Administrative Simplification and the Potential for Saving a Quarter-Trillion Dollars in Health Care

Nearly every industry in the US has experienced substantial improvements in productivity over the last 50 years, with 1 major exception: health care. In 2019, the US spent an estimated $3.8 trillion on health care, including an estimated $950 billion on nonclinical, administrative functions, and that number has increased despite major technological enhancements.^1,2 This Viewpoint considers several specific steps that can be taken to simplify administration in health care and boost overall productivity in the economy.

To run any organization, a base of administration is necessary. A typical US services industry (for example, legal services, education, and securities and commodities) has approximately 0.85 administrative workers for each person in a specialized role (lawyers, teachers, and financial agents). In US health care, however, there are twice as many administrative staff as physicians and nurses, with an estimated 5.4 million administrative employees in 2017, including more than 1 million who have been added since 2001.³

The administrative complexity of health care is profound. There are multiple transaction nodes, including more than 6000 hospitals, 11 000 nonemployed physician groups (defined as hospital-affiliated and independent practices with 5 or more physicians),⁴ and 900 private payers; regulatory complexity (compliance requirements such as the Health Insurance Portability and Accountability Act and regulated markets such as Medicare Advantage); and contrasting incentives, for example, market-driven checks and balances, such as prior authorization.⁴ The sheer complexity associated with so many entities makes administrative simplification difficult.

A new report provides an extensive evaluation of administrative spending to determine which parts are necessary and which could be simplified.² The analysis dissected profit and loss statements of individual health care organizations, estimated spending on specific processes, and compared administrative spending in health care with that of other industries. The conclusion of the report is that an estimated $265 billion, or approximately 28% of annual administrative spending, could be saved without compromising quality or access by implementing about 30 interventions that could be carried out in the next 3 years.² This set of interventions works within the structure of today’s US health care system in order to preserve its market nature (eg, multipayer, multiclinician, multi–health care center) and the associated benefits (eg, world-leading innovation in care delivery).

The starting point is 5 functional areas that account for approximately 94% of administrative spending (see eTable in the Supplement). The largest of these is industry-agnostic corporate functions: general administration, human resources, nonclinical information technology, general sales and marketing, and finance. This functional area accounts for an estimated $375 billion of spending annually. The second-largest category is the financial transactions ecosystem, which includes claims processing, revenue cycle management, and prior authorization, accounting for an estimated $200 billion annually. The rest is made up of industry-specific operational functions, such as insurance underwriting (an estimated $135 billion annually), administrative clinical support operations such as case management (an estimated $105 billion annually), and customer and patient services such as call centers (an estimated $80 billion annually).

For each of these functional focus areas, known interventions that could reduce spending without harming patient care were considered. This meant using a financial and operational perspective for the analysis, but also acknowledging that these interventions could and likely will have broader benefits on other outcomes, such as access, quality, patient experience, physician satisfaction, and equity.

The individual organization level was used as the starting point, by looking at “within” interventions, those that can be controlled and implemented by individual organizations, and “between” interventions, those that require agreement to act between organizations but not broader, industry-wide change. This spending is amenable to interventions that address highly manual, inefficient workflows, such as patient admission and discharge planning in case management; poor data management and lack of standardization, such as nonstandardized submission processes for prior authorization forms; and disconnected tools and systems, for example, the lack of interoperability between the claims systems of payers and hospitals.

Organizations could potentially save an estimated $210 billion annually by addressing these issues.² The majority of those savings reside in industry-agnostic corporate functions such as finance or human resources. Interventions that affect these functions include automating repetitive work such as generation of standard invoices and financial reports; using analytical tools for human resources departments to better predict and address temporary labor shortages; integrating a suite of tools and solutions to coordinate staffing for nurse managers; and building strategic communications platforms between payers and hospitals to send unified messages. These interventions have been adopted in the marketplace by some payers, hospitals, and physician groups, with a positive return on investment using current technology and nominal investment (that is, once the interventions are fully rolled out, the cost of implementation is generally paid off in about a year by the recurring savings). Research has shown that organizations that aggressively pursue industry-leading productivity programs are twice as likely to be in the top quintile of their peers as measured by economic profit.⁵

