Are Health Administrators To Blame?

The graph at right made the twitter rounds a few days ago (1.3k RTs and 2.7k likes for Noah). The graph looked off to me immediately. Between approximately 1992 and 1994 the number of administrators went up by a factor of 4? (Or, if something goes from a 500% growth since 1970 to a 2000% growth rate since 1970, is that a factor of 3? Confusing! Anyway, a big jump.) Big jumps are often a sign that definitions, not reality, have changed. Indeed, what is an administrator?

There’s another problem with this type of graph which shows not absolute numbers but percent growth since 1970. Everything in this graph depends on getting one number, the number of administrators in 1970, exactly correct! But the first number is the one that is the farthest in the past, often the hardest to find and the most suspect. But if that first number is underestimated then every other number in the chart is overestimated.

People send me this kind of thing all the time. “See,” they say, “Why are the Prices So D*mn High is wrong! It isn’t Baumol!”–and I am always reluctant to follow-up because tracking down the underlying data, figuring out what it means, if there are mistakes etc. is a huge time sink. It was the excellent Conversable Economist who go the ball rolling on the latest iteration of this graph, however, and he cites the graph to noted health economist Uwe Reinhardt’s last book, Priced Out so I thought it could be worthwhile to go deeper.

Unfortunately, Reinhardt simply calls this a “famous graph” and it’s clear that he just found it on the internet like everyone else! Oh dear. Following up further, I did find the original Woolhandler-Himmelstein analysis written in 1991 and taking the data up to 1987. WH cite the Statistical Abstract of the United States  (Table 64-2, 109th edition). You can find the SA 109th edition here but it doesn’t have the data. At least, I couldn’t find it. Ok, several hours wasted.

Finally, however, I did find a number for health administrators in an earlier edition of the SA. In the 1980 edition in Table 165, Employed Persons in Selected Health Occupations, there is a number for “Health administrators,” which says 118 thousand in 1972. Aha! Now things are beginning to make sense because from that same table there were at least 3.5 million workers (physicians, nurses, technicians and others) in health occupations and 118 thousand administrators is clearly far too low. Indeed, in a later paper Woolhandler, Campbell and Himmelstein estimate that in 1969, 18.2% of health care workers were in administration which would imply a figure of 639 thousand health administrators circa 1970, a much more plausible number.

The Woolhandler, Campbell and Himmelstein piece also finds that between 1989 and 1994 the share of health care administrators as a percent of the health care workforce increased from 25.5% to….wait for it….25.7%. In other words, no big jump and inconsistent with the huge jump seen in the graph.

It was at this point that I found Kevin Drum’s excellent analysis. Drum was also suspicious of the graph and after a lot of work he concludes that the graph exaggerates by at least a factor of 3 and probably more. Drum estimates an increase in administrators of 831%; using my initial number and Drum’s end number, I estimate an increase of 682%. All numbers to be taken with a grain of salt. Is that a big increase? Compared to what? Drum gives his best takeaway of the data as this graph, administration costs as a percent of health care costs :

I agree with Drum–this way of presenting the data looks plausible, sensible and much less sensationalist than the original graph. Note that there has been an increase in administrative costs. Why? Here’s Drum’s bottom line:

Bottom line: the health care system has grown tremendously over the past 50 years, but that’s mostly not because we have a lot more doctors. It’s because we have MRI techs and ultrasound specialists and more kinds of nurses and more kinds of pills and enormous proton beams to cure cancer. (Those proton beams are massively expensive and require large staffs, but that doesn’t mean you need any more oncologists per patient.) To manage all this new stuff, we need bigger admin and support staffs. As a result, admin and support have grown about 50-100 percent on a relative basis. That’s the real number.

I believe the original graph uses a number for administrators that is too low in 1970 and includes what I suspect was a change in definitions around 1992 (project the 1970 to 1990 line forward or the 1994 to 2009 line backward and you will get a more accurate graph.) More generally, the graph is misleading because it suggests that “administrators” are to blame for high health care costs and if only we could focus on the “real producers” of medicine, the physicians, costs would be much lower. Blaming administrators for high prices is a lot like blaming “the middlemen.” It’s easy to say and easy to tweet but blaming the middlemen reflects a naive perspective on how goods and services are actually produced in a modern economy.

