Friday, December 5, 2008

Healthcare's "Indefensible Administrative Costs"

Administrative inefficiencies in U.S. healthcare are obvious to the most casual consumer. But how much inefficiency is there?

On December 2nd 2008, Emdeon and Newt Gingrich's Center for Health Transformation (CHT) announced the formation of the U.S. Healthcare Efficiency Index.

The US Healthcare Efficiency Index measures the progress towards use of electronic transactions and stands at a lowly 43%. Current electronic transaction utilization for medical claims ranges from Claims (75%), Eligibility Verification and Claims Status (both 40%), Claim Remittance Advice (26%) and Payments (10%).

Converting the remaining paper transactions to electronic is estimated to save the U.S. healthcare system $30 billion annually. This is equivalent to the bailout of U.S. automakers... twice per year.

The problem of high administrative costs is much bigger than the issue of administrative simplification as it was contemplated under HIPAA. However, the Efficiency Index reveals that HIPAA has failed to deliver the promised percentage of electronic transactions usage as documented in the final rule for Standards for Electronic Transactions.

So what are the broader parameters of high and inefficient administrative costs?
  • A 2008 California Health Care Foundation (CHFC) Snapshot: Health Care Costs 101, calculates that 7% of the national health expenditure is on administration. Administration costs are growing at an 8.8% rate, much higher than recent growth in overall healthcare spending (6.7%) and higher still than CPI growth (3.2%). Since 1986, administration costs have grown from 5% to 7% of the national health expenditure, rising from $23 billion to $145 billion. Private spending on administration is 9% while public spending administration is 6%.
  • On November 21, 2008, Uwe Reinhardt, economics professor at Princeton criticized these "indefensible administrative costs". In referring to the McKinsey study, his analysis concluded that of the 21% excess spending, "85% of this excess administrative overhead can be attributed to the highly complex private health insurance system in the United States. Product design, underwriting and marketing account for about two-thirds of that total. The remaining 15% was attributed to public payers that are not saddled with the high cost of product design, medical underwriting and marketing, and that therefore spend a far small fraction of their total spending on administration."


Anonymous said...

I am part of your linkedin group, I like your blog and what you are saying!
As for your recent article, here is my take on it...

What is the capital outlay for a healthcare organization such as a hospital to plan, implement and maintain a paperless electronic management system. I think those costs will greatly offset the 30 billion you are quoting here plus you have to factor in the annual costs of staff, software licensing/upgrades and replacement of servers (every 3-5 years) not to mention added capacity that will be needed on these systems over the long haul. One of my hospital clients spent $30 million dollars to update there systems to be paperless and that is just one regional hospital. What is the average cost over the 6,000 hospitals in the U.S.?

This savings is enticing but how are hospitals and healthcare providers going to fund these new systems now that investments and credit lines have been greatly squeezed or dried up altogether. Oh not to mention bond issues are tighter than they ever have been as well. Bottom line is they have to first be more effiient with what they currently have THEN move to systems that will ADD to that effiency. Hospitals can be efficient right now, I see it everyday in hospitals that have had super tight budgets for years. Hospitals approve every purchase order and every employee on staff they control their own destinies.

Anonymous said...

Automating these types of transactions will not require a major capital outlay. In fact, most hospitals and physicians practices have applications in place (HIS and POMIS) that have the capability to deliver these healthcare transactions electronically today. If not, they are affordable to acquire and the payback period is months - not years. There is benefit to the payer as well. Think of all the paper EOBs, remits, and's all about workflow and processes.

Anonymous said...

With regards to "interoperability' you might not be aware of a solution that scales well and addresses the needs of Practices, Clinics, Hospital on all the day to day communications that keep practices and hospitals tied to phones and fax machines. This approach addresses the two most common objections of new technology applications namely "work flow" disruption and "cost".

At the heart of the issue surrounding the practice and administration of healthcare is HIPAA and the requirement to protect ePHI, both at rest and in transit. This has been a contributing factor in failure of the healthcare industry to adopt the web and capture some of the cost saving and productivity gains that other industries have realized. "The revenue cycle management company Emdeon estimates that the health care industry could save more than $50 billion annually by using electronic processes. (Tennessean, Health Data Management.)".

Yet the dialog surrounding Interoperability seldom focuses on the day to day administration of healthcare that does not land in an EHR/PHR. What about the level of communication between practices and their day to day business counter parties such as insurers, hospitals, labs etc and of course patients. Almost 70% of the consumers surveyed by the National Research Corporations Healthcare Market guide want to communicate with their physician online; an amazing number when you consider the survey touched 200,000 households.

Implicit in the current dialog and focus on the subject of healthcare interoperability appears to be a sort of .com myopia. By that I mean the efforts almost universally suggest versions of a fire-walled ASP or centralized Database. Big companies are putting a lot of effort into creating the centralized asp that they will monetize with revenue from users that are increasingly challenged financially.

The market could use a more fundamental approach to this facet of healthcare communications. A "cloud" approach would serve the Healthcare industry well. Some define cloud computing as anything an entity consumes outside the organizations firewall. The “cloud" is a reference to the internet. Cloud computing solutions offer a way to increase capacity or add capabilities on the fly without investing in new infrastructure, training new personnel, or licensing new software. Cloud computing encompasses any subscription-based or pay-per-use service that, in real time over the Internet, extends IT's existing capabilities.

We have developed a "Cloud" solution to interoperability by creating a secure communication platform (patent pending)at the Top Level Domain (TLD) level. .md Because Medicine is your Domain. It was developed to help independent organizations communicate securely with Zero chance for loss of ePHI. Those that register for the service can communicate with any other registrant in domain without any further encryption and externally with a SendAnywhere capability for pennies per user per day.

This is an Omni-directional encrypted communication capability that can be added on the fly without investing in new infrastructure, and without retraining existing or new personnel or licensing new software. The solution integrates with any modern email client (Outlook, Mozilla, Blackberry etc.) and provides each organization a means to communicate securely anywhere over the internet. The suite of tools was designed to increase staff productivity, protect ePHI and comply with HIPAA requirements. Once information is captured in an electronic format it can be easily retransmitted or moved into other applications. This is a low cost, high productivity, scalable solution to improving office productivity for every type of healthcare organization. The solution works just as effectively and economically for organizations that are currently operating their own exchanges servers as for practices that have no IT staff. No legacy system issues in a fragmented market like healthcare is a significant positive.

Many day to day issues can be accomplished faster and more efficiently with this approach; E-referrals, E-meetings with SecureIM, resolving claims disputes that are normally done over the phone, Communicating Lab results to patients, or forwarding to another Doctor, pre-filling forms before a visit, sending care instructions both post op and pre-op or pre-visit and post visit, passing information from a practice to hospital, and even communicating with all the day to day business partners electronically and securely. Email is ubiquitous because it is efficient. For many practices the lost time to phone tag and faxing is astounding. This is an Omni-directional secure communication capability that also reinforces the brand identity of the user. There is no need to subordinate the brand to a third party provider (ASP) and the cost is affordable to even the smallest healthcare organization.

This solution was developed with the Doctor, Practice and Hospital and their businesses issues in mind. By improving the ability of Doctors, hospitals or any other healthcare organization to communicate electronically helps them begin to capture the productivity gains alluded to above. That they can do it for pennies per user per day is exactly the type of web solution they are entitled to.