DECEMBER 13, 2012
Reducing Waste in Health Care
A third or more of what the US spends annually may be wasteful. How much could be pared back--and how--is a key question.
Health care spending in the United States is widely deemed to be growing at an unsustainable rate, and policy makers increasingly seek ways to slow that growth or reduce spending overall. A key target is eliminating waste--spending that could be eliminated without harming consumers or reducing the quality of care that people receive and that, according to some estimates, may constitute one-third to nearly one-half of all US health spending.
Waste can include spending on services that lack evidence of producing better health outcomes compared to less-expensive alternatives; inefficiencies in the provision of health care goods and services; and costs incurred while treating avoidable medical injuries, such as preventable infections in hospitals. It can also include fraud and abuse, which was the topic of a Health Policy Brief published on July 31, 2012.
This policy brief focuses on types of waste in health care other than fraud and abuse, on ideas for eliminating it, and on the considerable hurdles that must be overcome to do so.
|What's the background?|
Many studies have examined the characteristics and amounts of wasteful or ineffective US health care spending in public programs, such as Medicare and Medicaid, and in care paid for by private insurance as well as out-of-pocket by consumers. By most accounts, the amount of waste is enormous.
THE COST OF WASTE: By comparing health care spending by country, the McKinsey Global Institute found that, after controlling for its relative wealth, the United States spent nearly $650 billion more than did other developed countries in 2006, and that this difference was not due to the US population being sicker. This spending was fueled by factors such as growth in provider capacity for outpatient services, technological innovation, and growth in demand in response to greater availability of those services. Another $91 billion in wasteful costs or 14 percent of the total was due to inefficient and redundant health administration practices.
By looking at regional variations in Medicare spending, researchers at the Dartmouth Institute for Health Policy and Clinical Practice have estimated that 30 percent of all Medicare clinical care spending could be avoided without worsening health outcomes. This amount represents about $700 billion in savings when extrapolated to total US health care spending, according to the Congressional Budget Office.
More recently, an April 2012 study by former Centers for Medicare and Medicaid Services (CMS) administrator Donald M. Berwick and RAND Corporation analyst Andrew D. Hackbarth estimated that five categories of waste consumed $476 billion to $992 billion, or 18 percent to 37 percent of the approximately $2.6 trillion annual total of all health spending in 2011. Spending in the Medicare and Medicaid programs, including state and federal costs, contributed about one-third of this wasteful spending, or $166 billion to $304 billion (Exhibit 1). Similarly, a panel of the Institute of Medicine (IOM) estimated in a September 2012 report that $690 billion was wasted in US health care annually, not including fraud.
CATEGORIES OF WASTE: Researchers have identified a number of categories of waste in health care, including the following:
|What are the issues?|
Although there is general agreement about the types and level of waste in the US health care system, there are significant challenges involved in reducing it. Much waste is driven by the way US health care is organized, delivered, and paid for and, in particular, by the economic incentives in the system that favor volume over value. An additional problem is that attacking "waste" usually means targeting someone's income.
In its September 2012 report, the IOM offered 10 broad recommendations for creating a very different health care system in which research, new incentives, partnerships between providers and patients, and a culture that supports continuous learning and development could lead to real-time improvements in the efficiency and effectiveness of US health care.
Although the IOM committee that prepared the report did not estimate cost savings, it predicted that implementing these measures would improve care and reduce expenses. The panel's recommendations included the following:
One way to improve transparency and reduce prices is through "reference pricing," in which an employer or insurer makes a defined contribution toward covering the cost of a particular service and the patient pays the remainder. The objective is to encourage patients to choose providers with both quality and costs in mind. In a September 2012 Health Affairs article, University of California, Berkeley, researchers James C. Robinson and Kimberly MacPherson reviewed how this approach is being tested.
Many of the measures described above are in process, although they are playing out at different rates in different regions and systems around the country. There are widespread concerns about how replicable and scalable some new payment models are, and how soon they will make a major difference in the way care is provided and in what amount. There are also cross-cutting trends, including consolidation of hospital systems and their employment of physicians, which could lead to the provision of more unnecessary services, not fewer.
For example, in a May 2012 Health Affairs article, Robert A. Berenson, an institute fellow at the Urban Institute, and coauthors found that dominant hospital systems and large physician groups can often exert considerable market power to obtain steep payment rates from insurers.
