Healthcare Economy

US Wastes $760 to $935 Billion Annually on Health Care

Nearly 25% of U.S. spending on health care is wasted, according to a new study published Tuesday in the Journal of the American Medical Association (JAMA). Health care accounted for an estimated 17.8% of U.S. gross domestic product in 2018, or about $3.5 trillion out of $20.5 trillion in GDP.

The estimated wasted portion of that $3.5 trillion ranges from 21% ($760 billion) to about 25% ($935 billion) of all U.S. dollars spent on health care. Only 17 other countries achieve total GDP greater than the amount of money the United States wastes on health care spending. At the low end, wasteful health care spending in the United States is just slightly below the entire $770 billion GDP of Saudi Arabia — which is one of the world’s wealthiest countries. Here is a look at the 25 richest countries in the world.

In an editorial comment on the new study, Dr. Donald M. Berwick of the Institute for Healthcare Improvement and one of the authors of a similar study in 2012, commented: “With US health care expenditures exceeding $3.5 trillion annually, 25% of the total would amount to more than $800 billion per year of waste (more than the entire 2019 federal defense budget, and as much as all of Medicare and Medicaid combined). Even 5% of the total cost is more than $150 billion per year (almost 3 times the budget of the US Department of Education).”

The research project, conducted by Dr. William H. Shrank and Teresa L. Rogstad of health insurer Humana and Dr. Natasha Parekh of the University of Pittsburgh School of Medicine, sought to estimate current levels of health care system waste based on six previously developed topics, or in the language of the study, “waste domains.” Earlier studies had estimated that 30% of health care spending was wasted.

The six waste domains covered by the research were: 1) failure of care delivery, 2) failure of care coordination, 3) over-treatment or low-value care, 4) pricing failure 5) fraud and abuse, and 6) administrative complexity.

Researchers reviewed 71 estimates from 54 unique peer-reviewed publications, government reports and reports from the “gray” literature, which the University of Illinois defines as “documentary material in print and electronic formats, such as reports, preprints, internal documents (memoranda, newsletters, market surveys, etc.), theses and dissertations, conference proceedings, technical specifications and standards, trade literature, etc., not readily available through regular market channels because it was never commercially published/listed or was not widely distributed.”

The review yielded estimates of both dollars wasted in each of the six domains and how much of that waste could be eliminated.

In the failure of care delivery domain, an estimated $102.4 billion to $165.7 billion is wasted, and the researchers estimate that $44.4 billion to $93.3 billion of the wasted spending could be eliminated.

Wasted spending related to failing to coordinate care totals an estimated $27.2 billion to $78.2 billion, and savings of $29.6 billion to $38.2 billion were identified.

Over-treatment or low-value care wastes $75.7 billion to $101.2 billion, and an estimated $12.8 to $28.6 billion could be saved.

Pricing failure adds $230.7 billion to $240.5 billion to health care’s wasted spending and could contribute savings of $81.4 billion to $91.2 billion.

Waste accounted for as fraud and abuse cost an estimated $58.5 billion to $83.9 billion, and estimated savings could range from $22.8 billion to $30.8 billion.

The domain responsible for the most wasteful spending is administrative complexity, which accounts for an estimated $265.6 billion in overspending. The researchers reported finding no studies focused on reducing these expenditures. As Dr. Berwick notes, “No one has seemed interested enough in this high-potential change to do something about it.”

Of the estimated $760 billion to $935 billion wasted annually on health care, some $191 billion to $282 billion could be eliminated, or about 25% of the wasteful spending. Based on an estimated 2019 health care spending total of $3.82 trillion, eliminating waste saves between 5.0% and 7.4% of estimated 2019 health care spending.

Pricing failure (domain #4) has received substantial attention from policymakers because this is where the cost of prescription drugs is included. Surprise billings for out-of-network services are another significant component of pricing failure. Still, the researchers conclude, “[I]n the dynamic health care marketplace, where profit-motivated firms will respond to any new policy with strategies to protect their margins, no single policy is likely to suffice; a coordinated policy effort is likely needed to create long-standing change that will meaningfully reduce waste resulting from pricing failure.”

The researchers also noted that some of the waste due to administrative complexity is due to fragmentation in the U.S. health care system. However, the “greater opportunity to reduce waste in this category should result from enhanced payer collaboration with health systems and clinicians in the form of value-based payment models.”

A value-based model that includes clinicians assuming the financial risk for the total cost of care could reduce waste by eliminating costs (like prior authorization) or delegating the costs to clinicians. The new study suggests several other steps that could intervene to reduce administrative costs. But they also note that the “science describing the success of these interventions is limited and more evidence is needed to quantify the waste in this category that could be reduced and the resulting savings.”

A reduction in wasteful spending could result in more affordable care. Currently, the high cost of health care is one of the most serious public health issues America is facing today.

Let’s allow Dr. Berwick the last word: “What Shrank and colleagues and their predecessors call ‘waste,’ others call ‘income.’ People and organizations (for-profit and not-for-profit) making big incomes under current delivery models include very powerful corporations and guilds in a nation that tolerates strong influences on elections by big donors.”