Semro column: The cost of waste in American health care
One of the strongest indictments of the American health care system is the amount and cost of the waste it generates. Americans pay for that waste through higher costs and taxes.
The Institute of Medicine (now the Health and Medicine Division of the National Academies of Sciences) published a report a few years ago which concluded that 30 percent of all health care spending in the United States in 2009 could be classified as waste. The report defined waste as overuse, inefficiencies, fraud and other activities that don’t improve health. In 2009, the U.S. spent $2.6 trillion on health care. According to the report, $765 billion of that total could be described as waste.
This breaks down to $210 billion in waste from unnecessary services, $130 billion from inefficiently delivered services, $105 billion from prices that are too high, $190 billion due to excessive administrative costs, $75 billion from fraud and $55 billion in waste created by missed prevention opportunities.
According to the study, unnecessary services were defined as medical overuse beyond established benchmarks and using higher cost services that don’t contribute to a better health care outcome. Inefficiently delivered services were described as operational inefficiencies, mistakes, errors, preventable complications and unnecessary use of higher cost providers. Excessive administrative costs resulted from high insurance paper work costs, insurer administrative inefficiencies and documentation requirements.
Unfortunately, based on a later study, it appears that this level of waste actually increased. According to a report entitled “Eliminating Waste in US Health Care” by Donald Berwick and Andrew Hackbarth, published in the Journal of the American Medical Association, the median estimates for health care waste in 2011 reached 34 percent of all health care spending for a total of $910 billion. That’s just two years after the Institute of Medicine study.
To put these amounts in perspective, the TARP bank bail-out in 2008 cost $700 billion. Total military spending was $668 billion in 2009 and $712 billion in 2011. In Fiscal Year 2012-13 total local, state and federal spending on K-12 education was $620 billion. In short, the money wasted in the American health care system was higher than the cost of the 2008 bank bailout, annual military spending or the amount of money we spent on educating our kids.
I already know how some will respond to this data. They’ll say that this waste is the result of government programs and malpractice lawsuits that drive up the cost of care. They’ll say that government programs are inefficient compared to private business and this increases costs due to administrative complexity and regulation. And government programs are far more susceptible to fraud than the private health care system.
Government programs like Medicare and Medicaid probably have higher administrative costs than they should have, as well as unacceptable levels of fraud, since all fraud is unacceptable. That wasted spending shouldn’t be minimized, but it shouldn’t be exaggerated either.
For example, according to the 2011 study, Medicare and Medicaid represented 13 percent of the median waste estimate resulting from administrative complexity. In comparison, the private health care system ran up 87 percent of excessive administrative costs. Medicare and Medicaid accounted for 36 percent of the total amount of money lost through fraud and abuse. The remaining 64 percent of that fraud largely came out of the private health care system.
Without question, defensive medicine to avoid malpractice lawsuits increases the number of unnecessary services and drives up the cost of care. But, once again, while that waste shouldn’t be minimized, it shouldn’t be exaggerated.
According to a 2010 study by the Harvard School of Public Health, medical malpractice in the U.S. cost $55.6 billion with defensive medicine accounting for $45.6 billion of that total. While that’s a huge amount of money, it still amounted to only 2.4 percent of total health care spending and 8 percent of total waste in that year. That clearly suggests that while this represents a significant problem, it’s hardly the major driver of wasted spending in health care.
According to the National Practitioner Databank, roughly 70,000 malpractice lawsuits were filed in 2015. That’s an average of only 21.8 lawsuits for every 100,000 residents in the U.S. And even though a 2016 study from Johns Hopkins University listed medical error as the third leading cause of death in the United States, medical malpractice payouts are on the decline. According to the databank, paid malpractice claims under $500,000 dropped by half between 2003 and 2015 and paid claims over $500,000 decreased by about 40 percent.
Bottom line, if a system wastes more money annually than the country spends on defense or K-12 education, that’s a clear sign that something is fundamentally wrong. And, rather than falling back on ideological positions and political talking points, we need to identify and fix what’s really wrong regardless of where it takes us in government or the private sector.
Bob Semro of Glenwood Springs is a former health policy analyst for the Bell Policy Center, and a legislative and senior advocate.