Administrative inefficiencies are intrinsic to the multi-payer system.

1. At the macro level: Wide variation in spending on governance and administration 1.1. Administrative costs are influenced by the type of financing system The resources that countries allocate to administrative activities at the system level vary substantially. While the OECD average was around 3% of health spending in 2014, it was double that level in France and higher still in the United States (Figure 6.2). On the other hand, a number of countries report administrative expenditures of less than half that level.

Note: Compulsory health insurance schemes predominantly refer to social health insurance (SHI) funds but can also refer to compulsory health insurance provided by private insurers. Voluntary prepayment schemes mainly refer to voluntary health insurance schemes. The OECD average includes 30 countries. Source: OECD Health Statistics (2016), http://dx.doi.org/10.1787/health-data-en. 1 2 While establishing completely comparable data remains a challenge (Box 6.1), a number of factors undoubtedly play a role in explaining the differences. For example, the costs involved in collecting revenues may be higher in countries with inefficient tax collection systems, large informal economic sectors, or a geographically scattered population. Skills can impact the efficiency of administration: a shortage of skilled workforce and low staff productivity due to insufficient information and communications technology (ICT) support will have an upward effect on costs. Cultural factors such as acceptance of schemes or the level of corruption within a country may impact the cost of regulation and monitoring (Nicolle and Mathauer, 2010). Finally, the legal culture and risk of litigation, with the resulting level of premiums and claims, can affect administrative costs. While differences in the size and scope of planning and management of health care systems can lead to some variations in overall costs, the way that health care is financed in a country – whether mainly tax-based, by social health insurance (SHI) funds, or by private insurance –appears to play a more pivotal role. Indeed, Figure 6.2 suggests that financing schemes organised around SHI funds or some kind of compulsory insurance generally feature higher administrative expenditure than those managed by general governments (covering both central and regional/ state-level governments). Frequently offered by for-profit corporations, voluntary private insurance incurs a relatively high share of total administrative expenditure, albeit accounting for a comparably low share of overall health spending. Thus systems featuring a high proportion of health care financing via SHI funds and/or private insurance generally demonstrate a higher share of administrative spending overall. The following sections explore in more detail the institutional characteristics that lead to these differences. 1.2. The multiplication of funds has a significant impact on administrative costs The high cost of administration is often cited as one of the main disadvantages of (multi-payer) insurance-based, public health financing compared with health care systems where coverage is based on residency and that are mainly financed through taxes (Saltman et al., 2004). Figure 6.3 shows that those systems with a more predominant SHI scheme tend to have higher administrative costs. On average, in countries where social security spending constitutes less than 40% of public health expenditure, administrative costs accounted for less than 2% of public spending on health in 2014, whereas it was more than double that in countries where social security funds accounted for the bulk of public health spending. Interestingly, while administrative costs appear similar for systems with residencebased entitlements, a much larger spread occurs across insurance-based health care systems. Ultimately, this variation reflects the number of different funding pools and the presence of competition, ranging from single-payer to multi-payer systems either with automatic affiliation or with a choice of insurers. Generally, countries with a single SHI

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fund (e.g. Hungary, Poland and Slovenia) show lower levels of administrative spending; indeed, levels are similar to those seen in health care systems with residence-based entitlement, such as Australia and Denmark. While administrative costs are higher in multi-payer systems, the distinction between those with choice and those with automatic affiliation is less clear-cut. For example, in the Czech Republic, Germany and the Netherlands, people can choose between competing insurers; the resulting administrative costs range from 3.3% of public health spending in the Czech Republic to more than 5% in Germany. In Austria, Belgium, France and Japan, multiple insurance funds also exist, but affiliation with a specific insurer is generally linked to a profession and not a matter of individual choice. While Austria and particularly Japan report administrative cost levels below those in countries where insurers do compete, Belgium and France have government administrative costs at a similar level. The United States and Mexico have notably higher government administrative costs – pointing to other inherent organisational and cultural factors. The litigious environment, but also scrutiny from regulatory bodies and efforts devoted to utilisation management and quality improvement, may partially explain why administrative costs in the United States are so high (Kahn et al., 2005). In Mexico, distinct health financing systems exist for different sections of the population, creating many administrative duplications (OECD, 2016). 1.3. Administrative costs for private insurance are much higher than for public schemes Not surprisingly, given that profits more often than not play an integral role, administrative costs associated with the private health insurance (PHI) market are significantly higher than those in public systems, albeit they generally cover less people and purchase fewer services. Across the OECD, administrative costs of PHI schemes range from 9% of spending in Australia to more than 30% in Spain, the United Kingdom and Austria (Figure 6.4). Administrative costs in public schemes represent at the most 9% of health spending in any country. This is in line with the analysis of Mathauer and Nicolle (2011), who stipulated that administrative costs are about three times higher in PHI schemes compared to their public counterparts globally, with large variations across and within countries. In summary, analysis of the existing data suggests that: ● Little difference arises in governments’ administrative costs between tax-based systems with residence-based entitlement and single-payer, insurance-based systems. ● Single-payer systems have lower administrative costs than multi-payer systems. ● Multi-payer systems with free choice of insurer tend to have higher administrative costs than multi-payer systems with automatic affiliation. ● Private insurance schemes have much higher administrative costs than any public schemes. The next section sheds more light on how the range of activities linked to different financing systems can help explain these differences. 1.4. Cost differences relate to the scope of administrative functions associated with different financing schemes In any health financing environment, the regulator and the entity running the scheme(s) must perform a number of tasks to ensure achievement of system goals and to best operate in their business environment. Table 6.1 lists various tasks related to collection and pooling of funds, purchase of goods and services, and stewardship of the system. It then shows, from a purely conceptual point of view, how these tasks might apply and affect costs across various types of health financing schemes.2 As mentioned above, the extent to which insurers are permitted to generate profits has a significant impact on total administrative “costs”. The rest of the section elaborates on these initial findings and provides a more detailed explanation of structural differences in the level of administrative costs required to operate different financing schemes.

