Administrative Costs of Accountable Care Organisations

Admin back office costs are not inherently wasteful, they enable the functioning of complex healthcare systems, accountability, supporting data and intelligence, and cross provider care coordination. They can sometimes be seen as inefficiencies, unrelated to the frontline, duplicate efforts across layers, that absorb funding that could otherwise improve direct patient care.

I wanted to compare the administrative costs across the U.S. Accountable Care Organisations (ACO), the English NHS, and health systems across OECD countries, with support and access to the RSM library.

There is growing speculation (June ‘24) that the forthcoming NHS 10-year plan will recommend a shift toward ACO-like models, where major hospitals or groups of NHS trusts will lead local systems of care. The idea has good intentions to: align leadership, reduce duplication, and drive population health outcomes. But if these models are patterned closely on U.S.-style Accountable Care Organizations (ACOs), we risk repeating costly mistakes of the marketisation of the NHS in the 2000’s (PbR), and previous lauding of ACO’s in the 2010’s.

The evidence across countries with different models below.

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Accountable Care Organisations were introduced in the US to tackle fragmentation by giving providers responsibility for costs and outcomes. Studies referenced here, show that the majority of ACO expenditures go to personnel (55.5%), followed by infrastructure (22.3%) and management firms (15.3%) [1]. Internal analytics platforms can cost c.$9 million annually to build and operate per 100,000 population [2]. Licensing third-party platforms still requires 0.5–1.5% of total care spend. Evaluations from 2005 to 2018 show that most Medicare (similar to government funded insurance aka NHS) delivered savings between –0.7% and +0.3%, very close to zero, effectively breaking even once shared savings payments were made [24].

A 2012 study of Rural Health found that joining an ACO increased the average cost per visit by 13.5%, compared to just 4.4% for non-ACO [1].

ACOs appear to have lean internal administrative structures of 2% of spend [1], this is close to the European averages, but they operate within a health system that remains the most administratively expensive in the world [6,7].

The NHS has been recognised for its administrative lean-ness. In the 1980’s, administration made up just 5% of health spend. But following decades of market-based reforms, estimates now range from 6% to 15% [5,10,11,27].

Integrated Care Systems (ICSs) were meant to change the admin cost profile across systems by placing collaboration ahead of competition. If evolving ICS models replicate ACO architecture too closely, they risk driving up, not down, administrative costs when the NHS is being asked to do more with less (relatively / historically).

Integrated Care Systems (ICSs) were supposed to be a deliberate pivot away from fragmented transactions towards collaboration. The intention to simplify governance, reduce duplication, and align planning around population needs rather than fee for service contracts remains commendable. Whether ICSs reduce administrative burden in reality depends on this next evolution, especially the simplification of oversight and governance, realistic longer term budgeting, and shared, interoperable, cloud data infrastructure [5,28] (for scale and savings).

Some OECD comparable countries such as Spain, Sweden, Finland, and Denmark achieve better outcomes with less. Those providers who operate under public ownership, with unified budgets, shared data platforms, and regional accountability structures [3,4] achieve administrative costs in the range of 2% to 4%. Integration is embedded in clinical governance, not layered onto it via contracts. Spain’s integrated care organisations combine hospitals and primary care in single entities. Nordic systems use local government as a delivery anchor, supported by national infrastructure like Finland’s Kanta and Denmark’s Sundhed, Scotland is aiming for something similar with its SEER2 programme.

What emerges from these comparisons?

The more fragmented the system, the higher the administrative burden.

The more contractual the integration, the greater the duplication of infrastructure.

The more structural the integration, the more sustainable the cost profile.

If integration remains a central pillar of the NHS Long Term Plan as it did in the 2019 iteration then administrative design must be part of the solution.

Structural simplification: reducing interfaces between layers;

Shared infrastructure: particularly cloud-based, interoperable digital platforms;

Outcome-based planning: with fewer process measures and more population-level impact tracking.

Some OECD comparators achieve outcomes equal to or better than the NHS at a lower administrative cost because integration is designed in, not contracted out. Their administrative spend sits between 2% and 4%, compared to 6–15% in England and 15-34% in the broader U.S. system.

The most administratively efficient systems do not eliminate oversight; they embed it. They do not incentivise coordination; they enable it through design. The challenge is not to avoid administration costs, it is to ensure they serve the system, not consume it.

As the NHS enters a new strategic phase, it must do so with a clear-eyed view of international lessons. Structural alignment is the key to sustainable, low-cost, high-impact care coordination.

References

Thanks to the Royal Society of Medicine Library team for the research search, and Perplexity a free AI tool, that it provides summaries backed by citations.

Fisher, E.S. et al. (2021) ‘An analysis of Medicare accountable care organization expenses’, Journal of General Internal Medicine. PubMed PMID: 34889580

McKinsey & Company (2021) The Math of ACOs: Several Factors Will Shape the Financial Performance of Physician- and Hospital-Led Organizations. Available online

Hernández-Quevedo, C., et al. (2023) Spain: Health System Review 2024. European Observatory on Health Systems and Policies. Available online

OECD (2022) Improving Estimates of Spending on Administration. PDF

Full Fact (2023) ‘How much is the NHS market system costing?’, FullFact.org. Available online

Commonwealth Fund (2023) ‘High U.S. Health Care Spending: Where is it all going?’, Issue Brief. Available online

OECD (2022) Understanding Differences in Health Expenditure Between the United States and OECD Countries. PDF

Himmelstein, D.U. et al. (2014) ‘Administrative costs in selected industrialized countries: a comparative perspective’, Health Care Financing Review. PMC

NHS England (2023) National Cost Collection for the NHS. Available online

King’s Fund (2024) Key facts and figures about the NHS. Available online

BMJ (2023) ‘Why does the NHS spend only 2% of its budget on admin?’, British Medical Journal. Available online

NHS Confederation (2023) ‘Are other health systems more cost-effective than the NHS?’, NHS Confed. Available online

OECD (2017) Tackling Wasteful Spending on Health. PDF

Stat News (2021) ‘Stop the failed accountable care organization experiment’, STAT News. Available online

HFMA (2024) ‘NHS England delivers balanced outturn despite major cost pressures’, HFMA.org.uk. Available online

Bailey & Moore (2021) Costing in the NHS. PDF

UK Parliament (2023) NHS Funding and Expenditure (Research Briefing SN00724). PDF

HFMA (2024) Chapter 17: Costing, Introductory Guide to NHS Finance. Available online

Statista (2023) ‘Per capita health administrative costs by country 2022’. Available online

OECD (2023) Health Spending and Financial Sustainability. Available online

Gilfillan, R.J. and Berwick, D.M. (2021) ‘Stop the failed ACO experiment’, STAT News. Available online

HFMA (2023) ‘NHS Cost Pressures and Reforms’. Available online

NHS England (2022) National Cost Collection for the NHS. Available online

UK Parliament (2023) NHS Funding and Expenditure Briefing. Available online