Much of US Healthcare Spending Wasteful, Researchers Say

Kerry Dooley Young

October 08, 2019

About $1 of every $4 spent on healthcare in the United States may be squandered due to a combination of potentially avoidable administrative hassles, failures in coordination and delivery of services, use of treatments of little care, and fraud, a study found.

William H. Shrank, MD, MSHS, from insurer Humana Inc, and coauthors built on previous research in developing this estimate. In a special communication published online October 7 in JAMA, the researchers pegged the total annual cost of waste in the US healthcare system at $760 billion to $935 billion. Their topline estimate represents almost 25% of the $3.82 trillion estimated to be spent in the United States on healthcare this year, they explain.

Yet there have been significant efforts over the years to address this waste. The authors say that current efforts to combat waste save $191 billion to $282 billion annually. This reduces the net effect of waste to perhaps $478 billion to $744 billion, Shrank told Medscape Medical News.

In seeking to identify waste, Shrank and colleagues looked at work published from 2012 to 2019, using articles from the Agency for Healthcare Research and Quality, the Centers for Medicare and Medicaid Services (CMS), the National Quality Forum, the National Academy of Sciences, the Commonwealth Fund, RAND Corporation, the Urban Institute, PricewaterhouseCoopers Health Research Institute, and Health Affairs. In the end, their paper reflects 71 estimates drawn from 54 publications.

There is some complex interplay within these estimates of waste and savings with efforts to combat it. Insurers count on prior authorization, for example, to try to rein in overtreatment and what they call low-value care, such as use of expensive drugs when there are cheaper equivalent treatments. Yet prior authorization also contributes to what the authors term "administrative complexity," the biggest category of wasteful spending identified in their paper, according to Shrank.

"The providers' administrative complexity represents the payers' effort to reduce waste," he told Medscape Medical News. "It's a perfect example of where the incentives are perfectly misaligned and it creates administrative complexity that just sucks value out of the system."

Shrank sees this as further proof of a need to move to a value-based system, in which payment for clinicians would be more closely tied to patient outcomes.

In such a system, physicians might receive a set amount of money for care of a patient or an episode of an illness. That would end the need for checking in with insurers about which treatments or drugs to use through prior authorization, Shrank said. Giving clinicians this autonomy would be part of a broader move toward value-based care, he explained. In discussions of value-based care, it is often noted that clinicians operating in these kinds of payment models would need to get feedback more quickly through data systems to understand their performance.

"We need transformation in how the clinical care is delivered. We need transformation in the data infrastructure, and we need transformation in how we pay providers and align incentives," Shrank said. "The good news is all three of those are heading in the right direction right now."

Other researchers appear less optimistic about the pace at which the US healthcare system may become more efficient.

Shrank's article is intended to serve as an updated analysis of a 2012 report in JAMA that suggested that waste might consume as much as 34% of national health expenditures.

An author of that 2012 analysis, Donald Berwick, MD, wrote an accompanying editorial published October 7 in which the former CMS administrator dug into the reasons why wasteful spending has been difficult to root out of healthcare.

There's a "viscosity" due to investments already made in capital structures and ingrained workforce that blind "even smart executives and boards of directors to the need to change," Berwick writes. He contrasts the performance of the US healthcare systems with that of large industries that also rely on technological advances.

Computers and household appliances tend to become both better and cheaper over time, whereas healthcare costs are "relentlessly increasing at a multiple of the general rate of inflation," Berwick writes.

Like Shrank, Berwick argues for a need to try to tie payment to outcomes in healthcare. He also emphasizes the potential benefit of physician-driven efforts, such as the American Board of Internal Medicine's Choosing Wisely campaign.

"In local markets, physicians can champion changing payment from fee-for-service to shared risk and forms of global payment that encourage everyone to end wasteful care," Berwick explains. "In the end, physicians can and should act with strong voices and political courage to openly oppose greed and deception in pricing policies wherever they arise."

Six Kinds of Wasteful Spending

Shrank and colleagues acknowledge limitations to their work. The studies selected for review may not represent all of the waste happening in the different sectors identified. They divided wasteful spending into six categories, including fraud and abuse, which may account for $58.5 billion to $83.9 billion.

Administrative complexity was the category estimated to take the largest bite of healthcare spending ($265.6 billion), write Howard Bauchner, MD, and Phil B. Fontanarosa, MD, MBA, the editor and the executive editor, respectively, of JAMA, in another accompanying editorial. There could be significant savings in attempting to shrink the administrative costs seen in the private sector, running to about 15%, to the level seen in the Medicaid and Medicare programs, reportedly no more than 5%.

"That alone could save approximately $120 billion (based on 10% savings of $1.2 trillion spent on private health insurance)," they write.

The administrative category also includes time spent on billing and coding, as well as that needed for physicians to report quality measures. The healthcare system could benefit from greater standardization of the many metrics clinicians must report, suggest the authors of another editorial accompanying the Shrank and colleagues study. In it, Karen E. Joynt Maddox, MD, MPH, from Washington University in St. Louis, and Mark B. McClellan, MD, PhD, from Duke University, Durham, North Carolina, said that hospitals could redirect resources now used for "collecting unharmonized metrics" if there were more standardized approaches to metrics.