Little difference arises between administrative activities of different single-payer systems Residence-based entitlement schemes and single-payer insurance systems perform roughly the same services with regard to pooling, purchasing and stewardship. There is therefore reason to assume that similar resources would be required to perform these functions. Differences can exist in relation to member enrolment and subsequent collection of funds. Coverage in residence-based schemes occurs automatically and revenues are usually collected as part of general taxation. In social insurance systems, where coverage is compulsory or voluntary, additional resources are required to identify, register and enroll members or to verify entitlements at the point of service (Paris et al., 2010). The management of contributions – and perhaps even their collection – can add a burden to insurance-based schemes. Additionally, in an insurance scheme, if coverage is not universal, specific mechanisms or programmes may have to be put in place to ensure that all citizens have access to care before contributions can be collected. Multi-payer systems duplicate many of the same activities Health care systems in which coverage is provided by a single entity generally have lower administrative costs than multi-payer systems, partly because they enjoy more economies of scale (Mossialos et al., 2002). Enrolment, collection of contributions, claims processing, benefits management, sales and marketing, and insurance funds’ compliance with government and non-government regulations and accreditation need only a single accounting and processing system in single-payer schemes, whereas multi-payer systems by their nature multiply the same functions (Bentley et al., 2008). The same holds true for purchasing and contracting, which creates an additional burden at the provider level. Moreover, in multi-payer systems, costly and technically demanding risk-equalisation and resource transfer mechanisms are frequently required to counter issues of patient selection, ensure equal basic benefit packages, or indeed avoid budgetary difficulties of payers. Such systems exist, for instance, in Belgium, the Czech Republic, Germany, Japan, the Netherlands and Switzerland (Paris et al., 2010; van de Ven et al., 2013) but are not required in single-payer systems. Patient choice can drive up administrative costs Multiple social insurance funds with free choice of insurer exist in a number of OECD countries, including the Czech Republic, Germany, the Netherlands, the Slovak Republic and Switzerland. Competition among insurers is credited with stimulating innovation and responding better to patient needs (Paris et al., 2010; Saltman et al., 2004; Carrin and Hanvoravongchai, 2002). The complexity of fostering competition in health insurance markets while guaranteeing universal access is nevertheless associated with higher administrative costs. Competition in the insurance market only works when consumers can make informed decisions. But the need to provide information on benefits, premiums or contribution rates as well as the related advertising and marketing all comes with a cost. Moreover, when switching insurers is an option, such information needs to be up-to-date and communicated regularly to clients (Paris et al., 2010). Naturally, where affiliation is automatic these requirements do not normally apply. Of course, competition can lead to a more efficient organisation of insurers, with costs offset by more streamlined procedures. The sharp decrease in insurers’ administrative overheads in the Netherlands from 4.5% in 2006 to 2.9% in 2010, for instance, was linked to the effects of such competition (Jeurissen and Trienekens, 2014). But in many instances, competition in health insurance markets with multiple insurers is limited without leading to any detectable gains in efficiency (Mathauer and Nicolle, 2011). Competing insurers may also contract selectively with providers. This can lead to a multiplication of transactions, such as contract negotiations and claims management, and may require additional data collection on prices and quality. But again, these additional administrative costs may lead to savings elsewhere in the system. It was hypothesised, for instance, that the threat of selective contracting and associated negotiations alone put pressure on prices and increased the efficiency of care delivery in the Netherlands (Jeurissen and Trienekens, 2014). Private health insurance schemes face strong competition but lack economies of scale PHI can play different roles, for example providing coverage for a basic benefit package when public schemes are absent or for additional services not covered by public schemes. What is common is that in countries where PHI plays a role in health care financing, a high degree of competition is typically present. In contrast to the public system, many administrative functions are less likely to be shared, leading to a duplication of processes and a lack of economies of scale. More resources are therefore required for: distribution of information; registration and enrolment of patients; billing and underwriting of members’ insurance policies; and negotiation, contracting and payment of providers. PHI schemes also spend more on marketing and acquisition, product innovation and agents’ commissions (OECD, 2004).