This article first appeared in JAMANetwork.com. It is co-authored with Anuraag Chigurupati, MBA.
Administrative complexity in the US health system has been identified as the source of enormous spending and potential cost savings.1 In a new report, Sahni and colleagues2 provided a detailed evaluation of administrative cost-savings opportunities, including an estimated $175 billion that could be addressed without new laws or regulatory changes.
Health care is complicated because complexity is profitable. In the US health care system, payers, health systems, physicians, other clinicians, drug companies, pharmacies, and pharmacy benefit managers all earn more revenue because of administrative complexity. Moreover, unlike virtually any other sector of the economy, except higher education, health care can raise prices annually faster than inflation.3 This means that revenues, margins, and profits can all improve without addressing administrative efficiency. In most other sectors, organizations can only improve margins if they improve labor productivity or simplify administration.4
That administrative spending is greater in health care than other service industries is not new. Of the $3.8 trillion spent in 2019, an estimated $935 billion was on administrative spending.1 This percentage, approximately 25%, has been roughly constant for more than a decade.5 This Viewpoint explores the misaligned incentives that have made it difficult to make progress in reducing administrative spending and suggests potential changes necessary for administrative simplification to occur.
The Economic Incentives of High Administrative Spending
First, the current health care administrative system is the natural byproduct of economic forces rewarding payers, health systems, physicians, other clinicians, drug companies, pharmacies, and pharmacy benefit managers to maximize their profits. For example, payers profit from administrative complexity, using prior authorization and claims processes to reduce medical costs and designing custom benefit designs to achieve a specific premium price. Health systems profit from administrative complexity such as through opaque pricing, differential prices based on insurance coverage, and coding or risk adjustment activities to increase revenue.
The way health care services in the US are most often reimbursed with the fee-for-service payment system fuels this wasteful administrative give-and-take between payers and health entities. For instance, health care organizations are motivated to spend money on more sophisticated billing strategies to capture more revenue from payers, and payers are motivated to spend money on sophisticated review strategies to avoid paying claims to health care organizations and clinicians. These equal and opposite forces increase each year while canceling each other out and creating no aggregate value. While organizations innovate to improve the productivity of these billing or claims review activities, productivity improvements generally drive more activity rather than reduce total expense. For example, as offshore labor made medical claim reviews and denial appeals less expensive, payers have used this approach to review more claims, and health care organizations and clinicians have appealed claim denials more frequently. At times, the same business-process-outsourcing firm may provide services (such as call centers) for payers as well as services (such as call centers) for health care organizations.
Second, regulators (such as state departments of insurance and the Centers for Medicare & Medicaid Services) add administrative complexity as they act to protect patients from harm, ensure access and fairness, and protect public health. To achieve these goals, regulators collect data and quality metrics, formalize appeal and grievance processes, monitor payment accuracy, and conduct audits. Even regulations that require insurers to spend 85% of premiums on medical care—intended to cap administrative costs plus profits at 15%—decrease insurers’ incentive to reduce medical expenses, which in turn weakens the incentive for health care organizations to reduce their administrative costs.
Third, the US health care market structure blocks attempts to standardize. Payers are governed and organized at the state and county levels, whereas many health systems are primarily local organizations with concentrated market power in a single medical service area. Health plans need local health systems to join their networks to create marketable insurance products and do not have much leverage to force health care centers and clinicians to adopt processes or technologies that could lower administrative spending.
Aligning Technology With Economic Incentives to Help Lower Administrative Costs
Against these challenges, health care organizations are applying new technologies like remote process automation and artificial intelligence to address administrative processes and costs. Remote process automation is an approach for automating recurring processes, and because it is inexpensive to set up, it could be applied to many different processes. A common use is to manage prior authorization requests across many different payers. Artificial intelligence is also frequently deployed against complex administrative processes because it can iteratively solve problems and “learn.” A common administrative use for artificial intelligence is to assist with coding because the software can learn from payment and denial experiences that codes maximize revenue. Still, these technologies are ultimately workarounds, automating how the structural complexity is handled but not simplifying health care.
