Waste

Many health sector experts characterize the U.S. health care system as administratively wasteful. Economist Henry Aaron described the system as " . . . an administrative monstrosity, a truly bizarre mélange of thousands of payers with payment systems that differ for no socially beneficial reason, as well as staggeringly complex public systems with mind–boggling administered prices and other rules expressing distinctions that can only be regarded as weird" (Aaron, 2003).

International comparisons suggest that the United States outspends most other countries on health care administration. Data from the National Health Accounts collected by the Organization for Economic Co–operation and Development (OECD) show that insurance administrative costs are significantly higher in the United States than in other countries (see the figure).

Percentage of National Health Expenditures Spent on Health Administration and Insurance, by Country, 2006

SOURCE: Data are from OECD, 2009. Click to Zoom

Other researchers cite evidence of administrative waste in the U.S. health care system by comparing our multi-payer system to the single-payer system in Canada. Although methodologies vary, these types of studies generally find significant administrative cost savings in the hypothetical transitioning of the United States to a single payer system (see Table 1).

Table 1. Estimates of U.S. Health Care Administrative Savings from Transition to a Canadian Style Single Payer System

Other efforts to identify administrative waste focus on specific sectors in the health care industry. For example, there are significant differences in administrative overhead between public and private insurances, leading some to conclude that the excess spending by private insurance companies must constitute administrative waste. Estimates indicate that overhead/administrative costs (premiums minus claims payments) make up 14 percent of total private insurance expenditures, compared with 3–5 percent of spending in public sector programs such as Medicaid and Medicare (Davis et al., 2007; Catlin et al., 2007).

Other sector specific data suggest that the multi-payer system in the United States carries with it significant administrative costs, some of which can be attributed to redundant processes. Practitioners and hospitals, in their interactions with multiple payers, are encumbered by numerous billing requirements, a multitude of formularies and clinical care guidelines, and patients with different covered benefits. Simplifying product design and the verification processes could save both time and money. Similarly, medical groups usually have contracts with multiple payers, each separately negotiated and usually renewed annually. Estimates suggest that medical groups alone incur $700 million per year in negotiating these contracts (Medical Group Management Association, 2005). These types of data reveal spending in the system that might constitute waste.

As yet, there is no comprehensive overview of clinical waste in the health care system. Nonetheless, researchers have attempted to identify and quantify clinical waste in a variety of ways.

A large number of RAND studies over the past two decades have used the RAND/UCLA Appropriateness Method to examine the appropriateness of various medical and surgical procedures. In general, a procedure was considered appropriate if the patient’s expected health benefits substantially exceeded the expected health risks. Overall, these studies indicate that one-third or more of all procedures performed in the United States are of questionable benefit. (See, for example, Bernstein et al., 1993; Hilborne et al., 1993; Kleinman et al., 1994; Winslow et al., 1988.) Such procedures may constitute clinical waste.

Examination of regional variations reveals marked differences in Medicare spending in different parts of the country. After adjusting for age, sex, and race, per capita Medicare spending in 2000 in New York City was more than twice as much as it was in Portland, Oregon ($10,550 versus $4,823) (Fisher, 2003). Such differences stemmed from differences in practice patterns rather than from differences in price or underlying illness, and outcomes were unaffected. Spending variations that do not result in improved clinical outcomes may constitute clinical waste.

Another way to identify clinical waste is to look at specific procedures whose use varies in different parts of the country. For example, Weinstein et al. (2006) found a 20–fold regional variation in the use of a type of back surgery known as a lumbar fusion. Without clear evidence of clinical benefit, the excess use of this procedure could be considered clinical waste. Bentley et al. (2008) estimate that inappropriate use of spinal fusion results in more than $11 billion in wasted resources per year.

Finally, there is evidence that changing treatment thresholds leads to increasing treatment of individuals without confirmed disease. For example, changing thresholds for high blood pressure treatment has led to the treatment of many individuals (such as those with a diagnosis of "pre–hypertension") for whom the benefit of treatment is unclear. Kaplan and Ong (2007) estimate that lowered thresholds for hypertension diagnosis and treatment have led to an additional 13 million individuals being treated for high blood pressure. Medication treatment costs can vary, but they may be as high as $500 per year and can also lead to costly side effects and increased visits to a physician for monitoring. Since the benefits of this treatment are still unclear, much of the treatment may ultimately be considered clinical waste.