Abstract
Health care spending continues to rise, and opportunities to decrease costs without negatively impacting patient care are a priority. Addressing administrative spending, approximately 25% of US health care spending, is an opportunity. To identify savings, hospitals and policymakers need data to quantify administrative expense categories and establish benchmarks for comparisons. However, it is unknown whether the Medicare Cost Reports—the only universal, public source for US hospital financials—accurately capture administrative expenses. We found that, at the national level, administrative expenses for 5639 hospitals were $166.1 billion, or 17.0% of total hospital expenses. A total of 4417 (78.3%) hospitals reported only a single overall “administrative and general” expense, averaging 18.9% (SD: 5.8%) of total hospital expenses, while 1222 (21.7%) provided detailed data on administrative expenses averaging 17.1% (SD: 5.0%) in sum. For those reporting subcategories, “other administrative and general” represented $37.6 billion (66.1%). Of the 3971 subcategories reported, 31.2% appeared mislabeled. In summary, hospitals report widely variable administrative expenses (7.0 percentage points between the 25th and 75th percentile), with few detailed, and often mislabeled, data to guide the identification of savings opportunities. As structured today, the Medicare Cost Reports are not a consistent, reliable, or actionable dataset to aid hospitals or policymakers in quantifying and addressing excess administrative spending.
Keywords: Medicare cost reports, administrative spending, hospital expenses
Introduction
The US health care system experiences substantially higher spending than other countries, but does not produce better health outcomes on common measures such as life expectancy at birth. There is a critical need to identify ways to reduce health care spending without negatively impacting patient care. Recent data suggest that approximately $1 trillion, or 20% to 25% of health care dollars, is spent annually on administrative services in the United States.1-7 Despite evidence showing that known interventions could save up to $210 billion (22%) annually, administrative spending as a proportion of total US health care spending has not substantially declined in 30 years.1-27 In addition, post–COVID-19, increased economic pressures are forcing hospitals nationwide to reduce administrative expenses to maintain sustainable margins.28-31
One potential reason for the slow progress is a lack of valid data on administrative expenses on which to base operational decisions.32 For organizations, data transparency is necessary to (1) identify detailed administrative expense categories, (2) establish benchmarks and comparisons for those categories, and (3) define specific opportunities for savings. Private organizations in most industries, including health care, invest each year in data and consultants to help them develop such benchmarks and define opportunities for savings and quality improvement. Similarly, policymakers need data to base policy-related decisions aimed at helping to optimize administrative expenses. Overall, these data need to be consistent, reliable, and actionable across a wide range of hospital types.
Theoretically, such data should be obtainable through the Centers for Medicare and Medicaid Services (CMS) Hospital Cost Reports (Medicare Cost Reports), which are collected annually and made public via the Healthcare Cost Report Information System (HCRIS). These reports have several uses within CMS, including rate setting for facilities within the inpatient and outpatient prospective payment systems (PPS) and determining Disproportionate Share Hospital (DSH) payments.33 It is a distinctive opportunity of the US health care system that such data exist universally and publicly, and that they could be applied to aid the system in its efforts to reduce expenses and improve quality. Publicly available data, if they were to be useful and reliable, would inform hospitals with less resources on how they might capture similar operational efficiencies as larger organizations have seen.
While there are uses for the Medicare Cost Reports, to the best of our knowledge, no one has shown their usefulness for addressing excess administrative spending. Previous research has used the Medicare Cost Reports to reliably estimate total national administrative expenses.8-10,23,34 However, none of these analyses have evaluated the quality of the administrative expense data for the purpose of operational decisions, which requires benchmarking and comparing performance with peer hospitals' performance. In this article, we reviewed the administrative expense data from the Medicare Cost Reports for consistency, reliability, and actionability at the national, hospital, and subcategory levels as a tool for hospital operators and policymakers.
Administrative expense data in the Medicare Cost Reports
The Medicare Cost Reports contain financial and other operational and quality data submitted by hospitals annually to CMS using the Hospital 2010 form. The form contains nearly 30 sections called “worksheets” to be completed by most hospitals. The blank template is 196 pages long and is accompanied by a 632-page instruction manual. Administrative expense data for all hospitals submitting the Hospital 2010 Medicare Cost Report form can be found in Worksheet A, “Hospital expenses.” Worksheet A has nearly 100 cost centers. Within Worksheet A, 1 cost center—line 5 and its subcategories—is intended to capture administrative expenses.35 Line 5 can contain a maximum of 9 “subcategories,” including administrative and general; admitting; cashiering and accounts receivable; communications; data processing; management services; nonpatient telephones; other administrative and general; and purchasing, receiving, and stores (Figure S1). A hospital could report multiple enteries within a subcategory.
