To estimate administrative costs, we sought data on insurance overhead, employers' costs to manage benefits, and the administrative costs of hospitals, practitioners' offices, nursing homes, and home care. Our estimates use 1999 figures, the most recent comprehensive data. We used gross-domestic-product purchasing-power parities6 to convert Canadian dollars to U.S. dollars, and we used SAS software for data analyses.7

Insurance Overhead

We obtained figures for insurance overhead and the administration of government programs from the Centers for Medicare and Medicaid Services8 and the Canadian Institute for Health Information.9

Employers' Costs to Manage Health Care Benefits

For the United States, we used a published estimate of employers' spending for health care benefits consultants and internal administration related to health care benefits in 1996.10,11 We used this figure to estimate 1999 costs on the basis of the growth in health care spending among employers in the private sector.12 No comparable figures are available for Canada. We assumed that employers' internal administrative costs plus the costs of consultants (as a share of employers' health care spending13) are the same in Canada as in the United States.

Hospital Administration

For the United States, we calculated the administrative share of hospital costs by analyzing data from fiscal year 1999 cost reports that 5220 hospitals had submitted to Medicare by September 30, 2001, using previously described methods.14,15 For Canada, we and colleagues at the Canadian Institute for Health Information analyzed cost data for fiscal year 1999 (April 1, 1999, through March 31, 2000) for all Canadian hospitals except those in Quebec (which use a separate cost-reporting system), using methods similar to the ones we used to calculate costs in the United States. When questions arose about the comparability of expense categories, we obtained detailed descriptions of the Canadian categories from Canadian officials and consulted U.S. Medicare auditors to ascertain where such costs would be entered on Medicare cost reports. For both countries, we multiplied the percentage spent on administrative costs by total hospital spending.8,9

Administrative Costs of Practitioners

We calculated the administrative costs of U.S. physicians by adding the value of the physicians' own time devoted to administration to estimates of the share of several categories of office expenses that are attributable to administrative work. We determined the proportion of physicians' work hours devoted to billing and administration from a national survey16 and multiplied this proportion by physicians' net income before taxes.8,17 We calculated the costs of administrative work by nurses and other clinical employees in doctors' offices by assuming that they spent the same proportion of their time on administration as did physicians. We calculated the value of this time on the basis of total physicians' revenues8 and survey data on doctors' payroll costs from the American Medical Association.17 We attributed all of physicians' expenses for clerical staff to administration.17 Although administrative and clerical workers accounted for 43.8 percent of the work force in physicians' offices (unpublished data), we attributed only one third of office rent and other expenses (excluding medical machinery and supplies)17 to administration and billing. Accounting, legal fees (excluding the cost of malpractice insurance), the costs of outside billing services, and other such costs are subsumed in “other professional expenses,”17 half of which we attributed to administration.

To estimate the administrative expenses of dentists (and other nonphysician practitioners), we analyzed data on administrative and clerical employment in practitioners' offices from the March 2000 Current Population Survey using previously described methods.18 Administrative and clerical employees' share of office wages was 43 percent lower in the case of dentists' offices and 14 percent lower in the case of other nonphysician practitioners' offices than those of physicians' offices. We assumed that the administrative share of the income of dentists and other nonphysician practitioners mirrored these differences.

To calculate administrative costs in Canada, we obtained figures from a Canadian Medical Association survey on the proportion of physicians' time devoted to administration and practice management19 and multiplied this proportion by physicians' net income before taxes.9,20 To calculate the cost of nonphysician staff time, we used figures from Canadian Medical Association surveys of physicians' expenditures for office staff,20,21 which did not distinguish between clinical and administrative staff. We analyzed special 1996 Canadian Census tabulations to determine administrative and clinical workers' shares of total wages in doctors' offices.18 We attributed all of the administrative workers' share to administration and assumed that nonphysician clinical personnel spend the same proportion of their time on administration as did physicians.

To calculate the costs of office rent and similar expenses, we attributed one third of physicians' office rent, lease, mortgage, and equipment costs20,21 to administration and billing. We attributed half of other professional expenses20,21 to administration. To calculate the administrative expenses of nonphysician office-based practitioners in Canada, we used the same procedure that we used for the U.S. data and based the analysis on 1996 Canadian Census data.

Nursing Home Administration

No published nationwide data on the administrative costs of U.S. nursing homes are available for 1999, and only Medicare-certified facilities (which are not representative of all nursing homes) file Medicare cost reports. However, California collects cost data from all licensed homes. Therefore, we analyzed 1999 data on 1241 California nursing homes,22 grouping expenditures into three broad categories: administrative, clinical, and mixed administrative and clinical. We used methods similar to those employed in our hospital analysis14,15 to allocate expenses from the “mixed” category to the clinical and administrative categories. To generate a national estimate, we multiplied the administrative share of expenditures by total nursing home spending.8

For Canada, we and colleagues at the Canadian Institute for Health Information analyzed data for fiscal year 1998 (April 1, 1998, through March 31, 1999) on administrative costs for homes for the aged (excluding Quebec) from Statistics Canada's Residential Care Facilities Survey, using methods similar to those we used for the U.S. data. We multiplied the share spent for administration by total nursing home expenditures in Canada.9

Administrative Costs of Home Care Agencies

We analyzed data from fiscal year 1999 cost reports that 6633 home health care agencies submitted to Medicare. We excluded agencies reporting implausible administrative costs that were below 0 percent or above 100 percent and then calculated the proportion of expenses classified as “administrative and general.”

For Canada, we obtained data on administrative costs in Ontario; the categories used appeared similar to those used in the U.S. data.23 We totaled the administrative costs of Community Care Access Centres,24 which contract with home care providers; home care providers (White G, Ontario Association of Community Care Access Centres: personal communication); and provincial government oversight of home care. We multiplied the proportion spent for administration by total home care spending throughout Canada.25

Total Costs of Health Care Administration

To calculate total spending on health care administration, we totaled the administrative costs of all the categories detailed above. In analyzing the administrative share of health care spending, we excluded from both the numerator and the denominator expenditure categories for which data on administrative costs were unavailable: retail pharmacy sales, medical equipment and supplies, public health, construction, research, and “other,” a heterogeneous category that includes ambulances and in-plant services. These excluded categories accounted for $261.2 billion, 21.6 percent of U.S. health care expenditures, and $21.0 billion, 27.6 percent of Canadian health care expenditures.

Trends since 1969

The analysis for 1999 relied on several sources of data that were not available for earlier years. To assess trends over time, using previously described methods,18 we analyzed U.S. Census data on employment in health care settings from the March Current Population Survey for every fifth year since 1969 and the Canadian Census for 1971, 1986, and 1996.