Estimated Costs and Potential for Savings
By William H. Shrank, MD, MSHS 1; Teresa L. Rogstad, MPH 1; Natasha Parekh, MD, MS 2
JAMA, Special Communication, October 7, 2019
1. Humana Inc, Louisville, Kentucky
2. Division of General Internal Medicine, University of Pittsburgh School of Medicine, Pittsburgh, Pennsylvania
Importance: The United States spends more on health care than any other country, with costs approaching 18% of the gross domestic product (GDP). Prior studies estimated that approximately 30% of health care spending may be considered waste. Despite efforts to reduce overtreatment, improve care, and address overpayment, it is likely that substantial waste in US health care spending remains.
Objectives: To estimate current levels of waste in the US health care system in 6 previously developed domains and to report estimates of potential savings for each domain.
Evidence: A search of peer-reviewed and “gray” literature from January 2012 to May 2019 focused on the 6 waste domains previously identified by the Institute of Medicine and Berwick and Hackbarth: failure of care delivery, failure of care coordination, overtreatment or low-value care, pricing failure, fraud and abuse, and administrative complexity. For each domain, available estimates of waste-related costs and data from interventions shown to reduce waste-related costs were recorded, converted to annual estimates in 2019 dollars for national populations when necessary, and combined into ranges or summed as appropriate.
Findings: The review yielded 71 estimates from 54 unique peer-reviewed publications, government-based reports, and reports from the gray literature. Computations yielded the following estimated ranges of total annual cost of waste: failure of care delivery, $102.4 billion to $165.7 billion; failure of care coordination, $27.2 billion to $78.2 billion; overtreatment or low-value care, $75.7 billion to $101.2 billion; pricing failure, $230.7 billion to $240.5 billion; fraud and abuse, $58.5 billion to $83.9 billion; and administrative complexity, $265.6 billion. The estimated annual savings from measures to eliminate waste were as follows: failure of care delivery, $44.4 billion to $93.3 billion; failure of care coordination, $29.6 billion to $38.2 billion; overtreatment or low-value care, $12.8 billion to $28.6 billion; pricing failure, $81.4 billion to $91.2 billion; and fraud and abuse, $22.8 billion to $30.8 billion. No studies were identified that focused on interventions targeting administrative complexity. The estimated total annual costs of waste were $760 billion to $935 billion and savings from interventions that address waste were $191 billion to $282 billion.
Conclusions and Relevance: In this review based on 6 previously identified domains of health care waste, the estimated cost of waste in the US health care system ranged from $760 billion to $935 billion, accounting for approximately 25% of total health care spending, and the projected potential savings from interventions that reduce waste, excluding savings from administrative complexity, ranged from $191 billion to $282 billion, representing a potential 25% reduction in the total cost of waste. Implementation of effective measures to eliminate waste represents an opportunity reduce the continued increases in US health care expenditures.
From the Results
Administrative Complexity: Two articles addressed cost of waste from administrative complexity (Table 2), and no articles were identified that addressed savings from interventions. The estimated total annual cost of waste in this category was $265.6 billion.
From the Discussion
This review of the current literature of the cost of waste in the US health care system and evidence about projected savings from interventions that reduce waste suggests that the estimated total costs of waste and potential savings from interventions that address waste are as high as $760 billion to $935 billion and $191 billion to $282 billion, respectively.
The administrative complexity category was associated with the greatest contribution to waste, yet there were no generalizable studies that had targeted administrative complexity as a source for waste reduction. Some of that complexity results from fragmentation in the health care system. The greater opportunity to reduce waste in this category should result from enhanced payer collaboration with health systems and clinicians in the form of value-based payment models. 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. As more clinicians transition into value-based payment arrangements with financial risk, administrative burden and oversight could be reduced for all health care constituencies, including payers, hospitals, and physician practices; adoption of global prepayment mechanisms for patients and populations rather than fee-for-service payments would be expected to accelerate reductions in administrative complexity. Moreover, there is a need for better methods of assessing strategies to reduce administrative complexity while maintaining quality and without increasing spending. Presumably, all health systems, clinician practices, and payers have efforts underway to simplify processes and explore digital solutions to reduce administrative complexity. The science describing the success of these interventions is limited and more evidence is needed to quantify the waste in this category that could be reduced and the resulting savings.
