U.S hospitals can no longer afford the burden of administrative waste

Alan S. Kaplan and Abigail Abongwa

In January 2020, when COVID-19 was a minor blip on the radar of healthcare experts, the Annals of Internal Medicine published a major research study that put new numbers to what we already knew to be true: Administrative and regulatory burdens placed upon U.S. healthcare providers are ballooning out of control with severe financial consequences.^a

According to the study, administration of healthcare in the U.S. cost $812 billion in 2017. Americans pay over four times more than Canadians for administrative costs. This difference is attributed largely to excessive overhead associated with billing private insurers and private payer involvement in Medicare and Medicaid programs. In total, more than one-third of all healthcare costs in the U.S. were due to insurance company overhead and time providers spend on billing processes. The study’s lead author, David Himmelstein, MD, also noted that to accommodate the inefficiencies and waste in the payment system, U.S. physicians had to submit four times the amount of medical documentation than did physicians in other countries.^b Meanwhile, there is no evidence that the higher administrative costs translate into better care and outcomes.

Research from the American Hospital Association (AHA) found that health systems, hospitals and post-acute providers must comply with 629 discrete regulatory requirements from just four federal agencies.^c Additional regulations come from other federal agencies and states. To comply with the administrative aspects of these requirements, providers spend roughly $39 billion per year. An average size hospital dedicates 59 FTEs, one-quarter of whom are physicians and doctors, toward managing regulatory compliance.

COVID-19 begets new urgency for change

No country should tolerate administrative and regulatory waste, but if there was ever a time to attack them and the soaring costs and inefficiencies they generate, it is now. The AHA estimates that between March 1, 2020 and June 30, 2020, losses for U.S. hospitals and health systems totaled over $202 billion.^d These staggering financial hits, along with the strain the pandemic has placed on care delivery systems, have pressured healthcare providers to question everything about how they currently operate and what they can sustain going forward.

If it was not clear before, it should be now. Hospitals and health systems cannot continue to tolerate or afford unnecessary administrative demands and regulatory overload, which are jeopardizing their ability to provide timely and affordable care to their communities.

When regulatory barriers are removed, healthcare organizations have shown they can quickly adapt and improve. Recent CMS waivers provided flexibility to create additional hospital capacity, improve the ability to care for high patient volumes and avoid some of the burdensome reporting requirements during the pandemic. These waivers did not make the system crash and burn. They simply eased the pressure hospitals were facing during the pandemic.

Impact at the front line

The national numbers that put a dollar amount on administrative and regulatory waste are staggering, but what occurs at the front lines of care is compelling as well. The inefficiency, strain and risk that prior authorization procedures impose upon individual providers and patients is a case study in how to not manage healthcare administration and regulation.

The original intent behind prior authorizations was to ensure that treatments and surgeries were medically necessary, thereby promoting patient safety and reducing patient exposure to unnecessary or unexpected medical bills. That mission has been blurred as insurance carriers have increasingly placed administrative burdens on healthcare providers to clinically justify that care is required. In some instances, insurers have gone to extraordinary measures to deny payment for care: Prior authorization processes have morphed into such an extreme level of complexity and bureaucracy that multiple industry segments, such as software products, consultants and staffing agencies, have emerged and are thriving as providers struggle to manage processes on their own.

Hospitals must hire and train armies of patient access staff to perform multiple administrative tasks, including:

• Ensuring insurance coverage is active
• Verifying that the service is a covered benefit
• Confirming that the service meets medical policy requirements
• Obtaining prior authorization or pre-determination
• Documenting the case if it is denied
• Communicating with the patient and provider on the status of the prior authorization

Case examples: The drivers of waste and inefficiency

Inefficiencies and blatant administrative waste plague each step of the process.

Securing accurate information. Many payers do not offer an online means to verify current information, such as details about covered benefits, benefit variations by plan and what types of care require prior authorization. Some payers do not even provide basic lists that are searchable by CPT code. When asked whether pre-determination or prior authorization is required, some insurance representatives provide vague responses such as “recommended, but not required.”

Inefficient and lengthy phone calls. The prior authorization process requires making a phone call to payers, waiting on hold and having often lengthy calls with insurance company representatives. At UW Health in Madison, Wisconsin, we have seen patient access staff wait on hold for three hours with some payers. Staff may use scripts to ensure they get the information they need from payers, but the scripts make the calls last longer because they include multiple questions designed to ensure details are not missed. Insurance representatives may provide answers that raise further questions, so repeat calls are often made to verify or refute information. UW Health records insurer calls to have proof of information received.

Automation barriers. Many health plans continue to rely on verbal communication and fax machines instead of more advanced technologies. Full automation is not possible because no consistent standards exist for how providers should submit information to payers and how payers should respond. Providers may not even have a single set of standards for payers that have portals. For example, Anthem has health plans administered by different states. Instead of a nationwide Anthem contact, patient access staff must know which state administers the health plan and then contact that third party. UW Health contracts with 342 payers with 10,510 health plans, each with its own set of rules and idiosyncrasies.

