US Healthcare Industry Blog Series Part 1: Challenges

This blog posts discusses the challenges facing the US the healthcare industry and some of the trends that are emerging as the Government and Corporations prepare to address these challenges.

The Healthcare industry is in an unprecedented state of flux. Key systemic issues that have cropped up in the industry structure have led to Healthcare Reforms which will require all healthcare industry stake holders to adopt new strategies tools and best practices to bring in more efficiencies, productivity and quality in healthcare.

Healthcare Cost Escalation

The overall healthcare spending in US is higher than most of the other developed nations by a significant margin.

Developed Nation Healthcare Spending as a % of GDP
US 17.6%
Japan 8.5%
France 11.8%
Australia 8.7%
Germany 11.6%
Canada 11.4%
UK 9.8%

Source: OECD (2009)

The higher healthcare spending does not point to corresponding improvement in the healthcare profile of US indicated by factors like life expectancy, birth rate etc…

The Impact

Multiple academic studies have indicated that the escalating healthcare costs do not result positive impact in the quality of healthcare delivery or the overall healthcare profile of the nation.

However the impact of the increasing healthcare delivery costs is felt through increased spending on Medicare and Medicaid leading to a fiscal challenge for the Govt. and increasing premiums of private and employee insurance leading to lesser take home.

In the current economic scenario, this is leading to further slowdown of economic growth activity as household medical bills create severe limitations on public spending.

Key Factors for Escalating Healthcare Costs:

The escalating healthcare costs are attributed to 5 key scenarios which often have overlapping effects.

Inappropriate Services Delivered

Often due to the very nature of the economic incentives to the payors, practitioners and the patients, the focus is on the quantity of delivery and not on the quality. There simply are no structures to assess the outcome of healthcare on patients, performance of providers or the administrative efficiency of payers.This “fee-for-service” model leads to several unnecessary and inappropriate services prescribed to the patients.


The system fosters several inefficiencies due to the managed care model, where services prescribed are based on factors like insurance coverage, deductibles etc… rather than the general wellbeing of the services seeker. Due to the lack of a clear communication channel between various providers, payers and consumers, often repetitive testing prescriptions make the scenario complex for the patients.

Lack of Transparency

Often thereis complete lack of reliable medium for exchange of information like the actual cost of care, expenses of resources required in the delivery. For a market driven healthcare system like US , free and reliable flow of information is critical to enable consumers to make informed decisions. Transparency of cost and outcomes will also increase the decision accuracy of the providers leading to overall improvement in the quality of care.

High Administration Costs

Often a significant amount of effort of Physicians and healthcare workers is spent in administrative tasks rather than care delivery. This primarily due complex set of regulations of reporting and compliance which hinders clear capture of data in a user friendly way.

The administration costs in healthcare industry are significantly higher than the costs incurred in corresponding functions in other industries.

On the payer side also increased administration costs of BIR (Billing and Insurance Related) processes like claims processing and eligibility of providers. Frequent claim rejections, under payment and reclaims lead to a high administrative overhead on the part of the payers.

According to an estimate on an average level approximately 11% of the premium of commercial health insurance products is spent on administration. While the industry leading payers adopting technology and best practices succeed in keeping these expenses down to about 8%. On a pan industry level this amounts to saving of around $ 20 Billion.

Lack of Focus on Preventive Wellness

Preventive wellness is an area which is significantly underinvested in the healthcare system. Although prevention and wellness measures can prove to be of high value in controlling the higher costs of healthcare. Only about 4 Cents to every dollar of the $ 2 Trillion that the US spends on healthcare goes towards prevention and wellness. Preventive wellness can be achieved primarily through engagement of customers and encouraging healthy lifestyle and behavior through tools like self-help portals, wellness management.

Medical Fraud

Medical fraud primarily emanates from billing of unnecessary healthcare services and healthcare services which are not actually rendered. The annual cost to tax payers due to medical fraud is estimated to be around $ 80 Billion according to FBI. Some of the areas of medical fraud are mentioned below.

Billing for services not rendered
Upcoding of services
Upcoding of items
Duplicate claims
Excessive services
Unnecessary services


The graph below depicts the overall share of excess costs in the US healthcare system as estimated in a workshop by National Academy of Sciences.

This blog post primarily discussed the challenges and factors influencing them in the American healthcare system. The next blog post in this series takes a closer look at the all the relevant regulations that will have a key part to play as the healthcare industry heads for the next big evolution since the introduction of Medicaid and Medicare.

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