Three Ways To Lower Healthcare Costs Over The Next Decade

Healthcare’s affordability crisis is at a tipping point for everyone — insurers, providers, life science companies, government, employers, and, critically, consumers. For the first time since 2020, Americans cited healthcare costs as one of their top two financial concerns, according to a Gallup poll. The problem is only expected to worsen over time: Our analysis of federal data suggests that annual US healthcare spending will nearly double by 2035 to $9 trillion.

But this fate isn’t written in stone. In our work helping the nation’s biggest healthcare organizations optimize their performance, we’ve seen how pernicious cost pressures can be. We also see opportunities for healthcare stakeholders to take bold action. In our report, Healthcare’s $1 Trillion Challenge, we estimate that organizations can cut more than $1.3 trillion over the next 10 years by zeroing in on three high-cost areas: the labor intensity of care, a high administrative burden, and the growing cost of drugs.

While those cuts alone won't solve the affordability crisis, they would hold healthcare spending steady at 17% of gross domestic product in 2035, less than the 20% we project without any changes. Best of all, these improvements don’t require massive policy shifts or partisan debates. Industry players can start scaling these efforts now.

Streamlining clinical care: $640 billion

We project that costs related to the clinical workforce will double in 2035 to $3 trillion, driven by increased demand for clinicians, stagnant productivity, inefficient workflows, and reliance on high-cost sites like hospital campuses.

We estimate the industry can unlock $640 billion in savings by making better use of less costly and more accessible sites, further integrating advanced practice providers, and improving workflows through standardization, automation, and centralization.

Consider the home, an increasingly viable alternative site of care. After adjusting for patient complexity and social factors, we anticipate that up to 40% of total healthcare spending could be clinically feasible to be delivered at home in 10 years. Savings will come from fewer lab and imaging tests, faster recovery times, and lower readmission rates.

Telehealth offers ways to make further use of the home as a low-cost setting. The technology has lowered unit costs by nearly 25% compared to in-person visits. Expanded use of other technologies, including artificial intelligence, can further streamline clinical workflow. Redeploying the workforce will also generate savings, such as by allowing nurse practitioners and physician assistants to work to the top of their licenses and take on more direct patient care work.

Relieving administrative burden: $450 billion

Bloated administrative processes weigh heavily on the healthcare system. At the current pace, we expect annual administrative costs to surpass $2 trillion by 2035, or $6,400 per capita, double today’s $1 trillion. In all, we estimate the industry can reduce administrative costs by 20% by 2035, saving $450 billion.

Modernizing back-office functions would relieve burdens in such areas as human resources, legal, and accounting. For example, contract management is largely decentralized for most insurers. Software applications are available to digitize the process and allow for shared access and review of contracts. Artificial intelligence can be used to analyze contracts for inconsistencies and opportunities to renegotiate terms.

Embracing consumer-friendly technology will also help. Too many healthcare settings — 84% by some counts — still rely on the front desk or call centers to make appointments instead of embracing online, self-booking tools.

Arcane licensing and credentialling procedures are especially ripe for retooling. Physicians often spend months waiting to be credentialed with a payer. Deploying digital tools that allow for real-time updates of provider information will save time, improve data accuracy, and get clinicians into insurer networks faster.

These changes could improve overall productivity as well. Nearly two-thirds of physicians cite administrative work as a top cause of burnout, while studies show that 45% of non-clinical staff are suffering from work overload.

Curbing rising drug costs: $230 billion

As new high-cost specialty drugs come to market, and the use of GLP-1s and other medications increases, we project that drug spending will nearly triple to $2.5 trillion by 2035.

We estimate the industry could take out up to $180 billion of that if stakeholders execute on a few key areas. One is biosimilars — drugs that are near-identical copies of an original patented drug but come at a lower price once patents expire. Greater adoption could yield $80 billion in savings by 2035.

Another avenue for slowing the rate of growth in drug costs includes simplifying the contracting, management, and distribution processes, starting with generic drugs. Introducing a cost-plus pricing model could save $50 billion by 2035 if applied to all generic drugs. Under cost-plus pricing, distributors work directly with drug manufacturers to buy drugs at a low cost and then sell them to consumers with a modest, but transparent, markup to cover costs.

Now comes the hard part

Reaching $1.3 trillion in savings over 10 years requires leaders to think differently about operations. Some steps can be taken right away, like replacing retiring primary care physicians with nurse practitioners and creating care teams. Others will have a longer-term impact, like shifting capital investments away from new inpatient bed towers in favor of lower-cost settings and technology solutions to improve productivity.

Such actions will be rewarded in the future. Organizations with lower cost structures will be able to compete more effectively, attracting new volume and maintaining profitability. Reining in costs will also provide stable footing for embarking on more ambitious ideas to improve care delivery and accelerate innovation.

Most importantly, addressing the unit cost challenge represents a path toward a more sustainable healthcare system that delivers on outcomes, access, and affordability for everyone.