Human Capital

Annual Waste in U.S. Healthcare System Nears $1 Trillion

The waste equates to approximately a quarter of all healthcare spending, according to a study in the Journal of the American Medical Association.
David McCannOctober 22, 2019
Annual Waste in U.S. Healthcare System Nears $1 Trillion

It’s not exactly a secret that there’s waste in the U.S. healthcare system. But just how much?

How about roughly a quarter of all healthcare spending? So concludes a new study published in the Journal of the American Medical Association. The total estimated amount of waste amounts to between $760 billion and $935 billion annually.

The biggest culprit is unnecessary administrative complexity, which costs $266 billion, according to the study. “This is waste that comes when government agencies, payers, and others create inefficient or misguided rules,” the study says. “For example, payers may fail to standardize forms, thereby consuming limited physician time in needlessly complex billing procedures.”

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The greatest opportunity to reduce waste in this category “should result from enhanced payer collaboration with health systems and clinicians in the form of value-based models, in particular those in which clinicians take on financial risk for the total cost of care of the populations they serve.”

Next comes “pricing failure,” which is estimated to waste between $231 billion and $240 billion. This happens when prices “migrate far from those expected in well-functioning markets — that is, the actual costs of production plus a fair profit.”

For example, notes the study, because of a lack of transparency and competitive markets, U.S. prices for diagnostic procedures such as MRI and CT scans are several times more than identical procedures in other countries.

Pricing-related sources of waste likely result, at least in part, from the complex regulatory framework that governs the U.S. healthcare system. “Policy interventions are needed to drive meaningful reductions in waste in this domain,” the study report says.

But it adds, “In the dynamic health care marketplace, where profit-motivated firms will respond to any new policy with strategies to protect their margins, no single policy is likely to suffice; a coordinated policy effort is likely needed.”

Care delivery failures cost $102 billion to $166 billion. This is waste that comes with poor execution or lack of widespread adoption of known best practices, such as for preventive care and patient safety.

The waste tab for over-treatment or low-value care is $76 billion to $101 billion. This arises when patients are subjected to “care that, according to sound science and the patients’ own preferences, cannot possibly help them,” explains the study, authored by William Shrank, chief medical officer at health insurer Humana; Teresa Rogstad, a medical writer and research consultant at Humana; and Natasha Parekh, a clinical assistant professor of medicine at the University of Pittsburgh.

Such care is “rooted in outmoded habits, supply-driven behaviors, and ignoring science. Examples include excessive use of antibiotics, use of surgery when watchful waiting is better, and unwanted intensive care at the end of life for patients who prefer hospice and home care.”

The cost of waste related to fraud and abuse weighs in at $59 billion to $84 billion. Fraudsters issue fake bills and run other scams. Also, there are “blunt procedures of inspection and regulation that everyone faces because of the misbehaviors of a very few,” according to the study.

Finally, failure to coordinate care among providers generates $27 billion to $78 billion of waste. Such waste happens “when patients fall through the slats with fragmented care. The results are complications, hospital readmissions, declines in functional status, and increased dependency, especially for the chronically ill, for [whom] care coordination is essential.”

With respect to three of these categories of waste — care delivery failure, low-value care, and care coordination failure — certain interventions could reduce the waste by as much as half, according to the study.

“Many of these interventions have arisen in settings where payers are collaborating with clinicians and health systems, either to align payment models with value or to support delivery reform to enhance care coordination, safety, and value…. As value-based care continues to evolve, there is reason to believe such interventions can be coordinated and scaled to produce better care at a lower cost for all U.S. residents.”

What actions can employers take — right now — to make a meaningful dent in wasteful healthcare spending? A blog post in response to the JAMA study by Andrew Halpert, clinical innovation leader at Mercer, sheds some light.

Some strategies can address multiple inter-related waste buckets, according to Halpert.

For example, he writes, an on-site or near-site clinic approach can embed agreements with the operating provider (who is beholden only to the health plan sponsor) to implement best treatment practices, avoid duplicative care, and refer plan members only to efficient providers for off-site services such as imaging and outpatient surgery.

According to Mercer’s 2018 Worksite Clinic Survey, one-third of organizations with 5,000 or more employees provide a general medical clinic at or near the worksite. That was up from 24% in 2012. And the spread of shared near-site clinics gives smaller employers an opportunity to work together to influence care provision.

Centers of excellence can be deployed to address pricing failure (via aggressive bundled payments) and care delivery failure (through partnerships with high-quality providers), Halpert notes.

Such centers are defined in a 2017 study as “specialized programs within healthcare institutions which supply exceptionally high concentrations of expertise and related resources centered on particular medical areas and delivered in a comprehensive, interdisciplinary fashion.”

While bundled payments and partnerships with high-quality suppliers “can be accomplished most forcibly through direct contracts, employers of all sizes can and should ask their carriers for these features,” writes Halpert.