Administrative costs in the United States are high compared to other countries like Canada. (Helland and I discuss this in Why are the Prices So D*mn High.) We might even be able to lower administrative costs by moving to a single-payer, universal system. But there is no free lunch and there is no returning to an administrative free Eden.

Comments

the petty, defensive bickering of academics never ceases to amaze me.

They all have such fragile egos too. Especially in those fields that are less rigorous and therefore have more women like POSCI and SOC.

What is missing in this discussion is why so many staff hires. The problem is the plethora of regulations and mandates by the government.

You really make it seem really easy along with your presentation but I in finding this matter to be actually
something which I think I would never understand. It kind of feels too complicated and very large for me.
I am looking ahead to your subsequent put up,
I will try to get the dangle of it!

Cost disease is cuck disease.

Alex, One of your local hospitals, in the mid 90's was administered by a CEO, a vice chief, a CFO and a Chief of Nursing. When it was bought by Johns Hopkins and immediately the C-suite exploded. More and more committees were formed, more staff added to be assistants to the assistants of the CEO etc etc. I'd love to see the Admin budget then and now relative to the revenues of the hospital. Meanwhile, they built a completely new hospital, bought up the best medical practices, overpaid for a behemoth EMR system, instituted business oriented austerity tactics and encouraged if not pushed out the senior most, experienced staff. Universal sentiment in the trenches is Money means more to them than taking care of patients and staff. I got fed up and left. The "businessification" of Medicine has been horrible for medical practice, staff and patients. "Non Profit" is a joke. Profit is moved to the mothership and adminstrators, not at all to those generating it.

Boycott Disney!

The old model of the physician practice, the small practice with one or two physicians, a couple of assistants and few support staff, has gone the way of the horse and buggy, replaced by much, much larger group practices and hospital affiliated practices, which, because of size, have more support personnel to "administer" them. This didn't just happen, but was supposed to happen with health care reform, bringing medical practices into the 21st century and making them more efficient, with automation (including automated medical records) and other modern business practices. Economists criticized the old model as "fragmented", and encouraged consolidation to increase practice efficiency. As I've commented before, we have gone from the fragmented model to a consolidated model, reflected by the fact that more than half of all doctors now work for hospitals. This has been a massive transformation in a very short time, so one would expect a few glitches on the way. I sometimes joke that I will retire the day the last of my independent medical practice clients disappears by merging into the hospital or a very large, multi-specialty group practice. I will turn out the lights in my office on my way out.

My state does not prohibit what's known as the corporate practice of medicine: a physician working for someone other than herself or a physician-owned practice. With only a few exceptions, I could employ physicians to work for me or an entity I control. [California is at the other extreme, although they use ownership models that come awfully close to the corporate practice of medicine.] Thus, in my state the corporate practice of medicine is becoming a very popular structure, with physicians working for corporations that might be owned by venture capital firms or even a public company - the VC owned practice is where the action has been recently. One might approve this development, since the VC firm, one assumes, would be expert in maximizing profits with the most efficient models and methods.

+1 In the previous model of the sole practitioner or small practice office, the secretary/receptionist was the administrator, but was probably reported as a secretary.

States prohibit the corporate practice of medicine because it might interfere with the physician's independent medical judgment. Anyway, that's the rationale for the prohibition. Are physicians who are employed by hospitals more likely to refer patients to medical facilities owned by the hospital or to independent medical facilities? Duh. One will recall the hoopla about bending the cost curve. Do you know what was responsible for the bend? Independent (of hospitals) medical facilities such as outpatient surgery centers. Hospitals had an answer for that. What? They bought many of the independent facilities. Consolidation can make medicine more efficient and consolidation can make medicine less efficient. It depends. But with hospitals it never depends: hospitals are black holes.

I think states which prohibit corporate practice are just protecting the local docs. To say that docs are influenced by corporate structure is to deny they are influenced by insurance companies or non-profit hospitals.

Surgicenters specialty centers, outpatient surgery and surgicenters, etc are good to have in a market as niche competition but the real barriers are certificate of need and other restrictions, along with economies of scope you need for some procedures (something goes bad and you need another specialty or a special equipment or a surgery room ASAP. Otherwise you would be seeing hospitals springing up all over.

BarackAndMeCare outlawed all this malarkey.

I remember because it was when Margaret Thatcher shot up Stoneman Douglass high school back when I was VP.

