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Reducing wasteful spending in healthcare by curbing administrative complexity

Wasteful spending is an increasingly thorny problem in healthcare, especially with the industry comprising an ever-larger portion of GDP.

Jeff Lagasse, Associate Editor

The United States spends a lot on healthcare, especially when taken as a percentage of gross domestic product. In 2018, The Wall Street Journal analysis estimated healthcare spending will soon reach 20% of national GDP -- by far the highest among major economies.

Frustratingly, much of what is spent on healthcare is waste. About one-quarter of total healthcare spending in the U.S. is waste, with a price tag ranging from $760 billion to $935 billion, according to an analysis released this month in JAMA. The authors reported the total estimated annual cost of waste was $265.6 billion for administrative complexity alone, including billing and coding waste, and physician time spent reporting on quality measures.

Indeed, it's this administrative complexity that has drawn the attention of healthcare strategic management firm Numerof and Associates, which considers the 25% waste estimate to be conservative. Michael Abrams, the firm's managing partner, estimates the true share of waste in the system is closer to 30 to 40%, with administrative complexity largely to blame.

The topic of waste was recently covered in a blog post from Seema Verma, administrator of the Centers for Medicare and Medicaid Services. Much of Verma's post focused on efforts to curb fraud and abuse, and without a doubt, fraud is a widespread problem that can drain dollars from the healthcare system.

But Abrams estimates that fraud and abuse accounts for roughly 8% of waste in healthcare. Administrative complexity, he said, tops 30% of the total. So while it's a noble and necessary goal to pursue the former, addressing the latter will likely make a bigger dent in how much the U.S. pays for its care.

"That's far and away the biggest contributing factor," said Abrams. "As the largest payer in the nation, CMS controls the largest single source of administrative complexity, but it wasn't mentioned in the CMS article. It's not that fraud and abuse don't deserve attention, but it shouldn't be the single highest priority."

One of the reasons for administrative complexity has to do with the odd space the U.S. healthcare market occupies. In the traditional fee-for-service environment especially, buying healthcare services isn't like buying anything else. Any consumer who's been dissatisfied with their service has virtually no recourse outside of hiring a lawyer, for instance -- quite a difference from other industries, such as retail.

It's also difficult for consumers to find information about providers, so they often find it difficult to make market-based decisions on where to go for care. It's not easy to find out in advance what the charges for a service are going to be at a particular provider, so for many consumers it's a coin toss.

"CMS has attempted to step into the void and do what market forces typically have done," said Abrams. "All the regulations CMS puts out there on quality and reporting, and documenting every single thing, every service that gets done -- even all the HIPAA stuff -- is an attempt to discipline the market, because patients are not in a position to do so. All of those regulations create much of this administrative complexity. And they don't do a very good job of disciplining the market to deliver higher-quality care at a reasonable price.

"That's why," he said, "if we really encouraged market forces such that patients could find out ahead of time what's the best combination of cost and quality they want, that would force provider organizations to take steps to enable them to drive down costs and improve quality."


There are a couple of things that can be done to alleviate administrative complexity. Bundled pricing is one such approach; it incentivises a provider to be more thoughtful about the things it does for a patient who's getting a knee replacement, for example. It also would require certain quality outcomes, forcing providers to start thinking more about quality.

But the ultimate answer, at least according to Abrams, is capitation, in which a provider gets a fixed amount of money to spend over the course of the year. That, he said, forces them to be more thoughtful about how they spend money and spurs them to minimize costs. And assuming they're accountable for quality outcomes, their efforts to improve quality would come via a market mechanism, and would help to strengthen the market at the same time.

"I think where CMS needs to go is to continue to empower consumers such that they can make intelligent choices between providers based on cost, quality and other considerations that matter to them," Abrams said.

An additional step would be to require prices be made public. The administration has made some directives in this regard, but Abrams advocats for accelerating the pace, saying the rate of increase in healthcare expenditures is higher than in increases the U.S. is likely to see in its GDP. If things continue on their current path, the country will be spending a higher and higher percentage of its GDP on healthcare.

That assertion is backed up by data published in August in the journal Health Affairs. Looking at data over a 35-year period regarding healthcare and social spending among 35 countries in the Organization for Economic Cooperation and Development, the research found average healthcare spending across the OECD was about 8.8% of each country's GDP in 2015. But the U.S. was an outlier, spending 16.8% of GDP.

"So much energy is focused on the price of pharmaceuticals, not as much on the cost of care," said Abrams. "Not that there aren't some genuine and egregious problems with pharmaceuticals, but we can't afford to ignore the bulk of the problem."

Focus on Reducing the Cost of Care

This month, Healthcare IT News, MobiHealthNews and Healthcare Finance News take a look at what all of this means and how technology, as always, is spurring innovative solutions.

Twitter: @JELagasse

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