least 3.5 million workers (physicians, nurses, technicians and others) in health occupations and 118 thousand administrators is clearly far too low. Indeed, in a later paper Woolhandler, Campbell and Himmelstein estimate that in 1969, 18.2% of health care workers were in administration which would imply a figure of 639 thousand health administrators circa 1970, a much more plausible number.
The Woolhandler, Campbell and Himmelstein piece also finds that between 1989 and 1994 the share of health care administrators as a percent of the health care workforce increased from 25.5% to….wait for it….25.7%. In other words, no big jump and inconsistent with the huge jump seen in the graph.”
I think it much, much more likely that the number chosen as the starting number was way too low, and I also suspect that in the 90s there was a change in definition about what constitutes an administrative employee. Did sales people suddenly count as administrative just as an example? I can buy the 700%-800% estimates of Tabarrok and Drum, not 3500%. I also believe that the number of administrators has grown faster than the number of clinical staff based upon these and other numbers, so as I said above, I think that the increase in admin people has added to costs, but think it is more because of what they insist the rest of us do rather than the pure increase in numbers.
Steve