Payer inefficiencies. Payers may need 15 days or longer to process prior authorizations, which creates scheduling delays and uncertainty for patients and physicians. Urgent authorizations can be submitted, but they may take 72 hours. That timing is not acceptable when a cancer patient needs surgery. If authorization is not secured before care is provided, payers may refuse to pay for the service, even though it is for care they would have typically authorized and covered.

Lack of transparency. Providers lack transparency into payers’ prior authorization decision making. Changes in payer requirements are communicated once per month, and the nuances of the health plans or even major features are not documented on websites for easy access. Payers have made their processes so complex that even their staff are challenged to respond to questions about the processes and lack tools that provide details on medical policies. Payers also generally avoid communicating with their members about prior authorization decisions, making provider organizations the “middlemen” for explaining payer rules and requirements.

Denials despite prior authorization. Once prior authorization is received, payment may still be denied, or insurance carriers may refute that prior authorization was granted. Such a lack of inconsistency puts patients at risk for high out-of-pocket costs, and forces providers to create denial management functions to fight denials. In 2019, The Advisory Board estimated that commercial and public payers denied about one in every 10 submitted claims, which cost health systems up to 2% of their net patient revenue.^e

As hospitals and health systems strive to provide efficient and cost-effective care, the seesawing prior authorization process with payers has resulted in last-minute cancellations and revenue losses when OR schedules cannot be backfilled on short notice. Physicians spend increasingly large blocks of time documenting needed care instead of delivering it. The recent emergence of peer-to-peer conferences gives physicians 48 hours to discuss their case with a payer medical director, outside of which prior authorization may be denied.

Improvement objectives

Solutions are not outside of our grasp. Here are just a few of the steps that would help to eliminate administrative waste and inefficiencies in the nation’s healthcare system:

• Create standard lists of what requires authorization and what does not across all payers and plans. 
• Build standard submission pathways across all payers to enable automation.
• Shorten the decision-making time from 15 days to one week.
• Allow for retroactive authorizations when clinical information supports medical necessity. 
• Require transparency through online resources that show when prior authorization is required.
• Ensure that changes to policies and rules occur during contract negotiations rather than being rolled out piecemeal during the year.

We also must understand underlying reasons for waste and inefficiency by answering key questions, such as:

• What is the root cause of our administrative and regulatory bureaucracy?
• Why have unnecessarily complex processes like prior authorization persisted?
• Is improving access to data part of the solution?

For example, if over 95% of the time over the past five years, prior approvals for MRIs are secured, could payers agree to eliminate prior authorizations? Under such a circumstance, payers would be hard pressed to justify that value is being extracted from MRI prior authorizations. The hitch is that the data to drive such discussions and decisions is not available, so the inefficiencies persist.

Political barriers

Then there is the question of political will. As the Affordable Care Act has been challenged and chipped away during the past decade, prior authorizations have been just one of many ongoing healthcare system concerns requiring reform that has languished from inattention. Even with the strong lobbying arms of the American Medical Association, the AHA and other organizations that are advancing manifestos and model legislation for states to adopt, the problem has persisted and worsened.

Some may argue that the healthcare industry is too overwhelmed by the current COVID-19 crisis to tackle more change. But the bigger issue is that we cannot afford not to pursue change. Healthcare bureaucracy, such as prior authorizations, delays care delivery and needlessly burdens patients and providers with additional costs and stress. If administrative and regulatory requirements for healthcare providers are eased, billions of dollars could be redirected to lowering the cost of care, better caring for the medically underserved, addressing social determinants of health, funding additional research and improving clinical performance through increased training and education.

The healthcare industry already was experiencing a significant level of disruption prior to COVID-19. But then came the added turmoil of the pandemic, which has intensified the disruption to levels no one could have anticipated. It is precisely during such times of disruption that we must seize opportunities. We should strive now to relinquish bureaucratic red tape that no longer serves us well and build new processes and systems that make us better stewards of valuable healthcare resources. We can and must do better.

Footnotes

^a Himmelstein, D.U., Campbell, T., Woolhandler, S., “Health care administrative costs in the United States and Canada, 2017,” Annals of Internal Medicine, Jan. 21, 2020.

^b Carroll, L., “More than a third of U.S. healthcare costs go to bureaucracy,”  Reuters, Health News, Jan. 6, 2020.

^c AHA, Regulatory overload: Assessing the regulatory burden on health systems, hospitals and post-acute care providers, October 2017.

^d AHA, Hospitals and health systems face unprecedented financial pressures due to COVID-19, May 2020.

^e Fontana, E. and Brand, R., “Why your denials are skyrocketing (and 3 ways hospitals can respond),” Modern Healthcare, March 13, 2019.