For our analysis, the appropriate data files were downloaded from HCRIS as of April 30, 2024, merged, and queried.7,34,36 Reference files to identify facility type, state, and cost code categories were extracted from PDFs, requiring manual coding to cross-walk. Following previously established methods, 4 data-cleaning steps were undertaken.7,34,36 Starting with 6121 hospital reports, we first removed 276 hospitals reporting data for fewer than 300 days or more than 420 days. Second, in cases of providers submitting multiple reports, only the most recent submitted report was used, removing 65 duplicate reports. Next, 25 hospitals reporting negative data in a subcategory, likely indicative of mistyped information, were removed. Finally, to reduce the effect of outliers, 116 hospitals in the bottom and top 1% of administrative expenses as a percentage of total hospital expenses were removed. The final dataset contained 5639 unique hospitals (Note S1).
While several other line items, such as line 13 “nursing administration” and line 16 “Medical Records & Medical Records Library,” may be considered administrative expenses, for consistency we limited our analysis to line 5 “administrative and general” and its subcategories to ensure we were using the expenses most clearly delineated as administrative. Subcategories that had multiple entries with the same title were summed to calculate a single number per subcategory. For all values, column 7 (“net expenses for allocation”) was used.
Hospitals were divided into 2 mutually exclusive categories: (1) those that only reported overall “administrative and general” in line 5 and (2) those that provided more detailed information by subcategory. For hospitals only reporting “administrative and general,” this was termed their “administrative expenses.” For hospitals providing more detailed information, those subcategories were summed and the result was termed their “administrative expenses.” “Total hospital expenses” is the sum of all expenses across Worksheet A as reported in line 200.
Learnings from analyzing the Medicare Cost Reports
National level
We summed all 5639 hospitals' administrative expenses and compared them with previously published totals.3,7,11,21,24,25,36 At a national level, the overall amount of hospital administrative expenses is consistent with previous estimates. The 5639 hospitals collectively reported $974.5 billion of total hospital expenses, of which $166.1 billion was categorized as administrative expenses. In aggregate, administrative expenses were 17.0% of total hospital expenses for these hospitals (Table 1). Prior work on this topic estimates hospital administrative expenses accounting for $100 billion to $300 billion, although these use different sources and methodologies.3,11,21,24,25 This indicates that the data are consistent and reliable for the overall US health care system.
Table 1.
National-level variation.
| Count | Total expenses, $ billion (%) |
Administrative expenses, $ billion (%) | Aggregate administrative expenses as percentage of total hospital expenses | |
|---|---|---|---|---|
| All hospitals | 5639 (100.0%) | 974.5 (100.0%) | 166.1 (100%) | 17.0% |
| By facility type | ||||
| Short-term (general and specialty) | 3084 (54.7%) | 864.6 (88.7%) | 146.4 (88.1%) | 16.9% |
| Rural primary care | 1308 (23.2%) | 35.2 (3.6%) | 6.2 (3.7%) | 17.5% |
| Long-term and rehabilitation | 627 (11.1%) | 17.1 (1.8%) | 3.2 (1.9%) | 18.9% |
| Psychiatric | 538 (9.5%) | 19.0 (1.9%) | 3.4 (2.0%) | 17.9% |
| Other | 82 (1.5%) | 38.8 (4.0%) | 6.9 (4.2%) | 17.9% |
| By ownership | ||||
| Government | 1184 (21.0%) | 181.3 (18.6%) | 27.9 (16.8%) | 15.4% |
| Nonprofit religious | 568 (10.1%) | 116.7 (12.0%) | 23.0 (13.8%) | 19.7% |
| Nonprofit other | 2244 (39.8%) | 561.9 (57.7%) | 94.3 (56.8%) | 16.8% |
| Proprietary | 1643 (29.1%) | 114.6 (11.8%) | 20.8 (12.5%) | 18.2% |
| By line 5 (“administrative and general”) reporting | ||||
| Hospitals that only reported overall “administrative and general” | 4417 (78.3%) | 625.3 (64.2%) | 109.1 (65.7%) | 17.5% |
| Hospitals that provided more detailed information by subcategories | 1222 (21.7%) | 349.2 (35.8%) | 56.9 (34.3%) | 16.3% |
All analysis based on a final dataset of 5639 unique hospitals. Administrative expenses defined as total in “administrative and general” line 5. Total hospital expenses defined as the sum of lines 1–199 in Worksheet A.