The category that represents the second largest contributor to waste in the United States is pricing failure. In many ways, the evolution to value-based care would be expected to produce the least savings in this category since pharmaceutical pricing represents a major component of this waste domain and would not be affected by new approaches to care delivery and reimbursement.
Administrative complexity is the greatest source of waste in the United States today and can be a result of payers’ efforts to reduce waste by reducing overtreatment and low-value care. In value-based arrangements, improvements could be expected to reduce waste in both categories.
In this review based on 6 previously identified domains of health care waste, the estimated cost of waste in the US health care system ranged from $760 billion to $935 billion, accounting for approximately 25% of total health care spending, and the projected potential savings from interventions that reduce waste, excluding savings from administrative complexity, ranged from $191 billion to $282 billion, representing a potential 25% reduction in the total cost of waste. Implementation of effective measures to eliminate waste represents an opportunity to reduce the continued increases in US health care expenditures.
Table 2. Cost Estimates by Waste Domain
- Administrative complexity
- Billing and coding waste – $248 billion
- Physician time spent reporting on quality measures – $17.6 billion
- Total – $265.6 billion
Table 3. Estimates of Savings From Interventions That Address Waste
- Administrative complexity
- Not applicable
For full article (plus click on “Editorial Comment” for five editorials on this article):
Single-Payer Reform: The Only Way to Fulfill the President’s Pledge of More Coverage, Better Benefits, and Lower Costs
By Steffie Woolhandler, MD, MPH; David U. Himmelstein, MD
Annals of Internal Medicine, April 18, 2017
Table. Estimated Administrative and Prescription Drug Savings Under Single-Payer Reform, 2017
$219.6 billion – Insurance overhead and administration of public programs
$149.3 billion – Hospital administration and billing
$ 75.3 billion – Physicians’ office administration and billing
$503.2 billion – Total administration
$113.2 billion – Outpatient prescription drugs
$616.4 billion – Total administration plus outpatient prescription drugs
The Huge Waste in the U.S. Health System
By Austin Frakt
The New York Times, October 7, 2019
A new study, published Monday in JAMA, finds that roughly 20 percent to 25 percent of American health care spending is wasteful. It’s a startling number but not a new finding. What is surprising is how little we know about how to prevent it.
The largest source of waste, according to the study, is administrative costs, totaling $266 billion a year. This includes time and resources devoted to billing and reporting to insurers and public programs. Despite this high cost, the authors found no studies that evaluate approaches to reducing it.
“That doesn’t mean we have no ideas about how to reduce administrative costs,” said Don Berwick, a physician and senior fellow at the Institute for Healthcare Improvement and author of an editorial on the JAMA study.
Moving to a single-payer system, he suggested, would largely eliminate the vast administrative complexity required by attending to the payment and reporting requirements of various private payers and public programs. But doing so would run up against powerful stakeholders whose incomes derive from the status quo. “What stands in the way of reducing waste — especially administrative waste and out-of-control prices — is much more a lack of political will than a lack of ideas about how to do it.”
NYT Reader Comment:
By Don McCanne, M.D.
Direct quote from the JAMA article:
“The administrative complexity category was associated with the greatest contribution to waste, yet there were no generalizable studies that had targeted administrative complexity as a source for waste reduction.”
They reported as administrative complexity only “billing and coding waste” and “physician time spent on quality measures” which they calculate at $265.6 billion, when actually recoverable administrative waste is closer to $500 billion (Himmelstein and Woolhandler).
Yet the authors did not include this “greatest contribution to waste” – administrative excesses – in their calculations of recoverable waste, passing it off as “not applicable.”
The single payer model of Medicare for All would recapture this half a trillion dollars in administrative waste, and yet they disregard it. That is far more than the $191 billion in savings that the authors propose by multiple small tweaks to our dysfunctional system.
It is understandable how the authors from Humana would want to protect their industry, but it is difficult to understand why the editors of JAMA would widely distribute this article (for free!) that seems to be designed to counter the call for replacing the dysfunctional private insurance industry and the burden it places on the delivery system with an efficient system of Single Payer Medicare for All.
If you are going to ferret out waste, shouldn’t you attack the biggest heap?
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