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What A Waste

Administrative waste in health care is a major contributing factor to why health insurance rates are so high.


Employees may be surprised to find out in the coming weeks and months that the increase in their 2023 health insurance premium is lower than the increase in other goods and services. There is no time in recent memory that this has been the case but given the current rate of inflation, this is not surprising for two reasons. First, premium increases often lag cost increases for those services and goods that determine health care costs. Second, most employers understand a cost-competitive health insurance plan is part of a retention strategy, and given the current labor shortage absorbing some of a rate increase may be necessary https://tinyurl.com/ya4mxet3.


When our premiums increase we often look for the reason or reasons why. We are often told that it is some combination of high utilization, increasing pharmaceutical costs, an increasingly unhealthy population, the cost of new technology, and the employee's lack of involvement as a consumer in selecting health insurance products that align most with their needs. However, a special communication by The Journal of the American Medical Association (JAMA) in 2021 identified another key factor, administrative “waste” https://jamanetwork.com/journals/jama/article-abstract/2752664.


A National Library of Medicine article defines waste as spending to produce services that provide marginal or no health benefit over less costly alternatives

https://tinyurl.com/ms334aer. The United States spends nearly 18% of the Gross Domestic Product (GDP) on health care. This translates to approximately $3 trillion in spending of which between $760 billion and $930 billion represents waste.


There are many ideas and theories on how to reduce this waste with the goal of lowering the cost of health care. The global management consulting firm McKinsey & Company proposed in an executive briefing from October 2021, a plan to save a quarter of a trillion dollars by what they describe as Administrative Simplification based on thirty known interventions https://tinyurl.com/McKinseyGlobal.


However, the discussion of administrative waste, the impact of the inefficiencies that result from it, and the negative impact it has on health insurance rates are not new. Neither are the proposed solutions. For example, in a 2012 American Progress article the author provides recommendations that would save approximately forty billion dollars https://www.americanprogress.org/article/3-strategies-for-reducing-health-care-administrative-costs/. Just run a search on administrative waste in health insurance and you will find dozens of articles, studies, and reports about this topic.


From my limited research, two things seem apparent. First, technology enhancements, including the use of artificial intelligence, seem to be a common recommendation to make the process improvements necessary to reduce waste in health care. Second, either it is taking longer than expected to implement these recommended technology enhancements, there is no interest in doing so (or it has not been prioritized correctly), or they have not had the intended impact.


One of many examples in support of my position is a 2009 White Paper by the Vice President of Healthcare Analytics at Thomson Reuters. In that paper from 13 years ago, the estimated cost of administrative waste was $700 billion on a total cost of health care of approximately $2 trillion https://tinyurl.com/TReutersKelly. In other words, there has been no improvement in the percentage of waste to total spending since that time and with the overall cost of health care as a percentage of GDP increasing the real cost of waste is also increasing.


So although your 2023 employee health insurance premium increases may turn out to be lower than expected, 2024 premiums may tell a dramatically different story. When the full cost of inflation gets priced into premiums and employers face other bottom-line pressures, it may no longer be an effective strategy to subsidize premium rate increases. If that happens you can add the waste in the health care system to the long list of other causes which have resulted in your higher premiums.

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