Weekend Long Reads: How To Save A Quarter Trillion Dollars In Our Healthcare System

by Kevin Schofield

Each year, nearly $ 4 trillion is spent on health care in the United States; of this amount, about a quarter, or $ 950 million, is spent on administrative expenses. This week’s “long read” is a report by business consultant McKinsey & Company on how money could be saved through administrative simplification and other business process improvements.

The US healthcare system is a multi-payer system (over 900 of them), largely for-profit. The advantage of such a system is that it can spur innovation in technology and treatments, as we saw during the COVID-19 pandemic with vaccines to reduce infections and new drugs to treat disease. But as we all know too well, it is a flawed system in many ways: it is expensive, often inefficient, and far from complete. Many of the policy decisions that have brought us to this point are beyond the scope of McKinsey’s study, but it doesn’t take a lot of work to identify the inefficiency and expense arising from the overhead costs associated with multiple payers, providers and patients. The healthcare industry is also heavily regulated, which protects patients but creates additional overhead costs for compliance.

McKinsey’s analysis found that administrative expenses across the system could be cut by as much as $ 265 billion; that’s more than annual Medicare Part A spending ($ 201 billion) and about $ 1,300 per adult in America.

Their analysis identified that 70% of administrative expenditure occurred with three stakeholders: private payers, hospitals and physician groups. They further divided the savings opportunities between those requiring changes entirely within an organization, those requiring coordinated changes between organizations, and those requiring “seismic” changes in the functioning of the industry as a whole. Some opportunities for change cover these categories; for example, the opportunities to improve financial transactions include simplifying and streamlining the handling of complaints within a company, but McKinsey suggests that there is also a “seismic” opportunity to establish an automatic clearing house at system-wide for healthcare financial transactions passing between organizations, similar to the clearinghouses that already exist for checks and credit cards.

Bar graph illustrating the distribution of administrative expenditure by functional areas of intervention. Excerpt from “Administrative Simplification: How to Save a Quarter of a Trillion Dollars in Health Care in the United States.”

McKinsey points out that there are plenty of other ways to save money through better processes, for example, digitizing paper systems that nurses often use to organize and manage their workload.

The report also examines some of the barriers to these kinds of improvements. One would think that “internal” opportunities would be fruitful at hand, but these often require significant upfront investments before savings can be realized. When money is limited, it is difficult to move these efforts forward. The report also suggests that “seismic” changes, which often require leadership from government agencies, tend to fail for lack of “motivation to innovate.” For example, Medicare / Medicaid requires physicians to report more than 1,700 quality measurements; according to the report, this report takes the equivalent time of one physician seeing nine patients on a weekly basis. It’s easy to add more reporting requirements; it is much more difficult for a government agency to find the motivation (and political air coverage) to remove some of them.

Administrative simplification: How to save a quarter of a billion dollars in health care in the United States

Kevin schofield is a freelance writer and the founder of Overview of Seattle City Council, a website providing independent information and analysis on Seattle City Council and City Hall. He also co-hosts the “Seattle News, Views and Brews” podcast with Brian Callanan, and appears occasionally on Converge Media and KUOW’s Week in Review.

?? The image shown is attributed to Images Money (under a Creative Commons license, CC BY 2.0).

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