Background: Previous estimates of administrative costs in U.S. hospitals have been based on figures for California, and nationwide extrapolation has been controversial. If the costs of bureaucracy are high, major policy reforms may yield substantial savings.
Methods: We obtained detailed data on hospital expenses for fiscal year 1990 from reports submitted to Medicare by 6400 hospitals. We calculated each hospital's administrative costs by summing expenses in the following Medicare cost-accounting categories: administrative and general, nursing administration, central services and supply (excluding the purchase cost of supplies), medical records and library, utilization review, and the salary costs of the employee benefits department. We classified costs in most other categories as clinical. Some small categories of expenses (e.g., gift shop) were excluded from both our clinical and administrative groupings, and for others (e.g., plant operations), a proportional share was allocated between the two groupings.
Results: Nationwide, administration accounted for an average of 24.8 percent of each hospital's spending in fiscal 1990. Average hospital administrative costs ranged from 20.5 percent in Minnesota to 30.6 percent in Hawaii. Administrative salaries accounted for 22.4 percent of the average hospital's salary costs. Administrative costs were similar in states with high and low rates of enrollment in health maintenance organizations (HMOs).
Conclusions: Hospital administrative costs in the United States are higher than previous estimates and more than twice as high as those in Canada. Greater enrollment in HMOs, with more competitive bidding by hospitals for managed-care contracts, an important element of proposed managed-competition health care reforms, does not seem to lower hospital administrative costs.