The Cost of Waste in Healthcare

John McCracken, PhD

A recent study in JAMA estimated the cost of waste in the U.S. healthcare system to be between $760 – $ 935 billion, approximately 25% of the projected $3.82 trillion of healthcare spending in 2019.  To put that number in perspective, it represents approximately 4.5% of total U.S. GDP.

The data was compiled from 71 peer-reviewed studies conducted over a six year period and grouped into six domains of waste.  The domains and estimates are:

  1. Pricing Failure                                                          $230 – $240 billion
    The result of industry prices much higher than required to cover the true cost of production plus a fair profit.
  2. Administrative Complexity.                                 $265 billion
    Waste that results from needless and often conflicting rules, regulations, procedures and requirements of numerous healthcare payers and regulatory authorities. 
  3. Overtreatment and Low Value Care                 $75 – $100 billion
    Subjecting patients to care that science and best practice have determined to be of negligible value or even harmful to the patient. 
  4. Inefficient Care Delivery                                       $100 – $165 billion
    Clinical and hospital inefficiency that results from poor execution, medical errors and failure to adopt widely recognized best practices. 
  5. Failure of Care Coordination                              $30 – $80 billion
    Waste that results from fragmented and uncoordinated care, resulting in preventable complications and avoidable ED and hospital admissions. 
  6. Fraud and Abuse                                                      $60 – $85 billion
    Fraudulent billing and deceitful practices of unscrupulous and unethical professionals.

Reducing Healthcare Waste

For over a half century the government has initiated numerous policies and programs in a relatively unsuccessful effort to both reduce waste and restrain healthcare inflation. Finally, however, with the introduction of a proposed transparency rule and the evolution of value-based purchasing, progress is beginning to be made.

In June CMS introduced a proposed rule to require all community and critical access hospitals, as well as the physicians employed by them, to post payer-specific negotiated prices for a minimum of 300 shoppable services.   Though strongly resisted by the hospital industry, a final rule is expected to be issued before the end of the year.  Making hospital prices transparent to patients and employers should help reduce waste in the domain of pricing failure—the first item on the list—though it would not address high pharmaceutical prices, which represent a major component of this waste domain. 

With the recent evolution of value-based purchasing, both public and private payers have finally begun to get traction in their efforts to control costs. In contrast to traditional fee-for-service, value-based purchasing in the form of bundled payments and capitated population health is beginning to hold providers accountable for both the cost and quality of care they deliver.  

If finally successful, widespread adoption of value-based purchasing could be expected to reduce the cost of administrative complexity, which is the most costly item on the list.  In value-based models, where clinicians accept financial risk for the total cost of care they provide, many of the tools and practices used by payers to control costs and limit care could be discontinued, reducing the administrative burden on providers.  Two-sided risk models could also be expected to reduce the next three sources of waste—low value care, inefficient care delivery and lack of care coordination—as providers assume financial risk for the cost of care they deliver. 

The major challenge of  value-based purchasing and its promise of waste reduction is that it requires a fundamental transformation of the medical delivery model.  To effectively control costs, the delivery of care has to be transformed from the traditional model of a craft-based practice, organized around a medical specialty or facility, to a team-based practice, organized around patient or disease state.  For doctors, this entails an erosion of physician autonomy and hierarchy in favor of clinically integrated, team-based systems of care as well as direct accountability for both costs and outcomes. 

Team-based care with accountability for cost and outcomes is not the way most of today’s practicing physicians have been trained, particularly older physicians.  Progress to date has been slow, and may even require generational change and the ascendency of younger physicians—with different values and characteristics—into the leadership ranks before significant change can happen.  The question is whether the American public—who consistently ranks healthcare as their top Congressional priority—will give value-based purchasing enough time to become the norm, or whether Congress will act precipitously with some variant of Medicare for all and heavy-handed government control. 

John McCracken is Director of the Alliance for Physician Leadership, an educational partnership between the University of Texas at Dallas and The University of Texas Southwestern Medical Center which offers an MS/MBA program in healthcare leadership and management exclusively for physicians.