U.S. Health Care Spending: Where Is the Waste?

by Stephen Kemble

Many still assume universal health care must mean higher costs, but other countries prove this assumption false. The US spends about twice as much per capita on health care as other industrialized countries, yet others are able to cover everyone and have better health outcomes. If we are to succeed in health care reform, we must ask the question, "What are we spending on health care that other countries are not, and that does not add value to health care?" We are now spending about 18% of our gross domestic product on health care and rising. If we do not correctly identify wasted spending and take steps to reduce it, health care spending will continue to break the budget. Contrary to what some assume, all evidence indicates that government financing in health care is actually far more efficient than the private insurance industry. The "Patient Protection and Affordable Care Act" (PPACA) is built around the private insurance model with government subsidies to fill in some of the gaps. It will not reduce total national health spending or waste, and we will face escalating pressure to restrict necessary care.1,2

This Pie Chart is based on evidence from comparison with other countries that have well functioning national health plans, 3,4 from cost analyses of various national and state level health reform proposals, including the PPACA, done by The Lewin Group,2 the Congressional Budget Office (CBO), and Centers for Medicare and Medicaid Services (CMS),1 and from studies on regional variations in health care spending in the US. 5 The percentages are estimates, but based on available evidence they are "in the ballpark." The data is much firmer for administrative costs than for unnecessary and inappropriate care.


Administrative Waste (est. 24%)

Administrative waste is the difference between what the U.S. spends on health care administration and what countries with efficient universal systems spend.3,4 Administrative costs include health insurance administration (premiums collected minus payments to health care providers), and administrative costs for doctors, hospitals, employers, and the public.
The "waste" includes marketing and advertising, underwriting, multiple private bureaucracies, highly paid executives, managed care costs, pharmacy benefit manager costs, maintenance of insurance reserves, profit, lobbying and "government relations," employer and broker costs, costs to doctors and hospitals to deal with billing and insurance, and physician time lost to dealing with prior authorizations and formulary restrictions.

All of these are directly attributable to use of competing private insurance plans, and especially for-profit insurance companies, to finance health care. None add any measurable value to health care.

Unnecessary and Inappropriate Care (est. 20%)

Unnecessary and inappropriate care is due to inadequate access to necessary care (under-treatment), or to various forms of over-treatment. There is actually far more under-treatment than over-treatment in the U.S.,6 but much of it is in the form of unnecessary suffering and death due to lack of access to care that does not show up in cost figures.

Under-treatment results from lack of insurance, under-insurance, and inadequate access to primary care, leading to excessive use of emergency services and delay in disease treatment resulting in expensive complications and preventable hospitalizations. It also includes medical errors and inefficient care due to pressure on physicians to spend inadequate time with patients, leading to failure to listen and think through problems to provide the best care.

Over-treatment includes procedures and services driven by provider profit motive, rather than the best interest of the patient, and irrational reimbursement policies and misallocation of health care resources according to profit incentives rather than health care needs of the population. It includes direct to consumer advertising leading to inappropriate patient demand for care, especially for drugs. It includes defensive medicine due to fear of lawsuits. It also includes provider fraud.

All of these are much more difficult or impossible to address in a fragmented health care market. In health care, the evidence shows that competition among insurance companies and fragmentation of health care financing add administrative costs, drive up health care prices, impede access to necessary care, fail to reduce unnecessary care, impede detection of errors and fraud, and do not provide fiscal efficiency or add value to health care.7 The insurance exchanges in the PPACA may increase coverage, but add substantial administrative costs and cannot solve our cost problems.8,9

Other proposals to control costs, including health information technology, prevention, and comparative effectiveness research, may improve health care but are likely to cost as much as they save and will not "bend the curve" of escalating health care costs.10 Reorganization of doctors and hospitals into "accountable care organizations" and pay for performance schemes that shift insurance risk onto providers may reduce over-treatment, but bring an equally problematic and costly incentive for providers to under-treat and avoid taking on sicker and more complex patients. Reforms that target unnecessary care but rely on new layers of administration or use blunt strategies that restrict necessary as well as unnecessary care cannot make health care more cost-effective. Neither can reforms that push increasingly unaffordable costs onto those needing care, deterring more necessary than unnecessary care.

According to the CBO, malpractice costs are less than 3% of the US health care dollar. Tort reform proposals touted by the AMA are not likely to save more than 1% of health care costs at best.11

Only a universal publicly financed healthcare system could actually provide comprehensive coverage to all, free choice of doctors and hospitals, and reduced cost. Administrative waste could be eliminated off the top, and access to necessary care would improve substantially. The experience of other countries shows that a universal system would reduce or eliminate many of our perverse incentives for over-treatment, even if doctors are paid with fee-for-service. A system-wide quality improvement program with physician leadership could reduce unnecessary care more effectively than strategies now employed by insurance companies or proposed under the PPACA. Health care prices could be reduced in proportion to administrative savings without harming providers of care, and eliminating fiscal waste would greatly reduce pressure to limit benefits and deny and ration care. With a universal system, health care could be removed from injury litigation, markedly reducing both the size of judgments and the necessity to sue for access to injury related health care, eliminating more than half the cost of medical malpractice, worker's compensation, and automobile insurance.

