It’s no secret that the United States spends an exorbitant amount on health care, by far the highest in the world. In 2021, health care spending in the United States totaled $4.3 trillion and averaged nearly $13,000 per person.

It is also known that despite the huge health care spending in the US, we don’t get what we pay for in terms of results. Many experts emphasize the need to reduce unnecessary and wasteful health care costs to help support the country’s budget, economy and general well-being.

Administrative, Clinical and Operational

Dr. William Shrank of Humana (a health insurance company) and colleagues estimated that about 25% of health care spending is waste. Of that proportion, approximately $516 billion could be recovered or saved in three main areas: administrative, clinical and operational. Recent reports by Dr. Shrank and Harvard professor David Cutler with McKinsey outline solutions in each of these three areas that policymakers need to consider when seeking health care savings.

Solutions to Reduce Healthcare Administrative Expenditure

The biggest source of spending inefficiencies in US health care comes from administrative costs, estimated by Shrank to total $351 billion annually. Cutler and McKinsey & Company’s proposed changes could reduce administrative inefficiencies by $265 billion annually (after accounting for $50 billion in overlapping savings across interventions, which is why the following estimates are not fully additive).

  • Individual organizations ($175 billion in savings): Small-scale interventions can be implemented by single organizations. Options include streamlining the processes for submitting applications, automating repetitive work in HR and finance, leveraging new technologies such as analytics and cloud computing, and improving administrative support functions.
  • Among the organizations ($35 billion in savings): Some solutions would require collaboration between organizations, such as using compatible policies for prior authorization (a process in which a patient insurance company reviews the need for medical care or drugs before approving them). Other payer-provider platforms strategic to reducing friction and administrative duplicity would also reduce costs (for example, making it easier to find doctors online or cheaper prescription drugs).
  • Systemic Change ($105 billion in savings): Hospitals and clinics could adopt a standard automatic clearinghouse to process medical claims that would simultaneously detect fraudulent claims. Other options include standardization of medical policies, medical licensing, and reporting quality.

Changes at multiple organizational levels could reduce administrative inefficiencies by $265 billion annually


Solutions to Reduce Clinical Expenditure

Shrank and colleagues calculate that inefficient spending on clinical issues costs the United States $345 billion annually. Of that total, they estimate $160 billion could be saved through the following solutions.

  • Addressing Care Delivery Failures ($93 Billion in Savings): Options in this category include integrating behavioral and physical health ($58 billion), interventions addressing adverse hospital events and hospital-acquired infections ($5 billion), and patient campaign partnerships ($3 billion). There is also room for much improvement in prevention initiatives to address ailments such as diabetes, obesity and smoking ($26 billion).
  • Addressing Care Coordination Failures ($38 Billion in Savings): Areas for improvement include coordination of care in Accountable Care Organizations (ACOs) ($13 billion), Transition Care Programs, which help facilitate safe discharge at home or other facilities ($9 billion), effective care management for clinically complex patients ($8 billion); and emergency department-based strategies, such as video consultations and referral of patients to appropriate care with primary care physicians or retail clinics ($7 billion).
  • Addressing overtreatment and low-value care ($29 billion in savings): Savings from optimizing drug use could save $22 billion annually. Other options include shared decision-making tactics to reduce unnecessary procedures ($3 billion), expanding hospice access ($3 billion), improving prior authorization procedures ($250 million), and pioneering ACO strategies to reduce overuse ($200 million).

Addressing inefficiencies in clinical spending could save $160 billion each year


Solutions to Reduce Operational Healthcare Expenditure

Operational problems in healthcare, such as price failures and overspending on medicines, waste an estimated $243 billion each year. Through a few reform options proposed by Shrank and colleagues, $91 billion of that waste could be recovered.

  • Address Insurer-Based Pricing ($41 Billion in Savings): For commercially insured, prices for health care can vary widely and are typically much higher than those paid by Medicare or Medicaid. Correcting such pricing errors by instituting payment reform to fix or cap prices could result in cost savings.
  • Addressing Transparency and Pricing Structure ($30B in Savings): A study in JAMA found that patients who used a pricing website for common medical services were associated with lower claim costs. The resulting savings could reduce healthcare costs by nearly $30 billion annually. Another recent study from the University of Minnesota evaluated price transparency rules for hospitals and insurers from 2019 and found that those rules could lead to savings of up to $81 billion by 2025.
  • Addressing Drug Usage and Spending ($20 Billion in Savings): Interventions to address prescription drug use and spending in Medicare and Medicaid can further reduce spending by an additional $20 billion annually. The reforms include the ability to create more restricted forms and a reform of payments for infused products administered in an office or outpatient setting. Reforms that address drug pricing have gained popularity as a means to reduce operating spending, as did the Inflation Reduction Act by allowing Medicare to negotiate drug prices. It is estimated that this arrangement will save $102 billion over the next decade.
    $91 billion could be saved by addressing wasteful operating healthcare expenses



    Healthcare costs in the US are already high and are expected to rise further, posing a serious risk to the economy, the country’s fiscal outlook and the sustainability of the healthcare system. It is imperative that our leaders consider ways to reduce waste and thereby reduce healthcare costs. The solutions to reduce wasteful spending discussed in this blog offer potential paths to saving federal and state governments hundreds of billions of dollars annually.

    Related: US health care spending remains high

    Image credit: Mario Tama/Getty Images

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