Since many of these interventions are relatively standard, the question that arises is why they have not been implemented to date. A common set of barriers to implementation currently exists, including high levels of complexity and overlapping compliance rules such as privacy guidelines and requirements on how and where data can be stored; the need to manage labor displacement in an industry that is a driver of workforce growth; contrasting incentives for payers, hospitals, and physician groups in a primarily fee-for-service reimbursement model; and lack of prioritization from industry leaders on administrative simplification. Successful organizations often have common lessons for implementation including prioritizing administrative simplification as a top strategic initiative; committing to transformational change vs incremental steps; engaging the broader partnership ecosystem for the right capabilities and investments; and disproportionally investing in the underlying drivers of productivity, such as technology and talent.

Some of the inertia at the organizational level reflects market failures that require industry-level intervention, including the necessary decision-makers and influencers from both the public and private sectors for a given intervention. For example, individual organizations alone cannot change the systemic lack of interoperability in the US health care system. A set of “seismic” interventions were identified that require broad, structural collaboration across the health care industry.² These include new technology platforms such as the use of a centralized, automated claims clearinghouse; operational alignment such as standardizing medical policies across payers, for example, requiring the same set of diagnostics and clinical data before agreeing to cover a more complicated procedure or drug therapy; and payment design such as globally capitated payment models for segments of the care delivery system. These are meant to be examples of what is possible and are based on analogs from other industries that have undergone this type of change. If currently identified seismic interventions were undertaken, an estimated $105 billion of savings could occur annually.² These savings would largely occur in the financial transactions ecosystem and industry-specific operational functions such as clinician credentialing and medical records management.

Launching these seismic interventions could be considerably more difficult than the within and between interventions. A framework that focuses on how to promote innovation in the public sector was applied to isolate the mechanism required to enable action for each seismic intervention.⁶ For example, individual organizations do not experience the financial pressure today that would bring them together to create a centralized automated clearinghouse (which is what happened in banking). Financial incentives could help overcome this inertia.

A set of common actions is necessary to galvanize this change. These actions include using interoperability frameworks to support high-value use cases such as the assembly of longitudinal patient records; creating public-private partnerships such as piloting a complete Health Information Exchange in 1 or more states; and selecting third parties, such as foundations, to research facts to galvanize movement (for example, a foundation-backed randomized trial of administrative interventions to validate the conditions for success).

Across the 3 types of interventions, the analyses suggest that simplifying administration could save the US health care system an estimated $265 billion annually after accounting for $50 billion of overlap between organizational and industry-level interventions.² These savings, if realized, would be more than 3 times the combined 2019 budgets of the National Institutes of Health ($39 billion), the Health Resources and Services Administration ($12 billion), the Substance Abuse and Mental Health Services Administration ($6 billion), and the Centers for Disease Control and Prevention ($12 billon).⁷ In per capita terms, $265 billion is approximately $1300 for each adult in the US.

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

Corresponding Author: Nikhil R. Sahni, BA, BAS, BSe, MBA, MPA/ID, McKinsey & Company, 280 Congress St, Ste 1100, Boston, MA 02210 (nikhil_sahni@mckinsey.com).

Published Online: October 20, 2021. doi:10.1001/jama.2021.17315

Conflict of Interest Disclosures: Mr Sahni and Mr Carrus are partners at McKinsey & Company. Dr Cutler reported receipt of personal fees as part of the multidistrict litigation against opioid manufacturers, distributors, and pharmacies and the multidistrict litigation against JUUL.

Additional Contributions: We acknowledge Prakriti Mishra, BA, MBA, McKinsey & Company, a fellow author on Administrative Simplification: How to Save a Quarter-Trillion Dollars in US Healthcare, for her contributions to drafting and revising this Viewpoint. She was not compensated for her contributions.