Go to joe at 30030303...3.com

The Secret Service interviews all Presidential and Vice-Presidential impersonators. One more service of the Deep State.

if these numbers do not include the rise in the number of health insurance workers but are only office & hospital workers, this number should be compared to the change in insurance coding regulations at a minimum, or change in health insurance workers. The almost daily change in insurance requirements w/r/t coding in order to get paid is laughable. We delivered a baby boy and performed his circ but couldn't get paid because he was enrolled as a girl and this is only one of a thousand stories I can tell you. Insurance companies are pirates and hide behind their coding justifications. A patient has left breast cancer and the insurance requires a left anatomical modifier when the chemo port is placed on the patients right side. If you don't understand the irony of what I just said, then you don't understand the problem with healthcare in its entirety.

Coding is a cost imposed on the provider of services to enable the insurance computer system to do the work, reducing their administrative costs. Clean up work on the data is probably done in India or the Philippines.

Wait a second, let me put you on hold, while I answer someone else's coding question.

Thanks Bill. Didn't you find it interesting that in my state, Harvard Pilgrim has 1200 workers to serve 1.2 mil patients while Tufts has 2400 workers serving 1.2 mil patients? I take your point about insurance costs and efficiency and CEO pay!

Are they both the same: Is Pilgrim a provider supplied and controlled health plan administering insurance (also having to sell the insurance and administer the claims), and is Tufts solely a medical provider that leaves the insurance business to someone else. You're comparing an apple to an orange: One is insurance( sales, claims and administration) and healthcare; the other is just healthcare. One is vertically integrated and the other isn't.

I see that both have plans and both are merging. My apple and orange comparison may be inappropriate, although it looks like one plan is actually administered by United Health Care which leads me to suspect that its employee numbers do not incorporate the insurance administration component. I am suspicious though of your claim that the same number of patients are administered with the identical service offerings by two different plans without one of them offering a different level of service or engaged in a different business in addition to providing medical care.

'My apple and orange comparison may be inappropriate'

No, it perfectly captures what makes the American health care system so exceptional.

Nah, Barack and me fixed this years ago with BarackBidenCare.

I remember because it was just before Margaret Thatcher decided to go through with Brexit. And just after we visited Parkland as President/VP after the shooting in 2018. Was that Sandy Hook?

Go to ..send Joe to 30..00..3..0.3.gov. I’m off to sniff some women’s necks.

they are both health care insurers in MA and youre right they announced a merger. Harvard Pilgrim is the insurer-they partnered some time ago with United to cover in-state employees for employers who are large nationwide firms but HP runs the show. The numbers I cited were from the Boston Globe If I recall but even if the numbers are off by 10% or so, you get the message. I appreciate your looking into it. I know that doctors can be their own enemies but when I think of how docs lives have changed since my grandfather practiced and then I see what my sister-in-law makes on Wall Street, I think sometimes economist don't see the whole picture, i.e. what is comparative advantage when your trading partner steals your IP and hacks your computers. Do economists factor that in and I am being serious?

I've only been tangentially in the industry (some medical electronics development) but that was my concern as well. The burden in a multiple provider, multiple payer, insurance based system is huge. "Administration" is where incentive wars play out. "You pay." "No, you pay." "More!" "Less!"

A simpler system, the old "choose one," collapses this complexity, but is politically taboo for that reason.

Americans want all the options, which require all the administration.

Speaking of Uwe Reinhardt... from Wikipedia:

"In July 2015 Reinhardt's 2013 syllabus and first lecture for a class titled "Introductory Korean Drama" received attention from several bloggers. By way of explanation, Reinhardt introduced the class by stating:

After the near‐collapse of the world's financial system has shown that we economists really do not know how the world works, I am much too embarrassed to teach economics anymore, which I have done for many years. I will teach Modern Korean Drama instead.

Although I have never been to Korea, I have watched Korean drama on a daily basis for over six years now. Therefore I can justly consider myself an expert in that subject."

'(1.3k RTs and 2.7k likes for Noah)'

Does this mean anything at all? And if one answers yes, why?

'Everything in this graph depends on getting one number, the number of administrators in 1970, exactly correct!'

Not looking at the graphs, but I seriously doubt whether exactness (at least in terms of a number that is off by 11 administrators) is going to make any difference to anything at all.

