Inside the Black Box of Administrative Costs

Prologue: America's pluralistic health care system has been subjected to increasing criticism because it is very costly to administer, particularly when matched with comparable expenses in the health care systems of other industrialized nations. The focus of such cross-national comparisons has been Canada, which administers a universal health insurance plan that is considerably less expensive than the private/public mélange that makes up America's approach, although there is no agreement on the differential. Three papers in the Spring 1992 volume of Health Affairs addressed the relative administrative costs of the two systems; that debate continues in the Letters section of this volume. While the debate over administrative costs has continued—gaining far more attention, interestingly, than the other ninety cents or so of every health care dollar spent in the United States—some of the conclusions reached by analysts have been influenced as much by ideology as by analysis. Much less attention has focused on the question: Just what are the expenses that people group so casually under “administrative costs,” and what are the implications of reducing or redistributing them in some fashion? To address these questions more thoroughly, The Robert Wood Johnson Foundation convened a conference in February 1992. This paper by Ken Thorpe, which reflects original work of an outstanding nature, was presented at that meeting. Here Thorpe presents a typology of administrative costs throughout the health system and discusses the impact of costs in various sectors on systemwide spending. Such a typology is important, he writes, because “reductions in administrative expenses (assuming one could find them and transfer them) could be used to finance benefits for the uninsured.” Thorpe, who holds a doctorate in public policy (RAND Graduate Institute), is on the faculty of the University of North Carolina at Chapel Hill, Department of Health Policy and Administration.