The Effects of Administrative Burden in Health Care: Evidence from Medicare Contractor Transitions

Working Paper
Recent draft available here. BibTeX citation available here. FIOA’d contract transition documents are avaiable here.

Abstract: The US health care system is characterized by high administrative costs. This administrative burden may reduce total health care spending by curtailing wasteful care, or it may impose additional, unnecessary costs on providers. Using exogenous changes to the jurisdictions of Medicare Administrative Contractors, I show that providers respond to increased administrative burden by adopting billing technology, hiring billing staff, billing more aggressively, and consolidating into larger practices. These responses fully offset the mechanical reduction in payments from higher claim denials, such that Medicare spending does not fall. I rationalize these results using a model of firms’ investment in billing, which I estimate to find billing costs of $89 billion annually. These results indicate marginal administrative burdens impose large costs on providers without producing offsetting reductions in insurer spending.

I discussed this paper on the Visible Hand podcast, which can be found here.