'estimate that in 1969, 18.2% of health care workers were in administration'

Wow - who knew the American health care was that screwed up 50 years ago - and it certainly represents a significant number of people who would not want a more efficient system with many fewer administrators.

'Is that a big increase?'

Of course.

'Compared to what?'

All of the other health care systems which do not waste so much money on administrators, of course. Though this being an American health care discussion, someone is likely to point out how the extra billions that other systems don't spend is trivial. Which is always amusing, because only in American health care or defense spending debates is billions of dollars a trivial amount.

'We might even be able to lower administrative costs'

In the U.S.? Never is the answer that fits the data till now.

You can rage that a few billion *should* be considered large, but at root those amounts are about 0.1% of the total. Even assuming amounts of such size are total deadweight loss (questionable), they hardly explain much of anything.

'You can rage that a few billion *should* be considered large'

No raging- that few billion here or there represents an extremely entrenched interest that will absolutely not ever voluntarily give up its slice of the health care pie, regardless of what benefit it actually brings to health care.

'Even assuming amounts of such size are total deadweight loss (questionable)'

Not questionable in the least - how much money does NHS pay out to its shareholders? This information is from 2017, but should provide a bit of information - 'Combined, the nation’s top six health insurers reported $6 billion in adjusted profits for the second quarter. That’s up more about 29 percent from the same quarter a year ago — far outpacing the overall S&P 500 health care sector’s growth of 8.5 percent for the quarter, according to Thomson Reuters I/B/E/S data.' https://www.cnbc.com/2017/08/05/top-health-insurers-profit-surge-29-percent-to-6-billion-dollars.html That is only one concrete example of 'deadweight loss' in the American health care system, which is the same one where 9% of America's citizens are uninsured, in contrast to the effective 0% of UK citizens. A figure that comes from the following link, which points out that the profits for health insurance companies are capped under ACA - who knows what will happen under the Trump Administration if it is re-elected. https://www.verywellhealth.com/health-insurance-companies-unreasonable-profits-1738941

Basically, that is 24 billion dollars which has nothing to do with health care, as understood from the perspective of the NHS. Or the German Krankenkassen, for that matter.

But don't worry, after Oct. 31, you will likely be introduced to a more American style of running a health care system, one where profit is the only justification that is beyond question when debating health care. Lucky you.

And after that point, you too can dismiss a few billion here and a few billion there as of no importance at all.

So, this data is from 2018, and though clearly some administration will always be required, want to guess how much of the 3.6 trillion dollars spent on health care goes to 'Private Health Insurance Administration'? https://hctadvisor.com/2018/01/3-67-trillion-2018-us-healthcare-spending-category/

Let us just say that there is probably a bit of fat in that 252 000 000 000 dollar administration total (and note that figure apparently does not cover any of the money spent by government on such administration, though what that number is to be found is not covered).

But again, this is a discussion of American health care, so reducing that 252 000 000 000 dollars to 248 400 000 000 dollars (from 7% to 6.9%) is clearly a waste of time when that is less than the profit of one quarter in 2017 from the 6 largest health insurance companies in America.

Since we know what happens when providing major media reported examples of the actual health care system in the U.S., let us just say that saved amount would buy a lot of vaccines for school age children (basically, enough to cover all of them at no cost for every child in the U.S., but there is no single source, and the sources may not be especially reliable), and eliminate the need for web pages like this - https://www.vaccines.gov/getting/pay

Certainly you can pay for a lot of things with four billion, but the discussion you have engaged is whether such an amount is trivial, or not, in the context of where admin costs drive US costs higher than other nations.

Whether that money would be best spent on mandatory, non-elective vaccination really depends on the disease. Certainly under the NHS I've always had to fork out privately for the BCG vax, and travel vaccinations, as the QALYs just agent worth it otherwise, travel is an elective decision etc.

'Certainly you can pay for a lot of things with four billion'

Well, not dividends for the shareholders of the 6 largest health insurance companies in a single quarter of 2017 - that is 2 billion dollars too little.

'in the context of where admin costs drive US costs higher than other nations'

Notice my example was profit, not even 'admin costs,' which are apparently 7% of total American expenditures. A number which was not better defined, unfortunately.