"A hospital may need to collect one type of data on urinary tract infections for its Medicare programs, another for Medicaid, and yet another for a private payer," write Joynt Maddox and McClellan, who earlier served as a CMS administrator.

Another large category for wasteful spending identified by Shrank was so-called "pricing failure," with an estimated cost to the US healthcare system of $230.7 billion to $240.5 billion. This category represents cases where prices paid for services and treatments in the United States appear disproportionate, especially in relation to those paid in other affluent countries.

CMS and the US Food and Drug Administration could "take a series of steps to reduce drug prices, from opening up more competition to allowing for importation of generic drugs from other countries and potentially even negotiating drug prices directly," suggest Jose F. Figueroa, MD, MPH, from Harvard University, Cambridge, Massachusetts, and coauthors, in another editorial accompanying the Shrank review.

Shrank and colleagues attribute much of the wasteful spending to three other categories with more direct connection to the daily practice of medicine: failure of care delivery, $102.4 billion to $165.7 billion; failure of care coordination, $27.2 billion to $78.2 billion, and overtreatment or low-value care, $75.7 billion to $101.2 billion.

Figueroa and colleagues question how much payoff has been seen so far from significant recent efforts to address waste within the practice of medicine. The Affordable Care Act of 2010 kicked off several initiatives that have not yet produced major savings.

Figueroa and coauthors say there has been misplaced emphasis on clinical savings in strategies for addressing waste in US healthcare spending.

"Efforts to improve care coordination and care fragmentation are important and may improve care," they write. "However, to meaningfully tackle costs and waste, it is necessary to address the high prices and administrative complexity that plague the US health care system, because, as the infamous bank robber Willie Sutton said when asked why he robbed banks, that is where the money is."


Much of the work needed to address high prices and administrative complexity would have to be done by members of Congress and leaders within CMS.

"In large measure, the challenge of removing waste from US health care and reinvesting that harvest where it could do much more good is not a technical one. It is a political one," writes Berwick in his editorial. "In short, removing waste from US health care will require both awakening a sleepy status quo and shifting power to wrest it from the grip of greed."

There has been no shortage of detailed debate in Washington on this topic. An August 2019 analysis by the nonpartisan Committee for a Responsible Federal Budget identified a number of recent proposals from the White House and influential Senate committees that perhaps would save a combined $900 billion. There's bipartisan interest in these ideas.

Suggestions about how to save money on healthcare have in fact been rare points of agreement between the Obama and Trump administrations. Democrats and Republicans have supported efforts, for example, to end higher Medicare payment rates for the work of physicians in practices owned by hospital groups.

"The Bipartisan Budget Act of 2015 addressed this inequity for new off-campus facilities, but grandfathered facilities in existence at the time," said the Trump administration in its fiscal 2020 budget request.

President Donald Trump's proposal seeks to "equalize Medicare payment for all physician practices and off-campus facilities, regardless of whether they are hospital-owned or when established, lowering out-of-pocket costs for seniors receiving services at those facilities," according to a summary of his fiscal 2020 request.

But hospitals claimed a victory last month in their fight against site-neutral payments. US District Court Judge Rosemary Collyer ruled that CMS exceeded its authority by reducing payments for hospital outpatient services provided in off-campus provider-based departments grandfathered under the Bipartisan Budget Act of 2015.

In general, healthcare industry groups will fight bids by lawmakers and regulators to end what they consider wasteful spending, said J. Michael McWilliams MD, PhD, a professor of healthcare policy at Harvard University.

McWilliams has done his own research on efforts to make healthcare spending more efficient, including the June 2016 publication of a paper on accountable care organizations, "Getting More Savings from ACOs — Can the Pace Be Pushed?" in the New England Journal of Medicine.

"One person's waste is another's income," McWilliams told Medscape Medical News after reviewing the study and accompanying editorials. "That is probably the greatest impediment to progress so far."

There's been too much emphasis on the idea of making major impact through a few select avenues of payment reform, McWilliams said, adding that there will not be a "silver bullet" for addressing wasteful spending in healthcare. And despite great interest in value-based approaches, the fee-for-service model will persist to some extent, he said.

"We have been approaching payment reform like a game of pin the tail on the donkey, stumbling around half blind and hoping to get it right with one stab. Instead, successful payment reform might look more like a game of whack-a-mole," McWilliams said. "That is fine."

McWilliams suggested that medical professionals and health policy experts prepare for persistent battles to rid the healthcare system of pockets of unnecessary spending.

"The waste will never disappear, but we can beat it down some," McWilliams said.

Shrank reported receiving support from Humana Inc. Another author, Teresa L. Rogstad, MPH, reported receiving support from Humana Inc. A third author, Natasha Parekh, MD, MS, reported employment with University of Pittsburgh Medical Center Health Plan.

JAMA. doi:10.1001/jama.2019.13978. Full text

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