Such disarray inevitably leads to inefficiency and higher costs. One solution, which some 10% of the nation’s hospitals have adopted, is to put their entire electronic infrastructure in the hands of an outside expert. For example, Princeton HealthCare System, a central New Jersey group that runs a 300-bed teaching hospital as well as psychiatric and long-term care facilities, is in the third year of a five-year IT outsourcing contract among whose goals is to implement a clinical information system across all of the group’s hospitals and other facilities. When the contract is successfully completed, electronic patient records will be available instantly throughout the system, improving patient care.

Other innovations also have the potential to reduce administrative costs. A number of organizations are experimenting with “smart” cards that hold patient records on an embedded computer chip. During the past two years, Mount Sinai Medical Center and nine other New York City metropolitan hospitals have given thousands of patients the wallet-size plastic cards. Though there are up-front costs for technology to read the cards, and each patient must have a photo taken and fill out forms, the hope is that the card will make it easier to verify a patient’s identity and reduce mistakes that lead to insurance claim denials and medical errors. Paul Contino, vice president for informational technology at Mount Sinai, says the hospital is currently evaluating the pilot program to determine the administrative savings produced by the cards as well as the benefits of a portable medical record.

There are also national efforts to reduce complexity and costs. The three-year-old Healthcare Administrative Simplification Coalition, a group of payers, government agencies, providers and employers, is exploring ways to standardize billing and payment, insurance product design, and payer and provider contracting, among other initiatives. “Only recently have there been enough people saying we really need to do something about administrative costs because it would be a lot easier to save a few billion dollars by standardizing and streamlining these processes than to make changes on the clinical side—getting 800,000 to 900,000 physicians to change their practice patterns, for example,” says William Jessee, a physician and the president of the Medical Group Management Association, a co-founder of the coalition.

In a related effort, the Council for Affordable Quality Healthcare, an alliance of health plans and trade associations, has been working for more than five years to help standardize the physician credentialing process. It has now registered more than 570,000 doctors’ credentials through a form available on the group’s Website. Other CAQH initiatives include CORE, the Committee on Operating Rules for Information Exchange—which helps participants verify a patient’s insurance coverage—and a new attempt to simplify claims transactions.

States are getting involved as well. Legislation in California, Massachusetts and Ohio that was designed to ensure universal coverage for state residents is also supposed to reduce administrative hassles and costs. In Colorado last year, the governor signed into law a bill requiring provider contracts to be drafted in plain language with a standard set of terms—a move toward simplification that should trim costs.

Yet some groups, including the American College of Physicians, are impatient with piecemeal solutions and the slow pace of change. They would like the United States to sweep away the overly complex current system and replace it with a pluralistic system that includes the government and private payers, or with something similar to the Canadian health care system, in which the government is the sole payer. On this side of the border, they point to Medicare, which spends about 4¢ of every dollar on paperwork and claims processing. “The only strategy for reducing administrative costs that really makes sense is to move toward a single-payer system,” says UCSF’s Kahn.

But none of the health reform proposals being floated by presidential candidates calls for a single-payer system, and it appears likely the nation will have to make do with less comprehensive fixes. Kahn thinks legislation requiring standardized health benefits packages would help, and Niccie McKay, a professor at the University of Florida who has analyzed administrative costs at hospitals, points to multiple ways the processes could be streamlined. “There are so many things that could be done at the federal policy level, just in terms of standardization, that could make things better,” she says. “The problem is getting everyone to cooperate.”

  Dossier

1. “Analyzing Administrative Costs in Hospitals,” by Niccie McKay and Christy Lemak, Health Care Management Review, 2006. This landmark study integrates costs accounting, finance and organizational theory to define health care administrative costs.

2. “Fixing Health Care From the Inside, Today,” by Steven J. Spear, Harvard Business Review, 2005. The author examines the new tactics health organizations have adopted to manage quality and efficiency.

3. “The State of Regional Health Information Organizations: Current Activities and Financing,” by Julia Adler-Milstein et al., Health Affairs online, 2007 [http://content.healthaffairs.org/cgi/content/abstract/hlthaff.27.1.w60v1]. This up-to-date look at the challenges confronting regional health information exchanges finds fewer than two dozen functioning at even a modest scale.

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