'Whether that money would be best spent on mandatory, non-elective vaccination really depends on the disease. '

I was talking about free - a surprising percentage of American children do not have immediate access to free vaccines. Hence the web page explaining how children can get vaccinations, and how to pay for them.

If you're not actually talking about administrative costs, I'm not sure what you're getting at here - some mere variation of the lame old saw that private shareholder profits lead to high US medical cost ("WRONG!"), or something else?

It's not really surprising that access to some vaccines are not "free" - this is the case in every system, e.g. https://www.nhs.uk/common-health-questions/nhs-services-and-treatments/which-vaccinations-are-free/

(This is well known to most folk who do not imagine that healthcare systems outside the US are the medical equivalent of Sugarcandy Mountain, of course).

So simply linking to a page that talks about payment for vaccines as if it meant something, without any further information, has no real meaning.

Well, the point about profits started with this text - 'Even assuming amounts of such size are total deadweight loss (questionable)' Profits are not an element of either the NHS, nor of the Krakenkassen in the German for profit health care system, so the 'deadweight loss' would seem to be hard to dispute at all. And since the profits of the American health insurers is public information, it is possible to attach a reliable figure to them.

It was an attempt to point out that these American health care discussions always seem to end up dismissing 20 billion here, 10 billion as being meaningless.

'It's not really surprising that access to some vaccines are not "free"'

Um, in the U.S., we are talking about TB for example. Again, you may want to read that link, which is official advice on how parents can get their children vaccinated, particularly when they are not covered by health insurance - which is 9% of the American population, by the way.

'So simply linking to a page that talks about payment for vaccines as if it meant something, without any further information, has no real meaning.'

Does the NHS need to provide such information so that parents can vaccinate their children against TB? The American health care system does.

Depends on who and where you are. Its not on the schedule of NHS mandatory vaccination, so if you're getting it, its probably private with a private payment attached (though local authorities vary.

https://www.theguardian.com/society/2005/jul/06/schools.education

https://www.ed.ac.uk/vet/studying/admissions/before-you-arrive/immunisations-vaccinations - "Note that NHS GPs will not provide TB vaccination as this is no longer routinely administered to the population."

https://www.nhs.uk/conditions/vaccinations/bcg-tuberculosis-tb-vaccine/

http://vk.ovg.ox.ac.uk/vk/bcg-vaccine

here in mass an insurer must rebate patient when admin exceeds 20% and I have rec'd some of those rebates. I take your point that admin is only a portion, so is med liab insurance, so is the amount I write off when patients cant pay me their ever rising deductibles. Pete Peterson had it right when he said we in America spent an inordinate amount on the last few years of life when we should let folks go home and die peacefully in bed like the Brits do but do you want your mom to forego what might possibly extend her life?

'here in mass an insurer must rebate patient when admin exceeds 20%'

As noted in the second link - 'The fact remains that salaries are part of the administrative costs that health insurance companies are required to limit under the Affordable Care Act's medical loss ratio (MLR) rules. And so are profits.

Under the MLR rules, insurers that sell individual and small group health insurance coverage must spend at least 80 percent of premiums on medical claims and quality improvements for members. No more than 20 percent of premium revenue can be spent on total administrative costs, including profits and salaries. And for insurers that sell large group coverage, the minimum MLR threshold is 85 percent. Insurers that fail to meet these guidelines (ie, they spend more than the allowed percentage on administrative costs, for whatever reason) are required to send rebates to their members. In the first six years of the MLR rule implementation, insurers rebated $3.24 billion to consumers.'

'but do you want your mom to forego what might possibly extend her life'

Depends on her decision, one would assume - but to actually be allowed to die in America (at least if you can still be billed) remains challenging. In part precisely because of that attitude which suggests extending life is of the highest priority.

Amusingly, the German Krankenkassen are sitting on a cushion of 20 or so billion euros of 'profit' at this point, and there is discussion about adjusting rates to cancel this excess amount. The total of reserves involved, piled up over several years at this point, would just about cover one year's profits of those American health insurance companies. Of course, do note the term 'reserves' - the money is intended to be spent on health care in the future, and not distributed to shareholders.

>lower administrative costs by moving to a single-payer, universal system.

Yeah, because if there is one thing that the US Federal Government absolutely excels at, it's lowering administrative costs. Jesus.

Back to American exceptionalism, of the newer more perverse kind. We can't do what other countries manage, because we're (short bus) special.

