The Secret to Reducing Hospital Administration Costs

Hospital administrative costs in the United States are out of control. One study estimated that admin sucks up 25% of total U.S. hospital expenditures, and an estimated $361 billion annually.

Hospital administration costs consume 1.43 percent of GDP or $667 per capita in the U.S., according to the study. And those numbers are rising. Worse, there’s no apparent link between higher administrative costs and better-quality care. In fact, evidence points to an inverse relationship between administrative complexity and quality of care.

Administrative costs include procuring and coordinating facilities, supplies and personnel and running per-patient billing systems.

So, how do we reduce hospital administration costs? Most studies focus on the United States’ multi-payer payment system. And it’s true that admin costs are lower for hospitals in countries such as Canada, Scotland, and Wales. There, payment comes from global, lump-sum budgets instead of individual patients and insurance companies. Per-patient billing is expensive, administratively. It requires more clerical staff and specialized billing software. Negotiating payment rates with each payer is expensive.

But there’s another, more immediately implementable way to cut costs.

Standardization

Standardizing a few hospital processes could save $23 billion annually, according to a study released by Harvard Professor of Economics David Cutler. Examples include Walmart and the Federal Reserve. The former made suppliers conform to its computer standards and the latter  standardized the way banks’ computer systems communicated.

Standardization could also save $26 billion for physician and clinical services’ billing operations, according to James L. Heffernan from the Massachusetts General Physicians Organization. Comparing administrative costs of a single professional billing office to that of Medicare, he concluded that a single, transparent set of payment rules in a multi-payer healthcare system would potentially save money, plus four hours per physician per week and five hours of practice support staff time per week.

Intel starting looking hard at standardization when it projected a $1 billion bill to insure their 48,000 U.S. employees and their 80,000 dependents by 2012, which was triple the amount it spent in 2004. It wasn’t so much that employees were getting sicker, but that healthcare costs have skyrocketed. So Intel looked at how it could lower healthcare costs.

Intel used its deep supply chain management expertise to implement process improvements. Applying the Toyota Production System helped make healthcare more “lean.”

The pilot program was a Healthcare Marketplace Collaborative (HMC) in metropolitan Portland, Oregon. It created new clinical processes for treating six medical conditions and for screening patients for immunizations status, and illnesses such as diabetes and high blood pressure. Five years in, three of the conditions were 24% to 49% cheaper to treat. Intel actually reduced their cost of care even while the overall cost of care continues to skyrocket.

Intel also replaced ad hoc and disparate approaches to treating ailments such as uncomplicated lower back pain with a lean, effective, standard process.

Intel then simplified and standardized reporting in the hospitals they worked with.

Quality- and safety-reporting is inefficiently siloed in hospitals. Because every hospital measures outcomes differently, it’s difficult to compare hospitals. They also have to conform to overlapping and sometimes contradictory government regulations at the national, state, and local level. The reporting requirements for quality and safety programs differ from those required for state licensure (ultimately, we need to standardize regulations and reporting requirements to really reduce admin costs).

With a standard reporting process, hospitals don’t have to reinvent the wheel, and can learn from each other by comparing apples to apples.

In addition to what Intel is doing, industry-wide credentialing and health insurance enrollment needs standardization. Right now every government agency and insurance company uses its own multi-part verification process, leading to hospital admins giving many entities what is essentially the same information many times. It’s a process that’s inefficient, time-consuming, and costly.

A centralized, mandatory provider enrollment and credentialing system would reduce administrative expenses by only requiring providers to provide the data one time. Then both private-sector and public program stakeholders could access the information when they need it.

Conclusion

How can individual hospital admins work together to standardize processes? Has your hospital seen success standardizing billing or other tedious administrative procedures? Let us know in the comments!

Header by Abby Kahler