Abbreviation: pp, percentage point.
Hospital level
At the hospital level, we calculated each hospital’s administrative expenses as a percentage of its total hospital expenses. Averages, standard deviations, medians, and percentiles were calculated. These metrics were summarized by hospital characteristics including facility type and ownership (Note S2). Kurtosis and skewness were estimated to test for fit with a normal distribution. Two-tailed t tests assuming equal variances with 95% CIs were run to compare hospital groupings by facility type, ownership type, and how they reported administrative expenses.
Among all hospitals, the average of administrative expenses as a percentage of total hospital expenses was 18.5% (SD: 5.7%) and the median was 17.8% (25th to 75th percentile range: 14.5%–21.6%) (Table 2; Tables S1 and S2; Note S3). This is approximately in line with prior work using different data sources that suggested average hospital administrative expenses of around 26%.3
Table 2.
Hospital-level variation.
| Count n (%) |
Administrative expenses as percentage of total hospital expenses by hospital | ||
|---|---|---|---|
| Average (SD) | Median (range: 25th–75th percentile) | ||
| All hospitals | |||
| Total | 5639 (100.0%) | 18.5% (5.7%) | 17.8% (7.0 pp) |
| By facility type | |||
| Short term (general and specialty) | 3084 (54.7%) | 17.9% (5.2%) | 17.2% (6.4 pp) |
| Rural primary care | 1308 (23.2%) | 17.7% (5.2%) | 16.9% (6.5 pp) |
| Long-term and rehabilitation | 627 (11.1%) | 20.9% (6.0%) | 20.8% (7.3 pp) |
| Psychiatric | 538 (9.5%) | 20.9% (7.2%) | 20.4% (9.6 pp) |
| Other | 82 (1.5%) | 19.8% (5.9%) | 19.0% (7.5 pp) |
| By ownership | |||
| Government | 1184 (21.0%) | 16.2% (5.1%) | 15.4% (5.6 pp) |
| Nonprofit religious | 568 (10.1%) | 20.7% (5.7%) | 20.0% (6.7 pp) |
| Nonprofit other | 2244 (39.8%) | 17.7% (5.0%) | 17.0% (6.3 pp) |
| Proprietary | 1643 (29.1%) | 20.5% (6.0%) | 20.0% (7.5 pp) |
| Hospitals that only reported overall “administrative and general” | |||
| Total | 4417 (100.0%) | 18.9% (5.8%) | 18.1% (7.3 pp) |
| By facility type | |||
| Short-term (general and specialty) | 2410 (54.6%) | 17.9% (5.3%) | 17.4% (6.5 pp) |
| Rural primary care | 838 (19.0%) | 17.7% (5.3%) | 17.5% (6.6 pp) |
| Long-term and rehabilitation | 598 (13.5%) | 20.9% (5.9%) | 20.9% (7.1 pp) |
| Psychiatric | 518 (11.7%) | 20.9% (7.2%) | 20.6% (9.4 pp) |
| Other | 53 (1.2%) | 19.8% (6.1%) | 19.4% (7.1 pp) |
| By ownership | |||
| Government | 852 (19.3%) | 16.5% (5.4%) | 15.6% (6.3 pp) |
| Nonprofit religious | 412 (9.3%) | 21.2% (5.7%) | 20.7% (6.7 pp) |
| Nonprofit other | 1572 (35.6%) | 17.9% (5.1%) | 17.2% (6.2 pp) |
| Proprietary | 1581 (35.8%) | 20.5% (6.0%) | 20.1% (7.5 pp) |
| Hospitals that provided more detailed information by subcategories | |||
| Total | 1222 (100.0%) | 17.1% (5.0%) | 16.3% (6.2 pp) |
| By facility type | |||
| Short-term (general and specialty) | 674 (55.2%) | 17.9% (4.8%) | 16.5% (6.0 pp) |
| Rural primary care | 470 (38.5%) | 17.7% (4.9%) | 15.9% (5.9 pp) |
| Long-term and rehabilitation | 29 (2.4%) | 20.9% (6.4%) | 17.5% (8.7 pp) |
| Psychiatric | 20 (1.6%) | 20.9% (6.3%) | 16.7% (9.0 pp) |
| Other | 29 (2.4%) | 19.8% (5.4%) | 18.7% (8.9 pp) |
| By ownership | |||
| Government | 332 (27.2%) | 15.4% (4.0%) | 15.1% (4.5 pp) |
| Nonprofit religious | 156 (12.8%) | 19.5% (5.6%) | 18.9% (6.6 pp) |
| Nonprofit other | 672 (55.0%) | 17.3% (4.9%) | 16.4% (6.4 pp) |
| Proprietary | 62 (5.1%) | 18.8% (5.4%) | 18.3% (7.4 pp) |
All analysis based on a final dataset of 5639 unique hospitals. Administrative expenses defined as total in “administrative and general” line 5. Total hospital expenses defined as the sum of lines 1–199 in Worksheet A.