Well as me and Strom Thurmond used to say, poor kids are just as smart as white kids.

Send go to joe to 30..0..3..0..3.gov

This attempt at parody is of course highly illuminating, "we can't" because we're racists.

hey joe
where you going with that sophistry on your shoe?
what biden actually said was poor kids are just as bright and talented as
white kids...wealthy kids black kids asian kids"
you left out the last half of the sentence which is pretty convenient if your are the newyorktimes.com

I agree. A March 2025 Senate Homeland Security hearing revealed 6,500,000 names of people over the age of 112 years still on the Social Security (Medicare, etc., too?) rolls - Wikipedia lists about 10 0eople that ild still alive in the United States.
If Walmart, CVS, etc., mass marketed blood & urine tests along with Radiology, a lot of the guess work would be eliminated in the diagnosic cost area. New wearable sensors downloased to personal devices can monitor many conditions. Automated services can access the best advice.
This may be necessary as the number doctors and other health care workers continue to decline.
Single payer is a pipedream for better care and a boondoggle if the government runs it.

Only 13 of those people are receiving benefits. The 6.5 mil only refers to people without death records.

SS is very clever about verifying deaths. When they get a death record, they demand that the recipient report in person to the nearest SS office.

Ok, several hours wasted.

Time, or hours, if you will, can't really be wasted. It passes whether one is performing the last steps in finding a cure for dandruff or listening to Ava Max sing "Sweet But Psycho". Even reading through the comments here at Marginal Revolution isn't a "waste" of time, per se. If it was, the Protestant work ethic would prohibit public employee pensions.

I have read Disney was a secret Nazi sympathizer.

I have heard about it, too. It is shocking to think that beloved Disney can be associated to a foreign power to harm America.

I have decided never to watch a Disney movie again. A movie ticket is not worth my soul.

The US now uses the world standard ICD-10CM (International Classification of Diseases) code which in theory should make it easier for Americans to get quality care cheaper in foreign countries, both patients and insurers would be better off, but in practice this doesn't seem to be happening much. I wonder why?

Aside from border towns, foreign medical care will remain niche. Cheap and easy and safe stuff makes little sense. More difficult, expensive, risky and more complex care too difficult to do very far from home.

That's all fine and dandy fighting over numbers and all. But when you consider that one line maps a number which is strictly guarded by perhaps the strongest monopoly professionals union in history and the other is just office workers, I'm amazed the two lines can get on the same graph at all.

I just spent some time in sunny Spain, where I talked to a variety of doctors in my family about my personal experiences with US doctors, so they could compare what happens. Even the private practice feels large and wasteful to them: Ratios of assistants/doctors, and the low value of what assistants do. In almost every case, the tests ordered by a US doctors is also vastly larger than the ones they normally use. The Baumol effect applies there just as well as it applies here in the US, and yet, price-wise, they still embarrass us.

Why are the prices so much crazier here? No Baumol talk stares at the reality that the system has bad incentives all over the place.

Thanks for spending some time busting myths Alex. There seems to be extreme negative selection on who decides to leave a comment on this blog, so I just wanted to let you know there are normal people who read and appreciate these posts.

It gets worse, because the time when the huge jump supposedly occurred, was when healthcare cost growth slowed down.

The media, especially meteorologists, use averages to distort the facts often. Never rely on one statistic.

It occurs to me you could probably replicate that same graph with the NFL. The number of paid NFL players probably hasn't risen much since 1970 but the # of non-players has almost certainly risen a great deal.

But that would neglect the fact that NFL football in 1970 is not the same size product it is today. For example, in 1970 there was no digital rights for video games. That alone is an additional 'industry' added to the base of the actual football games by football players.

Likewise medical today is a bigger industry than it was in 1970. For example, the management of care for breast cancer survivors. Back in 1970 very few women survived breast cancer

http://nautil.us/issue/74/networks/the-flawed-reasoning-behind-the-replication-crisis

Medical cost-containment, corporate efficiency, monitor compliance, schmooze donors, put a public face on the organization, maintain a tight debt to income ratio.

The health / medical industry is very broad and with the evolution of technology, this industry is becoming increasingly complex. Health administration can cover many fields: human resources, laboratory business managers, department managers, OSHA administrators, operations directors, etc.
alkes

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