As the COVID-19 pandemic is sweeping across the planet, the world has become more aware than ever of the critical role the health sector plays, once again bringing to the fore questions about efficiency and adaptability.
Once this pandemic has passed, we’ll still need to address these questions. Even if there’s no outbreak like this one anytime soon in the future, we will still need to make the healthcare system as efficient and as agile as possible.
There are numerous advantages to making the healthcare system more efficient. An efficient health system will not only help protect more lives but will also have positive effects throughout the rest of the economic system.
What does efficiency in the healthcare system exactly mean?
To gain a better understanding of what efficiency means in the context of healthcare, let’s look closely at one of the core pillars of the healthcare systems: hospitals.
Even though a hospital’s purpose is saving lives, we need to take an objective look at it if we want to make our hospitals more efficient.
In many ways, a hospital resembles a factory. The quality of the inputs will determine the quality of the output. The difference is, while factories produce products, hospitals provide healthcare services.
According to a report by McKinsey, inputs that go into a hospital broadly fall into three main categories: labor, capital, and multifactor productivity; MFP for short. Simply put, multifactor productivity looks at how innovation and technology increase a system’s productivity.
When you take these inputs and add the element of time, the result will be your outputs or delivered services, such as treated patients and preventive measures offered.
Increasing a hospital’s efficiency can mean one of two things: creating more output using the same amount of input or providing the same output with less input. In less abstract terms, the question is, how do we treat more people without having to hire more medical professionals or buying new medical equipment.
What are the benefits of increasing the efficiency of the healthcare system?
A more efficient system is one that can treat more patients, increase the level of coverage, and make sure that no person is left behind untreated.
More efficiency also means that each individual will be more satisfied with the services they receive. Not only will they get the care they need when they need it, but the cases will also be processed faster with less aggravation.
An efficient healthcare system is one that inspires faith in those who use it. As a result, the more efficient the system is, the more amenable people will be to funding it, increasing social welfare and solidarity.
From an economic standpoint, an inefficient healthcare system may drain other sectors of the economy, sapping away valuable resources that could have been better utilized in other productive endeavors.
Today, the United States spends around 18 percent of its GDP on healthcare. What’s more, according to CMS, national health spending in the US should grow by 5.5 percent per year, making the projected total amount expended on healthcare in 2027 around $6 trillion.
However, according to the McKinsey study cited above, increasing the system’s efficiency could save the United States anywhere between $1.2 trillion to $2.3 trillion over the next decade.
What are the sources of inefficiency?
There are many different ways we can measure the inefficiencies in the healthcare system. One way economists analyze efficiency is by breaking it down into allocative and technical inefficiencies.
Allocative efficiency asks whether resources are going to the most valuable processes within the system. For example, if a country spends millions on expensive end-of-life cancer treatment, this may benefit a few individuals. Yet, given that the healthcare system has to get by with limited resources, society may judge that those millions would be more useful somewhere else.
On the other hand, technical efficiency looks at the processes that transform inputs into outputs. Inefficient processes will waste inputs by creating redundancies or lowering the output somehow. Ergo, technical efficiency investigates how to minimize resources and maximize outcomes for any given process.
The healthcare system of any nation is a complex network of interwoven modules, some more efficient than others. Such systems will be riddled with both allocative and technical inefficiencies.
Also, when talking about efficiency, time is an important factor to take into consideration: the less time it takes to process each case, the more patients can be admitted within the same facility.
From 2001 to 2016, MFP provided a negative contribution of -13 percent to the growth of the healthcare service. Given how little MFP contributes to the growth of the healthcare system, we won’t be looking at it separately.
Here are some of the main inefficiencies that afflict labor and capital resources.
In 2015, PPI estimated that labor costs for healthcare rose by $65 billion, which represented almost half of the total increase in spending that year. This surge in labor costs comes from rapid growth in healthcare employment.
In other words, 2015 witnessed the hiring of 429,000 new healthcare workers, which represents a massive influx of personnel and labor. What’s more, 2016 saw more than 500,000 new workers hired.
To get an idea of how big a role labor plays, you only have to look at the growth of the healthcare sector from 2001 to 2016. During this time, the industry grew by an average of 3.3 percent per year, 99 percent of which was contributed by labor.
The fact that the growth in healthcare’s GDP was fuelled by large scale employment means that the amount of output is increased only by increasing the input.
So, where is the inefficiency?
Let’s start with allocative inefficiency. The clinical workforce is rarely put to best use. Suboptimal scheduling practices leave a physician’s schedule at 80 percent density, whereas a high-performing practice should aim at a density of 90 to 95 percent.
Another problem is that highly skilled workers sometimes take on lower-skilled tasks. A third problem is the lack of use of technology that not only can automate certain tasks but can also provide an optimal service mix.
There are technical inefficiencies as well. For starters, the clinical workforce doesn’t receive the proper incentive structure to help it do its job. Untargeted fee-for-service payments push clinicians towards over-service. Line-item budgets can push in the opposite direction, incentivizing clinicians to under-serve the patient.
