Can You Fight Healthcare Waste?

Most everyone agrees that the U.S. healthcare system is tremendously wasteful, but few people appreciate just how much of that inefficiency is baked into the business models of health plans and hospitals alike. No matter how conscientious the management of any individual company, efforts to cut costs and improve service often have the perverse effect of reducing revenues.

In other words, initiatives that would be considered the hallmark of good management in other industries are frequently just bad for business in healthcare.

A recent report from the PricewaterhouseCoopers Health Research Institute titled "The price of excess: Identifying waste in healthcare spending" illustrates the point nicely. The paper itself is mostly a compendium of well-chewed problems in healthcare, although it does have some eye-opening numbers -- starting with its estimate that more than half of the $2.1 trillion spent on healthcare every year is wasted. (Again, not a typo.)

What's particularly interesting about the report, however, are its examples of the way fragmentation and perverse incentives drive inefficiency -- even if PwC sometimes pulls its punches along the way. Consider, for instance, its discussion of complexity in medical billing (emphasis mine):

About 700 different organizations, health plans, and employers pay the bills at Johns Hopkins Health System in Baltimore. Each one has different rules about what's eligible for payment, how much to pay and when to pay. As one of 4,500 hospitals in the U.S., it's a microcosm of the complexities that add costs to the health system. An in-house study found that potential administrative complexity fuels expenses in scheduling, registration, financial clearance, coding, claims processing, credentialing and utilization management for inpatient, outpatient and home care services. Reducing the redundancies could save the hospital more than $40 million annually, and that's only "numbers we could identify if we could just get computers talking to each other," said Richard Davis, vice president of innovation and patient safety at Johns Hopkins. Hopkins is "trying to focus on the front-end administrative tasks that are just required to get the patient in the door and receive a payment from a payer," but larger savings could result from cross-sector collaboration.

Culture: The industry often lacks the will and the agility to change business processes. Doing the right thing may not be the easiest path, making change more difficult.

[...]

Lack of a coordinated focus: The financial benefits of creating efficiencies in the health system often accrue to external organizations. Many participants in the system believe that someone else will solve the system's ills, and so they go back to working on their own organizational issues.

This is a state of affairs that leaves most healthcare managers and executives in the position of rearranging deck chairs on the Titanic, because they aren't going to get much support pushing quality or efficiency initiatives that cause the overall organization to suffer.

One last word from PwC (emphasis again mine):

Reducing waste isn't merely an exercise in subtraction. While the costs of waste are enormous and well documented, focusing on costs alone isn't constructive. Cost reduction, particularly in one sector, won't necessarily eliminate waste. It can increase costs elsewhere in the system. Organizations cannot and will not work against their own self-interests.

(Photo of medical waste by Flickr user Stephen Witherden, CC 2.0)