Wasted health care spending in the U.S. tops annual defense budget, study finds
- Waste in the U.S. health care system ranges from $760 billion to $935 billion per year, or more than total annual federal defense spending, according to a new study.
- Administrative activities account for the largest source of needless spending, followed by inflated and opaque pricing.
- “The prices of health care don't reflect what would happen in a competitive market,” one expert says.
The administrative tasks required of doctors, nurses and other medical professionals are so complex and time-consuming that they squander hundreds of billions of dollars each year, according to a new analysis of health care spending in the U.S.
Activities such as medical coding and billing, recordkeeping and other clerical activities result in roughly $266 billion in excess spending annually, according to the study, which was published this week in the Journal of the American Medical Association.
But the overall amount of money that goes down the drain is even greater.
Factoring in other inefficiencies, such as a lack of price controls for health services, poor coordination of care, and fraud and abuse, the total tab that is wasted every year runs between $760 billion and $935 billion, according to the researchers. That's fully a quarter of all annual health care spending in the U.S., not to mention greater than the entire 2019 defense budget.
“The health care system was never built intentionally for a smooth flow, so there is a lot of redundancy and errors in care,” said Dr. Donald Berwick, President Emeritus and Senior Fellow, Institute for Healthcare Improvement.
More payers, more paperwork
Administrative tasks are the biggest source of unnecessary health care spending, with experts pointing in particular to the system's daunting complexity.
“There are so many different payers, kinds of coding, billing products, recordkeeping requirements, that when you get a system that complicated it adds tasks and paperwork,” Berwick said.
Indeed, a 2016 study funded by the American Medical Association found that doctors spent almost twice as much time on administrative work (49% of their time) as they did seeing patients (27%). Physicians also took another one to two hours of clerical work home with them each night.
The existing fee-for-service payment system, under which each provider bills for the services they deliver, is another major source of complexity and waste.
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“Right now you're billed for the hospital room, by the ambulance company, by every doctor, rehab facility — everyone is keeping their own records and doing their own billing and dividing it up into tiny pieces, which makes it hard for the patient and hard for the caregivers,” Berwick said. “It has long since outlasted its usefulness.”
Moving to a value-based system could help reduce administrative costs, said the authors, physician William Shrank and public health expert Teresa Rogstad, both of Humana in Louisville, Kentucky, and Natasha Parekh, a physician and assistant professor at the University of Pittsburgh School of Medicine.
“The more we can make this whole process frictionless, seamless, simple for providers and patients and focus on what we really want to do — take care of patients — there is a real opportunity to do that and reduce waste at the same time,” Shrank said.
Rewarding caregivers for better care
The second-largest cause of waste in health care stems from the inflated, opaque pricing of medical services, drugs and medical devices, the study found. That accounts for an estimated $231 billion to $241 billion in needless spending per year.
“The prices of health care don't reflect what would happen in a competitive market,” Berwick said.
Three other areas — failure of care delivery, failure of care coordination, and overtreatment or low-value care — together account for as much as $345 billion in wasteful spending.
The solution? Rewarding caregivers for delivering better care — not just more services — would certainly help. Ultimately, the goal is to align incentives for doctors, patients and insurance companies.
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“If we pay doctors for the right outcomes, it addresses many of the key domains of waste that we outline in the paper,” Shrank said. “The vision is that insurance companies instead pay providers the outcomes they produce and the quality of care they deliver. In fact, they are rewarded when they produce the highest quality of care at the lowest cost.”
Not surprisingly, that's easier said than done. Under the current system, it's in the interest of health providers, hospitals, drugmakers and medical device makers to prioritize quantity, not quality, of care.
“The idea is that for decades the U.S. health system has paid doctors for delivering health services. As a result, the incentives have been aligned to deliver more services to patients,” Shrank said.
Fraud and abuse, such as overbilling, results in between $58 billion and $84 billion in excess spending, the study found.
“I don't know any other industry in which it's this onerous, and where it's taking money right the wallets of patients and families who are bearing greater and greater burdens of payment. It's a serious problem,” Berwick said.
Wasteful Spending in U.S. Healthcare Estimated at $760 billion to $935 billion
Waste accounts for about 25% of U.S. healthcare spending, new research indicates.
