Hospital cost structure in the USA: what's behind the costs? A business case

PURPOSE: Hospital costs in the USA are a large part of the national GDP. Medical billing and supplies processes are significant and growing contributors to hospital operations costs in the USA. This article aims to identify cost drivers associated with these processes and to suggest improvements to reduce hospital costs. DESIGN/METHODOLOGY/APPROACH: A Monte Carlo simulation model that uses @Risk software facilitates cost analysis and captures variability associated with the medical billing process (administrative) and medical supplies process (variable). The model produces estimated savings for implementing new processes. FINDINGS: Significant waste exists across the entire medical supply process that needs to be eliminated. Annual savings, by implementing the improved process, have the potential to save several billion dollars annually in US hospitals. The other analysis in this study is related to hospital billing processes. Increased spending on hospital billing processes is not entirely due to hospital inefficiency. RESEARCH LIMITATIONS/IMPLICATIONS: The study lacks concrete data for accurately measuring cost savings, but there is obviously room for improvement in the two US healthcare processes. This article only looks at two specific costs associated with medical supply and medical billing processes, respectively. PRACTICAL IMPLICATIONS: This study facilitates awareness of escalating US hospital expenditures. Cost categories, namely, fixed, variable and administrative, are presented to identify the greatest areas for improvement. ORIGINALITY/VALUE: The study will be valuable to US Congress policy makers and US healthcare industry decision makers. Medical billing process, part of a hospital's administrative costs, and hospital supplies management processes are part of variable costs. These are the two major cost drivers of US hospitals' expenditures that were examined and analyzed.