Abbreviation: pp, percentage point.
For hospitals that only reported overall “administrative and general” expenses, the average administrative expense was 18.9% (SD: 5.8%) and the median was 18.1% (25th to 75th percentile range: 14.8%–22.1%). For hospitals that reported more detailed information by subcategory, the average was 17.1% (SD: 5.0%) and the median was 16.3% (25th to 75th percentile range: 13.7%–19.9%). The difference between these 2 groups was statistically significant (P < .01) (Table 2; Table S2). These data suggest that the decision of how to report administrative expenses in the Medicare Cost Reports is depicting variation beyond that of just hospital performance.
By facility type, long-term and rehabilitation hospitals had the highest average administrative expenses as a percentage of total hospital expenses (20.9%; SD: 6.0%), followed by psychiatric (20.9%; SD: 7.2%), other (19.8%; SD: 5.9%), short-term (general and specialty) (17.9%; SD: 5.2%), and rural primary care (17.7%; SD: 5.2%) (Table 2). Short-term (general and specialty) hospitals were statistically different from all other types (P < .01), except for rural primary care. (Comparisons between other groups are presented in Table S3.)
By ownership, nonprofit religious hospitals had the highest average administrative expenses as a percentage of total hospital expenses (20.7%; SD: 5.7%), followed by proprietary (20.5%; SD: 6.0%), nonprofit other (17.7%; SD: 5.0%), and government (16.2%; SD: 5.1%) (Table 2). All differences were statistically significant (P < .05), except for nonprofit religious vs proprietary (Table S4).
Subcategory level
Data were grouped by hospitals only reporting overall “administrative and general” and those that reported more detailed information by subcategory. For those hospitals that reported more detailed information by subcategory, additional groupings were made by number of subcategories reported and which subcategory had the greatest reported value.
Of the 1222 hospitals that reported more detailed information by subcategory, 674 (55.2%) were short-term (general and specialty) and 470 (38.5%) were rural primary care. By ownership, 672 (55.0%) were nonprofit other, 332 (27.2%) government, 156 (12.8%) nonprofit religious, and 62 (5.1%) proprietary (Table 3).
Table 3.
Subcategory-level variation by subcategory (only hospitals that provided more detailed information by subcategories).