Another technical inefficiency is complex administrative functions. The different providers, payers, and insurers lack a standardized system, which creates excess costs, and this is not to mention the effects of the industry’s costly performance reporting requirements.
All the complexity mentioned above results in the employment of numerous non-clinical workers, which leads to more routine transactions being carried out. Those same transactions could be digitized or automated without a cinch; several other industries, including finance, have managed to do the same.
Compared to labor, capital’s contribution to the growth of the healthcare service is small; from 2001 to 2016, capital contributed to only 14 percent of the healthcare industry’s GDP growth in the US, which is lower than the contribution of capital to any other US service industry.
With that in mind, most of the inefficiencies with capital are allocative. Capital is either tied up in underutilized fixed assets or is directed towards something other than productivity-enhancing investments.
The simplest case in point can be seen when we realize that hospital bed utilization within the US in 2016 was around 63 percent.
How to address these inefficiencies?
There are several proposed solutions to inefficiencies within the healthcare industry. Let’s look at a few for the problems we just posed.
Solutions for labor inefficiencies
As we’ve seen earlier, even though labor provided most of the growth of the healthcare sector, this growth was propped on large scale employment. Instead, healthcare service providers should aim to increase their revenue without having to hire new health workers and clinicians.
Here are a few possible solutions:
Tasks should be reallocated to ensure that each clinician is working at the top of their license. This means that each clinician shouldn’t be performing menial tasks when they could be more focused on high-value work. This way, consumers are getting the biggest possible ROI for their investment within the healthcare system.
For instance, registered nurses, RNs for short, occasionally carry out duties that might be better assigned to nursing assistants and non-RN team members.
Another way to ensure that clinicians are operating at their best is to incorporate technology into the mix. For example, AI has been shown to outperform medical practitioners in certain tasks, enabling it to supplement clinicians and support them in their day-to-day activities.
Another way to tackle allocative inefficiency within labor is to modify scheduling systems as well as use automatic reminder systems to lessen the number of patients who miss their appointments.
Aside from helping clinicians in their day-to-day activities, technology can help them save time. The right technology can help physicians carry out routine procedures faster than they normally would.
Even in surgeries, technology has a significant role to play. Thanks to their accuracy, robots help surgeons during operations, and patients get to heal faster, owing to fewer and smaller incisions.
On the technical side, service providers need to find ways to simplify and streamline administrative processes. They should look into ways of standardizing reporting systems to reduce redundancies. Here, automation can help lower costs.
By one estimate, if healthcare providers and insurers were to adopt a model similar to the one employed in the finance industry, one where a clearinghouse was developed for the insurance information, administrative spending could drop by 30 percent.
International development partners also have a role to play. They can help countries create domestic financing institutions as well as reduce the degree of fragmentation of how they deliver their funds. Furthermore, international development partners are in a position to minimize redundancies at the global level.
Solutions for capital inefficiencies
The majority of inefficiencies regarding capital are allocative, so we’ll look at some solutions for more strategic allocation of resources.
When making allocation decisions, countries should be guided by information about the health needs of the population as well as the performance level of the providers. The good news is that, with modern analytics, this information is available.
Additionally, countries can use different contracting mechanisms to enforce this strategic allocation.
The healthcare industry needs to keep up with the times. For instance, estimates suggest that people will want inpatient service less and less over time. Ergo, service providers need to consider these changes when planning renovations or rebuilding.
Providers are in a position to increase the productivity of their fixed assets. Consolidating some of the services they offer will ensure that their fixed assets will be used at higher capacities.
Healthcare providers should look into managing their medical assets with GPS tracking and cloud computing. After all, a hospital alone can contain thousands of medical instruments, and if this equipment isn’t closely monitored, it may fail at a time when it is most needed.
There is not much efficiency to speak of when you have to waste time looking for equipment in case of emergency.
Just like with any other business, ensuring that all assets are used to their full capacity and readily available when necessary will mean that these assets are not just dead weight that needs to be stored and maintained, but returning value on its investment.
The importance of technology in healthcare
As you’ve noticed, several of the proposed solutions include the incorporation of technology. This should come as no surprise as technology has been having a major impact on the healthcare industry over the past few years.
In fact, technology is responsible for ushering in a new age of healthcare, healthcare 2.0.
Whereas healthcare 1.0 was all about defensive medicine, healthcare 2.0 relies on advanced analytics to improve clinical efficiency.
Healthcare 2.0 also aims to increase the quality of care, moving from a defensive model to a preventive one, where the patient sees the clinician to improve their health rather than fight a disease.
For many healthcare providers, the introduction of healthcare 2.0 means that things aren’t going to remain business as usual. For starters, this new age of healthcare will mean enhanced competition, where providers might have to compete with other entities such as pharmacy retailers.
Additionally, seeing as analytics will be at the core of this transformation, decisions must be informed by reliable data. And, above all, resource efficiency will be at the heart of it all.
Guest Submission by Ashley Wilson. Opinions are of the author.