down into such subcategories as general administration, claims administration, commissions, risk and profit charges, interest credit, and premium taxes. The percentage of costs attributed to the last two categories varies little or not at all by group size, but percentages for the other categories vary greatly. Overall, administrative expenses run a higher percentage of incurred claims expense for small employer groups than for large groups (CRS, 1988c). For example, administrative costs make up about 40 percent of claims expense among insured groups with 2 to 5 employees versus 16 percent for those with 100 to 499 employees and 5.5 percent for those with 10,000 or more employees. By way of comparison, administrative expenses for individually purchased health insurance make up approximately 40 percent of incurred claims expense but total approximately 2 percent for Medicare and 3 to 11 percent for Medicaid (Thorpe, 1992b).

Many factors contribute to the higher expenses associated with insuring small groups. For example, 100 groups of 20 employees generate higher marketing and service costs for insurers than does one group of 2000. In addition, small groups typically experience higher employee turnover than larger groups, and each added or dropped health plan member involves additional administrative expense. Also, because claims expense for small groups is less predictable (i.e., riskier), the risk charge increases.

Many believe that current administrative processes generate considerable inefficiency, that is, that the benefits of the procedures are not sufficient to justify the outlays. Estimates of the savings in hospital administrative and overhead costs if the United States adopted a Canadian-style single payer system range from $13 billion to $37 billion, and estimates of savings in insurance administrative and overhead costs range from $23 billion to $34 billion (Etheredge, 1992). This variability reflects the difficulties posed for national comparisons by differences in national health systems and health accounting practices (GAO, 1991a; Woolhandler and Himmelstein, 1991; Barer and Evans, 1992; Danzon, 1992; Poullier, 1992; Thorpe, 1992b). Estimates of additional expenditures that might result if certain administrative costs were eliminated also vary greatly, depending on what the estimates assume, for example, about the continued use of deductibles and coinsurance and utilization review. Government officials, insurers, and others have recently met to develop simpler, more standardized, and—it is hoped—less costly procedures for administering public and private health benefits, but it is too early to project the consequences.

Tax Expenditures

Another important element in the financing of health care benefits is the exclusion of employer-paid health insurance premiums from the calculation of an employee's taxable income. For 1992 the federal "tax expendi-



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