| Overall | Administrative expenses as percentage of total hospital expenses by hospital | ||||
|---|---|---|---|---|---|
| Count that filled out subcategory | Count that reported that subcategory as largest | Administrative expenses, $ billion (%) |
Average (SD) | Median (range: 25th–75th percentile) | |
| Total | 3971 (100.0%) | 1222 (100.0%) | 56.9 (100.0%) | 17.1% (5.0%) | 16.3% (6.2 pp) |
| By individual subcategory | |||||
| Administrative and general | 9 (0.2%) | 8 (0.7%) | 0.8 (1.4%) | 16.2% (6.4%) | 16.7% (7.4 pp) |
| Admitting | 605 (15.2%) | 20 (1.6%) | 2.2 (3.9%) | 1.6% (2.4%) | 0.9% (1.2 pp) |
| Cashiering and accounts receivable | 598 (15.1%) | 24 (2.0%) | 3.3 (5.9%) | 2.5% (2.9%) | 1.8% (1.7 pp) |
| Communications | 105 (2.6%) | 2 (0.2%) | 0.1 (0.1%) | 0.7% (2.2%) | 0.3% (0.3 pp) |
| Data processing | 519 (13.1%) | 44 (3.6%) | 6.1 (10.7%) | 3.7% (3.5%) | 3.0% (2.8 pp) |
| Management services | 30 (0.8%) | 8 (0.7%) | 0.3 (0.5%) | 4.4% (6.1%) | 0.9% (7.9 pp) |
| Nonpatient telephones | 418 (10.5%) | 36 (2.9%) | 1.7 (2.9%) | 2.0% (4.4%) | 0.3% (0.7 pp) |
| Other administrative and general | 1059 (26.7%) | 945 (77.3%) | 37.6 (66.1%) | 12.4% (6.2%) | 12.2% (7.7 pp) |
| Purchasing, receiving, and stores | 628 (15.8%) | 135 (11.0%) | 4.8 (8.4%) | 3.6% (5.8%) | 0.6% (3.1 pp) |
| By number of subcategories reported | |||||
| One subcategory | 237 (19.4%) | 9.7 (17.0%) | 16.8% (5.0%) | 15.9% (6.0 pp) | |
| Two subcategories | 240 (19.6%) | 9.1 (16.0%) | 17.5% (5.0%) | 16.7% (7.1 pp) | |
| Three subcategories | 226 (18.5%) | 7.7 (13.5%) | 17.6% (4.8%) | 17.2% (6.0 pp) | |
| Four subcategories | 180 (14.7%) | 9.7 (17.0%) | 17.6% (5.2%) | 16.6% (6.0 pp) | |
| Five subcategories | 180 (14.7%) | 10.2 (17.9%) | 16.7% (5.0%) | 15.9% (6.5 pp) | |
| Six subcategories | 157 (12.8%) | 10 (17.6%) | 16.4% (4.7%) | 15.7% (4.8 pp) | |
| Seven subcategories | 2 (0.2%) | 0.6 (1.1%) | 20.9% (11.0%) | 20.9% (7.8 pp) | |
All analysis based on a final dataset of 5639 unique hospitals. Administrative expenses defined as total in “administrative and general” line 5. Total hospital expenses defined as the sum of lines 1–199 in Worksheet A.
Abbreviation: pp, percentage point.
For these hospitals, a total of 3971 different subcategories were reported. The most frequently reported were “other administrative and general” (1059 times, or 26.7%), “purchasing, receiving, and stores” (628 times, or 15.8%), “admitting” (605 times, or 15.2%), and “data processing” (519 times, or 13.1%) (Table 3; Table S5).
Of the $56.9 billion in administrative expenses reported by these hospitals, the largest dollar subcategory reported was a catch-all “other administrative and general” at $37.6 billion, or 66.1% of all administrative expenses. The only other subcategory over 10% was “data processing” at $6.1 billion, or 10.7% (Table 3; Table S5).
Mislabeled analysis
For the 3971 different subcategories reported by 1222 hospitals, 771 (19.4%) appeared mislabeled where the self-reported description was the official assigned name of a different subcategory. For example, “other administrative and general” was mislabeled 544 (43.9%) times, the most often of all subcategories.
In addition, another 704 (11.8%) subcategories were mislabeled where the self-reported description likely represented a different official assigned subcategory name based on a hospital's interpretation. Common examples included the self-reported description of “business office,” which is best related to “management services” but was sometimes under “admitting”; or “information technology,” which is best related to “data processing” but sometimes under “nonpatient telephones.”
In total, 1240 (31.2%) subcategories were mislabeled. This represented $24.0 billion (47.9%) of administrative expenses for these hospitals (Table 4).
Table 4.
Mislabeled analysis.