FEAR OF RATIONING: In theory, a focus on eliminating waste in health care could skirt the issue of rationing because wasteful activities, by definition, carry no benefit to consumers. However, there may be a fine line between health care that is of no benefit and situations where the benefits are relatively small, especially in comparison to the cost.
A common example involves continued chemotherapy treatments for patients having certain advanced cancers. These treatments can cost tens of thousands of dollars but extend a patient's life by only a few weeks. However, restricting the use of such treatments or services can lead to accusations of "rationing."
To address many Americans' fear that the Affordable Care Act would lead to rationing, the law specifically forbids the federal government from making decisions on "coverage, reimbursement, or incentive programs" under Medicare that take cost-effectiveness into account, and "in a manner that treats extending the life of an elderly, disabled, or terminally ill individual as of lower value than extending the life of an individual who is younger, nondisabled, or not terminally ill." The law is silent on any of these activities going on outside of Medicare.
Efforts to extract waste from the health care system will in all likelihood continue along a range of federal government initiatives, including information technology adoption, pay-for-performance, payment and delivery reforms, comparative effectiveness research, and competitive bidding. Similar programs are also being initiated by state Medicaid agencies and by private payers. In the view of many experts, even more vigorous efforts to pursue the reduction of waste in health care are clearly warranted.
Anderson, Gerard F., Uwe E. Reinhardt, Peter S. Hussey, and Varduhi Petrosyan, "It's the Prices, Stupid: Why the United States Is So Different from Other Countries," Health Affairs 22, no. 3 (2003): 89-105.
Bentley, Tanya G.K., Rachel M. Effros, Kartika Palar, and Emmett B. Keeler, "Waste in the US Health Care System: A Conceptual Framework," Milbank Quarterly 86, no. 4 (2008): 629-59.
Berenson, Robert A., Paul B. Ginsburg, Jon B. Christianson, and Tracy Yee, "The Growing Power of Some Providers to Win Steep Payment Increases from Insurers Suggests Policy Remedies May Be Needed," Health Affairs 31, no. 5 (2012): 973-81.
Berwick, Donald M., and Andrew D. Hackbarth, "Eliminating Waste in US Health Care," JAMA 307, no. 14 (April 11, 2012): 1513-6.
Classen, David C., Roger Resar, Frances Griffin, Frank Federico, Terri Frankel, Nancy Kimmel, et al., "'Global Trigger Tool' Shows That Adverse Events in Hospitals May Be Ten Times Greater Than Previously Measured," Health Affairs 30, no. 4 (2011): 581-9.
Elmendorf, Douglas W., "Options for Controlling the Costs and Increasing the Efficiency of Health Care," Statement before the Subcommittee on Health, Committee on Energy and Commerce, US House of Representatives, March 10, 2009.
Farrell, Diana, Eric Jensen, Bob Kocher, Nick Lovegrove, Fareed Melhem, Lenny Mendonca, et al., "Accounting for the Cost of US Health Care: A New Look at Why Americans Spend More," McKinsey Global Institute, December 2008.
Hoffman, Ari, and Steven D. Pearson, "'Marginal Medicine': Targeting Comparative Effectiveness Research to Reduce Waste," Health Affairs 28, no. 4 (2009): w710-18. DOI: 10.1377/hlthaff.28.4.w710.
Institute of Medicine, "Best Care at Lower Cost: The Path to Continuously Learning Health Care in America," September 6, 2012.
Kelley, Robert, "Where Can $700 Billion in Waste Be Cut Annually from the US Healthcare System?" Thomson Reuters, October 2009.
Levinson, Daniel R., "Adverse Events in Hospitals: National Incidence among Medicare Beneficiaries," Department of Health and Human Services Office of Inspector General, November 2010.
Morra, Dante, Sean Nicholson, Wendy Levinson, David N. Gans, Terry Hammons, and Lawrence P. Casalino, "US Physician Practices Versus Canadians: Spending Nearly Four Times as Much Money Interacting with Payers," Health Affairs 30, no. 8 (2011): 1443-50.
|About Health Policy Briefs||
About Health Policy Briefs
Editorial review by
Brent C. James
Health Policy Briefs are produced under a partnership of Health Affairs and the Robert Wood Johnson Foundation.
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