Hospital Administrative Costs Are Highest in the United States

The Commonwealth Fund has sponsored yet another study that concludes that the U.S. health system is less efficient than others. This time, the measurement is specifically hospitals’ administrative costs. As always, it recommends single-payer, government monopoly as the solution. Readers of this blog know that I am not about to defend hospitals’ bloated administrative costs. However, the Commonwealth Fund’s scholars go way off-base when it comes to capital costs:

Differences in how hospitals obtain capital funds also appear to affect administrative costs. The combination of direct government grants for capital with separate global operating budgets—as in Scotland and Canada—was associated with the lowest administrative costs. (Wales has recently transitioned to such a system, reversing previous market reforms.) Hospitals in France and Germany, where direct government grants account for a substantial share of hospital capital funding, have relatively low administrative costs despite per patient, DRG-based billing.

Administration is costliest in nations where surpluses from day-to-day operations are the main source of hospital capital funds: the United States and, increasingly, the Netherlands and England. In such health care systems, the need to accumulate capital funds for modernization and expansion stimulates administrators to undertake the additional work that is needed to identify and pursue profit opportunities.

The authors ignore that these surpluses, in U.S. hospitals, are used to pay creditors. Borrowing money from the capital markets, even if at a preferred coupon because the lender does not have to pay tax on his interest income, is more “expensive” than getting a capital grant from the government, which appears to be “free.” Even if we take into account the government’s interest rate to borrow funds, it will be higher than the private non-profit’s rate. However, that is a benefit to society, not a cost. Because investors must look at the credit risk of each project separately, the cost of capital will be more accurately priced. If the capital budget is funded by government grants, there is no telling how the money gets handed out.

It is not clear how much differences in the apparent cost of capital (and the related transaction costs of raising capital) amount to in the Commonwealth Fund study. They need to be pulled out if we are to make good sense of this international comparison.

John R. Graham is a Senior Fellow at the Independent Institute.
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