| Mislabeled subcategories, count (%) | Administrative expenses represented, $ billion (%) | |
|---|---|---|
| All mislabeled errors identified | ||
| Total | 1240 (100%) | 27.3 (100%) |
| Administrative and general | 2 (0.2%) | 0.1 (0.3%) |
| Admitting | 48 (3.9%) | 0.4 (1.6%) |
| Cashiering and accounts receivable | 92 (7.4%) | 0.7 (2.4%) |
| Communications | 13 (1.0%) | 0.0 (0.0%) |
| Data processing | 149 (12.0%) | 1.4 (5.1%) |
| Management services | 19 (1.5%) | 0.2 (0.7%) |
| Nonpatient telephones | 138 (11.1%) | 1.4 (5.1%) |
| Other administrative and general | 544 (43.9%) | 18.9 (69.3%) |
| Purchasing, receiving, and stores | 235 (19.0%) | 4.2 (15.4%) |
| Errors where self-reported description was actually the official name of a different subcategory | ||
| Total | 771 (100%) | 18.8 (100%) |
| Administrative and general | 1 (0.1%) | 0.1 (0.4%) |
| Admitting | 26 (3.4%) | 0.4 (2.2%) |
| Cashiering and accounts receivable | 27 (3.5%) | 0.3 (1.5%) |
| Communications | 7 (0.9%) | 0.0 (0.0%) |
| Data processing | 71 (9.2%) | 1.1 (5.8%) |
| Management services | 5 (0.6%) | 0.1 (0.7%) |
| Nonpatient telephones | 108 (14.0%) | 1.2 (6.6%) |
| Other administrative and general | 355 (46.0%) | 11.5 (61.5%) |
| Purchasing, receiving, and stores | 171 (22.2%) | 4 (21.3%) |
| Errors where the self-reported description likely represented a different official subcategory name based on a hospital operator's interpretation | ||
| Total | 469 (100%) | 8.5 (100%) |
| Administrative and general | 1 (0.2%) | 0.0 (0.0%) |
| Admitting | 22 (4.7%) | 0.0 (0.4%) |
| Cashiering and accounts receivable | 65 (13.9%) | 0.4 (4.5%) |
| Communications | 6 (1.3%) | 0.0 (0.0%) |
| Data processing | 78 (16.6%) | 0.3 (3.6%) |
| Management services | 14 (3.0%) | 0.1 (0.6%) |
| Nonpatient telephones | 30 (6.4%) | 0.2 (1.9%) |
| Other administrative and general | 189 (40.3%) | 7.4 (86.5%) |
| Purchasing, receiving, and stores | 64 (13.6%) | 0.2 (2.4%) |
Analysis based on 1222 hospitals that provided more detailed information in subcategories. Hospitals could report data as individual entries; thus, some subcategories may have multiple entries associated with them. If both types of errors were identified within a subcategory, the entire subcategory was included as one where the self-reported description was actually the official name of a different subcategory. While not all the dollars for a subcategory could be an error (ie, when a hospital reported 3 entries for a subcategory, of which only 2 were errors), the entire subcategory's dollars were marked as mislabeled.
Insights from analysis
In this national study using the 2019 Medicare Cost Reports, $166.1 billion (17.0%) of reported hospital expenses were for administrative services. Apart from the national estimates, the Medicare Cost Report data were not sufficiently consistent, reliable, or actionable in order to guide hospital operations and systematic efforts to reduce administrative spending. These conditions are necessary to allow individual hospitals to monitor their own administrative expenses and benchmark them against other organizations and for policymakers to devise approaches to encourage administrative savings. A few points are worth emphasizing.
Consistent
Data from Worksheet A do not include all administrative expenses. For example, certain administrative expenses, such as nursing administration, are excluded from CMS's line 5 “administrative and general” category. More importantly, CMS also allows hospitals to use their own internal definitions and methodology, which precludes validity of comparisons across hospitals. Further, when using subcategories, the definitions are too broad and not mutually exclusive. In aggregate, the data do not seem to be consistent.
Reliable
Hospitals can choose to submit administrative expenses as a single cost center. The fact that hospitals reporting only “administrative and general” had average administrative expenses as a percentage of total hospital expenses that were nearly 2 percentage points higher than hospitals reporting more detailed information (P <.01) suggests that this choice leads to variation beyond a hospital's performance. Further, even among those reporting detailed information, over 30% of the subcategories and nearly 50% of the dollars seemed to be mislabeled. These data seem not to be reliable.
Actionable
Among those reporting any subcategory detail, the largest reported subcategory was a catch-all “other administrative and general” that amounted to 66.1% of these hospitals' total administrative expenses. A hospital would not be able to judge its performance relative to a peer without more information. This suggests that the data are not actionable.
Easy to report
The data must also be well organized and easily accessible to a hospital. Accessing the data required downloading multiple files and linking them through a multistep query process that took us many weeks. Doing this with common tools available to hospitals such as Excel is very difficult. Thus, the Medicare Cost Reports are not actionable, especially for smaller organizations that may not have the time, expertise, or resources to turn the data into useful information.
