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

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.

References