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...care hospitals Florida over the period 2000 through 2004. Results indicated that inflation-adjusted total administrative costs increased from about $22 million to $28 million on average over this time period. However, the percentage of total operating costs devoted to administrative costs was quite stable over the period, averaging approximately 23 percent in each of the five years.
Compared with those in rural areas, urban hospitals on average had higher administrative costs per adjusted admission but lower administrative costs as a percentage of total operating costs. Hospital administrative costs also differed by ownership: For-profit hospitals on average had higher administrative costs per adjusted admission than not-for-profit and government hospitals, but administrative costs as a percentage of total operating costs were highest for for-profit hospitals and lowest for not-for-profit hospitals, with government hospitals falling in the middle. For bed size, administrative costs as a percentage of total operating costs were highest for the smallest hospitals.
Results of this study will be useful to healthcare managers searching for ways to reduce unnecessary administrative costs while continuing to maintain the level of administrative activities required for the provision of safe, effective, high-quality care.
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The U.S. healthcare system is often criticized for having administrative costs that are unnecessarily high. In spite of the widespread agreement that they are a problem, administrative costs have received relatively little attention in the literature, and much of the research in this area has looked at the administrative costs of insurers. This study focuses on the provider side of the picture by examining variations in administrative costs among hospitals and distinguishes between administrative costs, which are those associated with managerial activities, and other types of support costs.
The data set for the study includes acute care hospitals in Florida over the period 2000 through 2004. An advantage of the five-year period of analysis is that it allows for the identification of trends over time. The empirical analysis compares how three different measures of administrative costs vary by urban/ rural location, ownership, and bed size. An important contribution of this study is the use of data that are detailed enough to distinguish between administrative costs and other indirect support costs.
Administrative costs in hospitals are substantial and can have a major effect on performance. For example, a report commissioned by the American Hospital Association (2001) found that paperwork added at least 30 minutes to every hour of patient care provided. Because this study provides additional information about administrative costs, it will assist healthcare managers in making better decisions, with the ultimate goal of eliminating unnecessary administrative costs.
PREVIOUS RESEARCH
Most previous research in this area has examined administrative costs for the healthcare system as a whole, with a focus on differences between the United States and Canada. Woolhandler, Himmelstein, and colleagues have published a series of articles concluding that the U.S. system has administrative costs that are considerably higher than those in Canada (Woolhandler and Himmelstein 1991; Himmelstein, Lewontin, and Woolhandler 1996; Woolhandler, Campbell, and Himmelstein 2003). Other articles have disagreed with this conclusion, pointing out that what are considered "administrative costs" differ between the United States and Canada (Sheils, Young, and Rubin 1992) and noting that the Canadian system may have hidden social costs (Danzon 1992).
Another topic of interest has been the effect of managed care on administrative costs. A study by Alexander and Lemak (1997), which examined outpatient substance abuse treatment organizations, found that managed care oversight was positively associated with the amount of time spent on administrative activities. For physicians, on the other hand, Remler, Gray, and Newhouse (2000) found that managed care exposure had little or no effect on measures of administrative burden.
Other studies have focused on the magnitude of administrative costs in hospitals. Cromwell and Butrica (1995) examined direct expenses (i.e., salaries and other expenses directly assignable to departments) for U.S. hospitals in 1992 and found that general management departments, such as administration and patient billing, accounted for 23 percent of the total. In two recent studies using state-specific data, Kahn and colleagues (2005) estimated that, for hospitals in California in 1999, 21 percent of revenues were devoted to administration, while McKay and Lemak (2006) found that administrative cost centers accounted for 23 percent of total operating costs for Florida hospitals in 2003.
ANALYTICAL FRAMEWORK
The fundamental hospital output is patient care, with clinical education and research also important in certain cases. Although the specific services offered may vary between, for example, a small rural hospital and a large teaching hospital, the basic service is patient care. In producing this service, hospitals use inputs, which are resources such as labor, capital, and supplies. Hospital costs depend on both the quantity of inputs used and the price of the inputs. The cost of nursing services, for instance, depends both on the number of nurses employed and on the wages they earn.
For purposes of this study, costs are categorized as direct or indirect. Direct costs are those that can be traced directly to the provision of patient care (or clinical education and research, in some cases). Examples of direct costs include the staff salaries in an intensive care unit or supply costs for an operating room. Indirect costs are classified as either administrative or support. Administrative costs are those associated with managerial activities, while support costs arise from other general activities needed for a hospital to operate effectively. For example, the computer expenses associated with patient accounting and...
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