We are told that universal publicly financed health care is "off the table." We need to get it back on.

(article with footnotes)

Vermont's Senate Passes Bill for Single-Payer Health Care

Vermont is on the fast track to becoming the first state with universal health care with the passage of a single-payer health care bill on Tuesday.

The Vermont Senate approved the bill 21-9 to offer government-funded health insurance to all state residents. The bill will now go to a conference committee, where the House and Senate will hash out the differences in the bill before sending it to Gov. Peter Shumlin, a Democrat.

Shumlin will have to obtain approval from the Obama administration before he could begin to implement the single-payer system, which would begin in 2013. President Obama offered waivers to states to implement their own health care systems if the state's plan covers as many people as the federal overhauhttp://www.blogger.com/img/blank.gifl at the same level of coverage, and if it doesn’t add to the federal deficit.

In an interview with MSNBC’s Rachel Maddow, Shumlin said he was confident the state’s plan would be approved.

“What we’re trying to do is have an affordable system that applies to all Vermonters, gives us all quality health care, but spends our dollars on health care and not on insurance company profits,” he said. “I’m convinced if we can create that system, we can get the waivers from Washington, and we will.”

When he ran for governor in 2010, Shumlin promised to bring a publicly financed health care system to the state.

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Key Senate Democrats push for health care public option

Washington (CNN) -- The fight over health care reform burst back into public view Tuesday as four Democratic senators asked Senate Majority Leader Harry Reid to hold a vote on a government-run public insurance option.

Most observers have considered the public option -- an idea long favored by liberal Democrats -- to be a non-starter since it was dropped from a Senate reform bill passed in December. But Sens. Michael Bennet of Colorado, Kirsten Gillibrand of New York, Jeff Merkley of Oregon, and Sherrod Brown of Ohio signed a letter urging Reid, D-Nevada, to hold a vote on the proposal under a rule known as a reconciliation, which would allow the measure to pass with only 51 votes -- a simple majority.

The letter was co-signed by 119 Democrats in the House of Representatives.

Liberal groups MoveOn.org, the Progressive Change Campaign Committee, Democracy for America, and Credo Action are pushing other Democratic senators to sign the letter as well.

Health care reform has long been considered President Obama's top domestic priority. Democrats, however, have been struggling to reach agreement on how best to pass a bill since Massachusetts GOP Sen. Scott Brown's upset victory last month in the race to fill the seat formerly held by Sen. Ted Kennedy.

Brown's win stripped Democrats of their 60-seat Senate supermajority and gave Republicans enough votes to block most legislation.

"We respectfully ask that you bring for a vote before the full Senate a public health insurance option under budget reconciliation rules," the letter states.

"There are four fundamental reasons why we support this approach -- its potential for billions of dollars in cost savings; the growing need to increase competition and lower costs for the consumer; the history of using reconciliation for significant pieces of health care legislation; and the continued public support for a public option."

Use of reconciliation is limited to legislation affecting the budget and therefore could apply only to certain elements of the health care reform agenda.

Senate Finance Committee Chairman Max Baucus, D-Montana, told CNN in January that he thinks reconciliation will ultimately be necessary to pass a health care bill in the chamber. However, multiple Democratic aides have warned that using the controversial maneuver would take time and evoke criticism of relying on a procedural trick to pass a bill.

"It looks too partisan," said Rep. Gerry Connolly, a freshman Democrat from Virginia. Democratic Rep. Earl Pomeroy of North Dakota likened the move to "legislative trickery."

Proponents argue there is a precedent for using reconciliation, noting that it was recently used to pass measures such as an expansion of the Children's Health Insurance Program.

A number of conservative Democrats are urging Obama to craft a more narrowly tailored health care bill -- excluding a public option -- that can win at least some bipartisan support. Increasingly frustrated liberals argue it is pointless to pursue negotiations with what they characterize as an ideologically rigid GOP minority determined to block every White House initiative for short-term political gain.

Obama is scheduled to hold a televised health care summit with Republican leaders on February 25. The president has said the talks should involve true give-and-take negotiations as opposed to mere "political theater."

Obama said last week he wants the meeting -- which also will include health care experts -- to "establish some common facts" on the health care issue and reach agreement on the most pressing health care problems facing the country.

To signal his willingness to compromise, Obama said he would consider a Republican push to include limits on medical malpractice lawsuits in a health care bill if the proposal can be shown to truly reduce overall health care costs.

However, Obama said bipartisanship on health care reform cannot mean only that "Democrats give up everything they believe in."

"Bipartisanship depends on a willingness among both Democrats and Republicans to put aside matters of party for the good of the country," he said.

Obama has not yet given any public indication he is prepared to make a renewed push for a public option.

GOP congressional leaders have repeatedly said health care legislation already passed by the Senate and the House of Representatives should be completely scrapped.

"What we need to do is start over, go step-by-step on a truly bipartisan basis to try to reach an agreement," Senate Minority Leader Mitch McConnell, R-Kentucky, recently told reporters.

"My members are open to doing that."

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Robert Reich Explains the Public Option