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Healthcare Administrative Spending Can Be Cut 28%, Report Says

Analysis  |  By Christopher Cheney  
   October 21, 2021

Administrative spending accounts for about a quarter of total U.S. healthcare spending, report says.

Three kinds of interventions could reduce administrative spending in healthcare by $265 billion annually, a new report says.

According to the new report, which was published this week by McKinsey & Company, total U.S. healthcare spending in 2019 was $3.8 trillion, with administrative spending pegged at $950 billion. "The goal is not to reduce administrative spending to zero but rather to gain the highest value for each administrative dollar spent without sacrificing quality or access," the report says.

More than a quarter of administrative spending could be eliminated through three kinds of interventions, the report says.

  • "Within" interventions are cost-cutting measures that can be made by individual organizations. Within interventions could achieve about $175 billion in annual savings, which represents about 18% of total administrative spending. Examples of within interventions include automation of repetitive back-office work such as human resources and finance.
     
  • "Between" interventions are cost-cutting measures that can be made through agreement and collaboration between organizations. Between interventions could achieve about $35 billion in annual savings, which represents about 4% of total administrative spending. Examples of between interventions include creating payer-provider communications platforms that provide unified messaging to patients.
     
  • "Seismic" interventions are cost-cutting measures that can be made with broad and structural agreements and changes throughout the U.S. healthcare system. Seismic interventions could achieve about $105 billion in annual savings, which represents about 11% of total administrative spending. Seismic interventions such as new technology platforms and changes in payment design are often based on partnerships between the public and private sectors to coordinate incentives for change.

"Many seismic interventions address the same sources of spending as the within and between ones but take the savings a step further. Accounting for this overlap, we estimate total savings across all three types of interventions at about $265 billion, or 28% of total administrative spending," the report says.

Some organizations have already achieved cost-cutting through within and between interventions, the report says. The keys to success in these efforts include four factors, the report says: "prioritizing administrative simplification as a strategic initiative; committing to transformational change versus incremental steps; engaging the broader partnership ecosystem on the right capabilities and investments; and disproportionally allocating resourc­es, such as capital and talent, to the underlying drivers of productivity."

Seismic interventions are more challenging to achieve than within and between interventions because they are opportunities for change related to a lack of motivation to innovate at the organizational level, the report says. Three stakeholders can drive seismic interventions, the report says.

  • "Government could set the framework in which other organizations operate. Federal and state bodies can set guardrails for payers, hospitals, and physician groups."
     
  • "Investors can prove ideas with pilots. They might create public-private partnerships to test interventions within a state and then scale up success stories nationally."
     
  • "Third parties, such as foundations and bipartisan groups, can conduct objective fact gathering and analyses. An arbiter of facts can galvanize action."

The conditions are ripe to tackle administrative spending, co-authors of the report wrote in article published by the Journal of the American Medical Association.

"Economic downturn often leads to health system change. With COVID-19 creating enormous disruption to the healthcare system, a known opportunity to capture more than a quarter-trillion dollars in the next few years without compromising the U.S. healthcare system’s ability to deliver care could be quite attractive. The sooner healthcare administration is simplified, the easier it will be for all to engage the U.S. health care system," the wrote.

Christopher Cheney is the senior clinical care​ editor at HealthLeaders.


KEY TAKEAWAYS

"Within" interventions are cost-cutting measures that can be made by individual organizations.

"Between" interventions are cost-cutting measures that can be made through agreement and collaboration between organizations.

"Seismic" interventions are cost-cutting measures that can be made with broad and structural agreements and changes throughout the U.S. healthcare system.

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