New Study Finds Outpatient Care is the Fastest Growing Segment of Healthcare

In a new report on the healthcare economy released by the McKinsey & Company’s McKinsey Global Institute, the international consulting firm found that outpatient care was the fastest growing segment of healthcare spending, rising to $850 billion in 2006, about two-thirds ($436 billion) more than McKinsey analysts expected.

Outpatient care accounted for 40 percent of healthcare spending and grew at a rate of 7.5 percent per year, adding $166 billion between 2003 and 2006. The report said most of that growth in outpatient care spending came from same-day hospital care and physician office visits.

McKinsey attributed that growth to the relatively higher U.S. reimbursement rates for outpatient care versus procedures performed on an inpatient basis, as well as the higher financial incentives for U.S. hospitals to provide outpatient services. Actual volume growth only accounted for 2.1 percent of that growth. “U.S. hospitals are able to grow revenue through both pricing and the provision of more expensive services,” the report found.

The study also found the following:

  • Ambulatory surgery center (ASC) and diagnostic imaging center (DIC) visits cost $28 billion, up from $22 billion in 2003, a rate of 8.4 percent annually;
  • ASC capacity grew annually by 7.6 percent and diagnostic imaging centers by 6.5 percent.
  • physician office visits accounted for $392 billion, rising by about $80 billion over that period, or 7.9 percent annually;
  • same-day hospital care accounted for $245 billion ($75 billion of which came from ER visits), which rose 9.3 percent annually from $188 billion in 2003;
  • dental care cost $92 billion;
  • other outpatient clinics cost $93 billion;
  • drug costs accounted for $98 billion; and
  • healthcare administration and insurance cost $91 billion, comprising 7 percent of healthcare spending and growing by 6.3 percent annually.

Increases in physician-office visit spending were due to higher costs per visit, rather than more frequent visits. McKinsey said high profit margins — often in the 25 percent range — and relative convenience compared to hospital care, along with growth in testing procedure volume, accounts for much of that growth among ASCs and DICs.

The report attributed overall outpatient provider capacity growth to high profit margins; technology-driven costs and physician judgment, as well as greater supply of outpatient services and price-insensitive patients with low out of pocket costs averaging 15 percent of total expenditures. Out of pocket expenditures as a percentage of healthcare costs dropped from 47 percent in 1960 to 12 percent in 2006. At the same time, private health plans’ share of health expenditures rose from 21 percent to 35 percent and government’s share increased from 25 percent to 50 percent.

Inpatient hospital care accounted for $458 billion, or 25 percent of healthcare costs, rising by 6 percent, or $73 billion during that period.

“Generous health insurance thus creates a moral hazard in the consumption of health care, particularly for healthcare services that are predictable and recurrent in nature,” the report found.

The study applauded the United States for moving far faster than other nations to outpatient care, leading to quicker recovery times and an estimated $100 billion to $120 billion in savings due to shorter inpatient stays. But it warned that the fee for service financing incentivizes increased utilization.

While hospital inpatient revenue per visit has risen by 5 percent annually for treating the same mix of patient conditions, profits have remained flat because labor and supply costs have grown by the same rate during that period.

Public administration costs, such as Medicare, Medicaid and other programs, average 6 percent, compared to 4 percent in peer nations.

Long term care and home care accounted for 9 percent of healthcare costs, but about $53 billion less than expected compared to peer nations. That’s partly because long-term care in the U.S. usually requires higher out of pocket spending.

The report said Americans lag behind peer nations in access and outcomes, but suggests opportunities for improvement in reaching the estimated 45 million uninsured. It recommends focusing on controlling demand by preventing illness and encouraging healthcare purchasers to become value-conscious. It also recommends changing payment incentives.

Learn more about the McKinsey & Company report.

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