More ways than one to eliminate waste in health care

Reformers should target waste in providers' and insurers' billing, collecting and prior authorization practices

Eliminating administrative waste has long been the strongest argument for moving to a single-payer health care system. The savings would be enormous.

In 1991, Drs. Steffie Woolhandler and David Himmelstein, long-time intellectual leaders of Physicians for a National Health Plan (PHNP), pegged administrative costs in the U.S. health care system at anywhere from 19% to 24% of all spending. Their peer-reviewed study, published in the New England Journal of Medicine, found the U.S. spent more than three times the amount Canada spent on a per capita basis. An updated version of that original study, published by the same authors in 2020 in the Annals of Internal Medicine, upped that estimate to 34% of all health care spending or a staggering $812 billion.

Subsequent research has confirmed their analysis. The only quarrel is with its scale. A Health Affairs issue brief summarizing the literature, released about a year ago, estimated total administrative costs at anywhere from 15% to 30% of all spending, with nearly half of that deemed wasteful.

Waste can be found in every area of health care administration. It is especially prevalent in billing and collections (known as “revenue cycle” in the health care industry); clinical documentation and coding (much of that function is related to billing); and prior authorization, which is the insurance industry’s preferred (and in many cases sole) method for controlling over-utilization. Waste can also be found in the excess profits extracted by insurers and suppliers (drug and medical device companies in particular), and the documentation burdens placed on physicians and nurses, which is a primary cause of burnout and drives many from the field.

Health care consumers not only pay for this waste, their lives are made miserable by it. A recent Kaiser Family Foundation survey found fully 60% of the public reported having problems accessing their health insurance, a number that rises to 80% if they suffer from a chronic condition. The survey also found access difficulties plague participants in every type of plan, whether employer-provided, Medicare, Medicaid or Obamacare’s individual plans. This wouldn’t surprise Medicare for All (M4A) backers since private insurers now oversee benefits for more than half of seniors and over 70% of Medicaid beneficiaries.  

Cut the knot with one blow?

For PNHP, Sen. Bernie Sanders (I-VT) and other single-payer advocates, the solution is clear. Switch to M4A and you would immediately eliminate much of that waste. No more hassling between 900 insurers and the system’s 6,000 hospitals and 11,000 physician groups over prior authorization. No more physician-insurer negotiations over payment amounts, physician directories, networks, and out-of-network billings disputes. Under a single-payer system, one agency – CMS – will determine what and how much it will pay for each service, just as it does now for the part of Medicare still under government control.  

Despite the allure of those massive savings, the self-interested behavior of nearly all the players in health care have conspired to make M4A a non-starter in U.S. politics. The powerful insurance industry has no interest in seeing itself legislated out of existence.

Providers fear a universal CMS rate, which they consider below their actual costs. And no one has yet figured out a politically acceptable tax reform that would enable government to pick up the one-half of all health care expenses that are currently paid for by the nation’s businesses, through employer-provided health insurance, and families, through out-of-pocket expenses.

But there are ways to cut wasteful administrative overhead without tilting at the M4A windmill. That challenge has been taken up in recent years by Dr. David Cutler of Harvard and McKinsey & Company, which assembled a team of researchers from its Center for U.S. Health System Reform to identify specific, achievable reforms that could eliminate at least some of the administrative waste that is unnecessarily raising costs and frustrating patients.

Their proposal, described in depth in a recent paper accepted for publication by Health Affairs Scholar, outlines how health care systems, insurers, physician offices and other service providers could save up to $200 billion a year. They start by listing specific changes in claims and payment processing, patient collections, and prior authorization which, alone, would save up to $60 billion a year.

They take their inspiration from the banking industry, which in the 1970s created an external clearinghouse that enabled seamless, same-day transactions between financial institutions, and the airline industry, which collectively built a reservations system called Sabre that is now used by most airlines, hotels and travel agents. They call for a centralized, automated clearinghouse to process claims, which could save up to $15 billion of the $165 billion spent each year on those activities.

First steps

It would require payers and providers to come together to agree on a standardized payment process and a common technology platform. It could be either publicly or privately-owned, they note. The biggest benefits would accrue to smaller insurers, hospitals and physician practices, for whom revenue cycle spending represents a proportionally larger burden on their cash flow.

They also call for a standardized policy on prior authorization, which should only be used to reduce unnecessary care, not deny useful interventions to save money. “The primary goal is to focus standardization on policies that have clear evidence,” they write. “Complex decisions associated with expensive treatments and uncertain clinical presentation could remain the decision of the individual payer.”

While this would only save up to $3 billion a year, those savings would come from reducing the amount of physician and nurse staff time devoted to the task of justifying utilization. That is time better spent on seeing patients – the reason they got into health care in the first place.

Their third industry-wide reform calls for standardizing the physician licensure process across the country and creating a national provider directory. That could save up to $12 billion a year.

The average physician today has contracts with over 20 private payers, each of which has its own process for inclusion in its directory of approved providers. Each state also has its own licensing standards. Creating a national database for providers with common licensing standards across the states would eliminate hundreds of hours of staff and physician time.

An individual physician or practice could update their record for all payers and state boards with a single, annual filing. They could immediately and easily change it should they move or add credentials. Insurers, which are now required by a 2021 law to provide accurate physician directories for their networks (the federal government still hasn’t issued implementing regulations), would have no excuse for not issuing directories with the latest information on physicians in their networks.

The paper also outlined another $30 billion in savings that would come from streamlining internal revenue cycle operations at both payers and providers. Much of that would come from automating processes now done by hand.

A side benefit of a more efficient revenue cycle system would be freeing up administrative personnel to work on eliminating fraud, waste and abuse in health care, which is estimated to cost the system $60 billion a year. “What the credit card industry has accomplished (by automating transactions between merchants and the card companies) show reducing fraud, waste and abuse is possible,” they write.

The benefits of incremental reform

Would-be health care reformers (including myself) are often looking for the One Big Change that will bring U.S. health care costs and outcomes more in line with international norms for advanced industrial countries. But the vested interests on both the provider and payer side of health care have no interest in massive change, and deploy their lobbying muscle to bury every bold proposal.

Incremental reforms that save money will also run up against institutional opposition, although much less than M4A. It might be possible for reformers to convince the trade associations for the insurance industry, organized medicine and the hospital industry to back legislation or compacts that create a nationwide claims clearinghouse, common prior authorization standards, a national physician directory, and a unified credentialing system.

But proponents would still face organized opposition from the 500 companies with 47,000 employees that provide revenue cycle services for health care providers and insurers, many of which outsource that function. Revenue cycle firms comprise an estimated $136 billion industry, projected to grow to $282 billion by 2030 if nothing is done to rein in spending on billings and collections.

 “Health care represented 9% of the economic growth in the last decade, but 30% of the job growth,” much of it in overhead, said Nikhil Sahni, the main McKinsey & Co. author of the study, who also runs its Center for U.S. Health System Reform. “Much of the savings come from reductions in labor, but there is a lot of opportunity to reskill and upskill folks in health care. We need more people thinking about the social determinants of health and clinical improvement, not billing and collecting.”

Much criticism has been levied at McKinsey consultants over the years, and a new book by New York Times reporters Walt Bogdanich and Michael Forsythe, When McKinsey Comes to Town, is definitely worth reading. But good ideas are good ideas. Health care reformers who are close to the Biden and congressional campaigns that are now taking shape for next year’s election ought to make eliminating overhead waste in health care a part of their platforms.