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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 that, about one-quarter, or $950 million, is spent on administrative expenses. This week’s “long read” is a report by the business consultant McKinsey & Company on how money could be saved through administrative simplification and other business process improvements.

American health care is a multi-payer (over 900 of them), largely for-profit system. The benefit of such a system is that it can drive innovation in technology and treatments, as we have seen during the COVID-19 pandemic with vaccines to reduce infections and new drugs to treat the disease. But as we all know only too well, it is a broken system in many aspects: It’s expensive, often inefficient, and far less than comprehensive. Many of the policy decisions that brought us to this point are beyond the scope of McKinsey’s study, but it doesn’t take much work to identify the inefficiency and expense derived from the overhead of having multiple payers, providers, and patients. The health care industry is also heavily regulated, which protects patients but creates additional overhead for compliance.

Chart depicting the precentage of annual health care spending across different stakeholder groups.
Chart depicting the percentage of annual health care spending across different stakeholder groups. Sourced from “Administrative Simplification and the Potential for Saving a Quarter-Trillion Dollars in U.S. Health Care.

McKinsey’s analysis found that the administrative expenses across the system could be reduced by as much as $265 billion; that is more than the annual spend on Medicare Part A ($201 billion) and about $1300 per adult in America. 

Their analysis identified that 70% of the administrative spending took place in three stakeholders: private payers, hospitals, and physician groups. They further broke out the opportunities for savings into those requiring changes entirely within an organization, those needing changes coordinated between organizations, and those requiring “seismic” changes to the way the industry as a whole operates. Some opportunities for change span those categories; for example, opportunities to improve financial transactions include simplifying and streamlining claims processing within a company, but McKinsey suggests there is also a “seismic” opportunity to establish a systemwide automatic clearing house for health care financial transactions passing between organizations, similar to the clearing houses that already exist for checks and credit cards.

Bar graph depicting the breakdown of administrative spending by functional focus areas with periwinkle-blue sections representing financial transactions ecosystem, teal bars representing industry-agnostic corporate functions, bright-blue bars representing industry-specific operational functions, blue bars representing customer and patient services, sky-blue bars representing administrative clinical support functions, and black bars representing other.
Bar graph depicting the breakdown of administrative spending by functional focus areas. Sourced from “Administrative Simplification: How to Save a Quarter-Trillion Dollars in U.S. Health Care.”

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

The report also looks at some of the impediments to making these kinds of improvements. One would think that the “within” opportunities would be low-hanging fruit, but these often require significant up-front investments before any savings is seen. When money is tight, it’s difficult to get those efforts going. The report also suggests that the “seismic” changes, which often require government agencies to lead, tend to fail for a lack of the “motivation to innovate.” For example, Medicare/Medicaid requires physicians to report on more than 1,700 quality measures; according to the report, that reporting takes the time equivalent to a physician seeing nine patients on a weekly basis. It’s easy to add more reporting requirements; it’s much harder for a government agency to find the motivation (and the political aircover) to remove some of them.

Administrative Simplification: How to Save a Quarter-Trillion Dollars in U.S. Healthcare

Kevin Schofield is a freelance writer and publishes Seattle Paper Trail. Previously he worked for Microsoft, published Seattle City Council Insight, co-hosted the “Seattle News, Views and Brews” podcast, and raised two daughters as a single dad. He serves on the Board of Directors of Woodland Park Zoo, where he also volunteers.

📸 Featured image is attributed to Images Money (under a Creative Commons, CC BY 2.0 license).

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