No other country spends more on healthcare than the United States, with the gross domestic product share of healthcare spending estimated at nearly 18% and rising. Earlier research on U.S. healthcare spending has estimated that waste accounts for about 30% of the spending total.
Reducing wasteful spending is a promising avenue to curb annual increases in the country's healthcare spending, according to the co-authors of the new research, which was published today in the Journal of the American Medical Association. “Implementation of effective measures to eliminate waste represents an opportunity reduce the continued increases in U.S. healthcare expenditures,” the researchers wrote.
The researchers examined data from 54 published reports.
They tallied waste in six categories identified in 2010 by the Institute of medicine (IOM): failure of care delivery, failure of care coordination, overtreatment or low-value care, pricing failure, fraud and abuse, and administrative complexity. Pricing failure includes medication pricing, payer-based health services pricing, and laboratory-based and ambulatory pricing.
In 2019, total U.S. healthcare spending is projected at $3.82 trillion.
The JAMA researchers generated several key data points:
- Annual wasteful spending on healthcare is estimated from $760 billion to $935 billion.
- Interventions to reduce waste in the six IOM categories would result in annual savings from $191 billion to $282 billion.
- The annual cost of wasteful spending from administrative complexity accounts for the highest category of waste, estimated at $265.6 billion.
- The annual cost of waste from pricing failure is estimated from $230.7 billion to $240.5 billion.
- The annual cost of waste from failure of care delivery is estimated from $102.4 billion to $165.7 billion.
- The annual cost of waste from overtreatment or low-value care is estimated from $75.7 billion to $101.2 billion.
- The annual cost of waste from fraud and abuse is estimated from $58.
5 billion to $83.9 billion.
- The annual cost of waste from failure of care coordination is estimated from $27.2 billion to $78.2 billion.
The impact of ly interventions to reduce wasteful spending are significant but limited, the researchers wrote.
“The best available evidence about the cost savings of interventions targeting waste, when scaled nationally, account for only approximately 25% of total wasteful spending. These findings highlight the challenges inherent in rapidly changing the course of a health system that accounts for more than $3.8 trillion in annual spending, 17.8% of the nation's GDP.”
Assessing the data
The highest amount of wasteful spending was associated with the administrative complexity category. The development and adoption of value-based payment models has the most potential to impact this category of wasteful spending, the researchers wrote.
“In value-based models, in particular those in which clinicians take on financial risk for the total cost of care of the populations they serve, many of the administrative tools used by payers to reduce waste (such as prior authorization) can be discontinued or delegated to the clinicians, reducing complexity for clinicians and aligning incentives for them to reduce waste and improve value in their clinical decision-making.”
Reducing spending the second-highest wasteful category—pricing failure—poses daunting challenges because of the rising prices of pharmaceuticals, the researchers wrote.
“New high-cost specialty drugs, which will soon exceed 50% of pharmaceutical spending, are raising new questions about how to maintain affordability.
This topic has thus received considerable attention from policy makers, and numerous proposals are currently under consideration.”
The researchers say strategies to ease cost pressure in pharmaceuticals include increasing market competition, importing drugs from countries with lower medication prices, and reforming price transparency.
The big picture view
An editorial accompanying the new research says the findings are a significant contribution to the ongoing effort to rein in the country's healthcare spending.
“At a time when the United States is once again mired in a great debate about the future of its healthcare system, the data reported in the article … should become part of the national discussion.
It would be nearly impossible for all waste to be eliminated in any healthcare system, just as it is impossible to know the true cost of any change in the delivery and financing of healthcare without understanding possible savings, and recognizing that there is complexity in knowing the savings,” the editorial says.
Concentrating on wasteful spending is crucial, the editorial says. “While no single solution will solve the continuous increases in U.S. healthcare spending, identifying, reducing, and eliminating waste are important and appropriate places to start.”
Christopher Cheney is the senior clinical care editor at HealthLeaders.
This new research updates earlier estimates of wasteful spending that focus on six categories identified by the Institute of Medicine.
In the new research, the biggest category of wasteful spending is administrative complexity, with annual waste estimated at $265.6 billion.
Interventions to reduce waste in the six Institute of Medicine categories would result in annual savings from $191 billion to $282 billion.