Although both artificial intelligence and remote process automation technologies have received much attention, another approach for addressing administrative complexity involves building technology-enabled customer service organizations. For example, in Medicare Advantage, some companies like Humana are offering one-stop patient “navigator” service functions that can handle nearly any question or problem. These approaches attempt to buffer patients, health care centers, and clinicians from insurance benefit design, network, and payment complexity. Even with these approaches, the underlying complexity persists, and the navigator services may increase administrative spending on customer service in exchange for higher satisfaction scores.
Reducing administrative spending will require changes in the regulation of and payment for health care. Actions to limit price increases, perhaps by indexing health care prices to the consumer price index, could also substantially increase motivation to reduce administrative spending. The Center for Medicare and Medicaid Innovation could pursue programs to test all-payer prices, hospital price oversight (such as adopted in Maryland), or Medicare–indexed hospital price caps based on local market dominance to drive margin pressure, motivating health care organizations to manage administrative expenses.6 Another policy lever could be enhanced Federal Trade Commission–Department of Justice enforcement and surveillance of hospital mergers at the local level, which would make it more difficult for health systems to raise prices.
Because incentive alignment is an effective mechanism for large and rapid change, one of the most important actions is to coordinate and accelerate the move away from fee-for-service payment models. Multipayer coordination could create an even stronger incentive. If payers adopt model contracts with the same quality metrics and definitions, data extraction and reporting could be automated. Standard prior authorization lists mandated electronic prior authorizations, and standardized payment denial and appeal protocols could all enable technology to automate these labor-intensive processes and reduce cost and complexity. Another cost-saving approach would be to reduce from 1400 the number of quality metrics reported.7
The US health care system is complicated but can be made simpler. To achieve this goal, the most important contributing factor is to make simpler, less expensive administration a profit imperative. All payers need to be enlisted in support of standardization around payment models, payment rules, and reporting metrics. Additionally, policies that limit price increases to the rate of inflation could create the profit margin pressures that have led to ongoing labor productivity and administrative simplification in other sectors.
Corresponding Author: Bob Kocher, MD, Venrock, 3340 Hillview Ave, Palo Alto, CA 94304 (email@example.com).
Published Online: October 20, 2021. doi:10.1001/jama.2021.18292
Conflict of Interest Disclosures: Dr Kocher reported being a partner at Venrock, which invests in technology and health care companies including Devoted Health, and serving on the boards of Devoted Health, Premera Blue Cross, and several other companies. Mr Chigurupati reported being an employee of and holding stock options in Devoted Health.
- Kocher RP. Reducing administrative waste in the US health care system. JAMA. 2021;325(5):427-428. doi:10.1001/jama.2020.24767
- Sahni NR, Mishra P, Carrus B, Cutler DM. Administrative Simplification: How to Save a Quarter-Trillion Dollars in US Healthcare. McKinsey & Company. October 20, 2021. https://www.mckinsey.com/industries/healthcare-systems-and-services/our-insights/administrative-simplifaction-how-to-save-a-quarter-trillion-dollars-in-US-healthcare
- Perry MJ. Chart of the day…or century? Carpe Diem AEI blog. January 14, 2020. Accessed August 27, 2021. https://www.aei.org/carpe-diem/chart-of-the-day-or-century-3/
- Kocher R, Sahni NR. Rethinking health care labor. N Engl J Med. 2011;365(15):1370-1372. doi:10.1056/NEJMp1109649
- Angrisano C, Farrel D, Kocher R, Laboissier M, Parker S. Accounting for the cost of health care in the United States. McKinsey Global Institute. Published January 1, 2007. Accessed August 27, 2021. https://www.mckinsey.com/industries/healthcare-systems-and-services/our-insights/accounting-for-the-cost-of-health-care-in-the-united-states
- Kocher RP, Shah S, Navathe AS. Overcoming the market dominance of hospitals. JAMA. 2021;325(10):929-930. doi:10.1001/jama.2021.0079
- Wilensky G. The need to simplify measuring quality in health care. JAMA. 2018;319(23):2369-2370. doi:10.1001/jama.2018.6858