Ironically, completing and filing the Medicare Cost Reports is itself administratively complex. The reports contain nearly 30 worksheets across nearly 200 pages. Many hospitals dedicate full-time employees to completing this paperwork.
Informing policymaking
Similarly, the Medicare Cost Reports are not consistent, reliable, and actionable for policymaking. For example, detailed information is not available to separate costs of quality and safety reporting vs finance expenses vs revenue cycle management. If CMS had better data to determine key drivers of excess administrative spending, it would be more straightforward to prioritize policy strategies to reduce spending. Data could help policymakers (1) understand the opportunity size of reducing administrative spending in the US health care system; (2) measure specific items that are known to increase administrative burden, such as the transaction cost of processing a claim; and (3) identify areas where industry-level change (eg, policy or regulation) may be needed to unlock the full value. Examples of priority policies to reduce administrative spending could include creating a centralized claims clearinghouse, standardizing physician licensure, or streamlining quality reporting.2,25,26
Limitations
There are limitations to these analyses and insights. First, all results reported are descriptive. We do not have detailed information to infer why we are seeing differences between groups. Nor can we comment on the “appropriate” level of administrative expenses. Second, in the absence of a standard dataset, we cleaned the data and linked different datasets following methods laid out in previous studies, documentation files, and to the best of our knowledge. Third, our interpretation of the definitions may differ from the hospitals filling in the data. In addition, we assumed the observed variability in the data cannot be solely explained by plausible performance differences between hospitals based on our experience, acknowledging that we do not have the actual individual hospital data to validate this. Finally, we used our best judgment to interpret the self-reported information by hospitals on what a subcategory represented.
Path forward
The current reporting of hospital administrative expenses in the Medicare Cost Reports suggests a non-ideal scenario: A substantial administrative burden on hospitals that yields data that are not consistent, reliable, or actionable for both hospitals and policymakers. A better data-collection instrument that elicits consistent and standardized detailed data from hospitals would allow for benchmarking and comparing hospitals with each other.
This revision would require the subcategories of the “administrative and general” cost center to be redefined and standardized. Previous research and our experience suggest that the data be organized into 5 operational categories: (1) financial transactions including claims processing and prior authorization, (2) industry-agnostic corporate functions such as human resources, (3) industry-specific operational functions such as credentialing, (4) customer and patient services, and (5) administrative clinical support functions. In turn, these 5 categories of administrative spending would comprise 20–25 subcategories which are generally known to hospital operators and would therefore be easier to gather and, most importantly, be actionable for administrative savings.32,37-39 Hospitals would then need to populate these subcategories consistently at a detailed level for this public dataset to be standardized and usable for reducing excess administrative spending. In addition, these data-collection changes themselves would reduce administrative expenses. If consistent, reliable, and actionable data on administrative expenses for hospitals were created, it could aid in the reduction of excess administrative expenses.
Supplementary Material
Acknowledgments
The authors thank Nipun Gorantla, Shreya Mathai, Isy Osubor, Tommy Wydra, and Laure Zhang for research support.
Contributor Information
Nikhil R Sahni, Economics Department, Harvard University, Cambridge, MA 02138, United States; Center for US Healthcare Improvement, McKinsey & Company, Boston, MA 02110, United States.
Brooke Istvan, Graduate School of Business, Stanford University, Palo Alto, CA 94305, United States.
Heather Bello Thornhill, Center for US Healthcare Improvement, McKinsey & Company, Boston, MA 02110, United States.
Karen E Joynt-Maddox, Cardiovascular Division, Department of Medicine, Washington University School of Medicine, St. Louis, MO 63110, United States; Center for Advancing Health Services, Policy and Economics Research, Institute for Public Health, Washington University, St. Louis, MO 63110, United States.
David Cutler, Economics Department, Harvard University, Cambridge, MA 02138, United States; National Bureau of Economic Research, Cambridge, MA 02138, United States.
Ezekiel J Emanuel, Healthcare Transformation Institute, Department of Medical Ethics and Health Policy, Perelman School of Medicine and The Wharton School, University of Pennsylvania, Philadelphia, PA 19104, United States.
Supplementary material
Supplementary material is available at Health Affairs Scholar online.
Funding
None.
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Notes
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