Waste accounts for one-quarter of healthcare spending

A new study found waste accounts for roughly one-quarter of all U.S. healthcare spending, an estimate that's in the same ballpark as its predecessors. 

The cost of waste in the U.S. healthcare system ranges from $760 billion to $935 billion annually, according to a JAMA review of 54 peer-reviewed studies, government reports and other information, released Monday. The study found one-quarter of that could be cut using interventions found to reduce waste.

Two previous studies on the subject from 2012 estimated waste at roughly 30% and 34% of total healthcare spending.

"There have been a lot of changes in the healthcare system in the last seven years," said Dr. William Shrank, an author of the study and chief medical and corporate affairs officer for health insurer Humana. "We thought it was an appropriate time to update that study." 

Shrank undertook the research with a Humana colleague and a third researcher from the University of Pittsburgh School of Medicine.

One reason the new study's estimate is lower than previous ones is because it took the conservative approach of not extrapolating Medicare-only data to the broader population, whereas previous studies did. Shrank said Medicare-only research represented the minority of contributing studies.

The current study divided waste into six previously identified categories. Administrative complexity accounted for the most waste, at $265.6 billion annually. Below that was waste due to pricing failure, which costs $230.7 billion to $240.5 billion annually. Failure of care delivery accounts for $102.4 billion to $165.7 billion annually. Overtreatment or low-value care results in $75.7 billion to $101.2 billion in waste annually. Waste related to fraud and abuse costs between $58.5 billion and $83.9 billion annually. Finally, failure of care coordination generates $27.2 billion to $78.2 billion in waste annually. 

The study also estimated potential annual savings from measures shown to cut waste. In aggregate, those interventions could save $191 billion to $282 billion annually, or about 25% of the total cost of waste. 

"There's always going to be some waste," Shrank said. "I don't think we'd ever expect to see zero waste." 

But there were no interventions in the scientific literature to chip away at the biggest culprit: administrative waste. Shrank said that's because those efforts tend to happen within businesses and aren't widely disseminated. He hopes this study encourages more shared learning across the healthcare industry. 

The key takeaway theme of the study, in Shrank's mind, is that aligning payers and providers through value-based care initiatives can go a long way toward cutting waste. He said sources of administrative complexity like prior authorization, utilization management or other billing issues are simply methods payers use to reduce waste. 

"In an environment where payers are pre-paying physicians or sharing risk with physicians for the management of populations, much of these sources of administrative complexity can be reduced or eliminated or streamlined," he said. 

Other experts drew far different conclusions. 

Former CMS Administrator Dr. Don Berwick, the Institute for Healthcare Improvement senior fellow who wrote a 2012 JAMA study on healthcare waste, said value-based payment arrangements like bundled payments and accountable care organizations have been shown to generate 1% to 3% in cost savings—a "big gap" from the waste estimates researchers have published. 

"I tend to be an optimist and I'm grateful for the progress, but I suspect we're going to need bolder approaches to changing the financing of healthcare than we have accepted so far," he said. 

Similarly, Dr. Ashish Jha, professor of health policy in the Harvard T.H. Chan School of Public Health, said research has shown almost no value-based care programs have yielded improvement. Even the most effective form of value-based care, physician-led ACOs, have produced savings up to roughly 3%. 

"I've got literally dozens of studies I can point to that show it's having little to no impact," he said. "This is not one where people just get to have differing opinions. You've got to bring some evidence to bear for why it's going to be useful, because all the data so far show things heading in one direction." 

Berwick said he thinks the solution to healthcare waste will need to be a political one. People must mobilize to say, " 'It's enough. We're not going to put up with this kind of administrative waste,' " he said. " 'We're not going to put up with this obscene pricing. It's time to stop.' I don't know without that kind of political force, how these circumstances can be changed." 

Jha thinks part of the solution will be to address healthcare's irrational pricing. One potential tool is price transparency improvement that will help people shop around for the lowest-cost care, although there's not much evidence that such efforts are helpful in lowering prices. 

Enhanced regulation of healthcare monopolies could also help, Jha said. In recent years, he said federal agencies haven't adequately pushed back against mergers and acquisitions, but that's partly because they're underfunded. Another difficult but potentially helpful task would be to either break up large health systems or enable new providers to enter markets, he said. Jha said the federal government could lower drug prices by importing generic drugs from other countries and potentially negotiating drug prices directly. 

Shrank believes stronger payer and provider relationships will help chip away at waste by allowing for more value-based partnerships. Those bonds must be built on trust and transparency, he said.

"In the absence of trust, that relationship is much more limited and our ability to take better care of people and reduce waste similarly will be far more limited," Shrank said. 

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