Wednesday, February 11, 2009

Administrative Costs 1: Lower than Charity?

I was asked the other day, why workers' compensation system have such large administrative costs. The questioner added, "Handing out money can't be that expensive". Of course, I thought, even charities have to spend administrative dollars 'give' money away...but the question made me wonder just how much administration costs ought to be for a charity or a workers' compensation system.

Like I said, even charities have costs to do their important work. Those costs may include a lot of items. To administer donations charities need staff; staff need a place to work, equipment to work with and systems to support them. And if you are a charity and have staff, you need to recruit, train, and retain them. And you will need more people to account for the money, develop programs, and manage policies.

The same is true for a workers' compensation system. Whether you are a public exclusive state fund, a self-insured/self-administered firm or a private insurer it costs money to make certain the right injured workers get the right benefits in the right time frame. But what proportion of expenditures ought to go to administration?

When I was asked this the other day, I decided to look at five prominent charities in Canada and see what their costs were. Most of us are familiar with charities like World Vision, Canadian Diabetes Association, Ducks Unlimited, Canadian Cancer Societies and the Heart and Stroke Foundations in various provinces. These are some of the best and they do fabulous work. Together, they spend about three quarters of a billion dollars (2007/2008). I obtained the tax returns for them so could actually begin to figure this out for myself.

What should one count as administration? This is not a simple question. For this exercise, however, I defined administrative costs to include the following:

  • Travel and vehicle,

  • Interest and bank charges

  • Licenses, memberships, and dues

  • Office supplies and expenses

  • Occupancy costs [office rent]

  • Professional and consulting fees, and

  • Salaries, wages, benefits, and honoraria

Everything else, in my view, can be defined and defended as core benefits distributed by the program. This would include advertising, which is focused on changing attitudes, beliefs and ultimately behaviours in favour of or in congruence with the charities goals. The range was from 19% to 49% but the weighted average for these five charities was 30.6% of expenditures going towards administrative costs as defined above.

If roughly 30% of total expenditures is a reasonable administrative load for top charities, how would workers' compensation systems compare? That will be the topic of my next post.

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