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Wasted health care spending in the U.S. tops annual defense budget, study finds

Up to $935B in health care spending wasted
Wasted health care spending in U.S. tops annual defense budget, study finds 01:11
  • Waste in the U.S. health care system ranges from $760 billion to $935 billion per year, or more than total annual federal defense spending, according to a new study.
  • Administrative activities account for the largest source of needless spending, followed by inflated and opaque pricing.
  • "The prices of health care don't reflect what would happen in a competitive market," one expert says.

The administrative tasks required of doctors, nurses and other medical professionals are so complex and time-consuming that they squander hundreds of billions of dollars each year, according to a new analysis of health care spending in the U.S. 

Activities such as medical coding and billing, recordkeeping and other clerical activities result in roughly $266 billion in excess spending annually, according to the study, which was published this week in the Journal of the American Medical Association. 

But the overall amount of money that goes down the drain is even greater. Factoring in other inefficiencies, such as a lack of price controls for health services, poor coordination of care, and fraud and abuse, the total tab that is wasted every year runs between $760 billion and $935 billion, according to the researchers. That's fully a quarter of all annual health care spending in the U.S., not to mention greater than the entire 2019 defense budget.

"The health care system was never built intentionally for a smooth flow, so there is a lot of redundancy and errors in care," said Dr. Donald Berwick, President Emeritus and Senior Fellow, Institute for Healthcare Improvement. 

More payers, more paperwork

Administrative tasks are the biggest source of unnecessary health care spending, with experts pointing in particular to the system's daunting complexity.

"There are so many different payers, kinds of coding, billing products, recordkeeping requirements, that when you get a system that complicated it adds tasks and paperwork," Berwick said. 

Indeed, a 2016 study funded by the American Medical Association found that doctors spent almost twice as much time on administrative work (49% of their time) as they did seeing patients (27%). Physicians also took another one to two hours of clerical work home with them each night. 

The existing fee-for-service payment system, under which each provider bills for the services they deliver, is another major source of complexity and waste.

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"Right now you're billed for the hospital room, by the ambulance company, by every doctor, rehab facilityeveryone is keeping their own records and doing their own billing and dividing it up into tiny pieces, which makes it hard for the patient and hard for the caregivers," Berwick said. "It has long since outlasted its usefulness."

Moving to a value-based system could help reduce administrative costs, said the authors, physician William Shrank and public health expert Teresa Rogstad, both of Humana in Louisville, Kentucky, and Natasha Parekh, a physician and assistant professor at the University of Pittsburgh School of Medicine.

"The more we can make this whole process frictionless, seamless, simple for providers and patients and focus on what we really want to do — take care of patients — there is a real opportunity to do that and reduce waste at the same time," Shrank said.

Rewarding caregivers for better care

The second-largest cause of waste in health care stems from the inflated, opaque pricing of medical services, drugs and medical devices, the study found. That accounts for an estimated $231 billion to $241 billion in needless spending per year.

"The prices of health care don't reflect what would happen in a competitive market," Berwick said. 

Three other areas — failure of care delivery, failure of care coordination, and overtreatment or low-value care — together account for as much as $345 billion in wasteful spending.

The solution? Rewarding caregivers for delivering better care — not just more services — would certainly help. Ultimately, the goal is to align incentives for doctors, patients and insurance companies.

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"If we pay doctors for the right outcomes, it addresses many of the key domains of waste that we outline in the paper," Shrank said. "The vision is that insurance companies instead pay providers based on the outcomes they produce and the quality of care they deliver. In fact, they are rewarded when they produce the highest quality of care at the lowest cost."

Not surprisingly, that's easier said than done. Under the current system, it's in the interest of health providers, hospitals, drugmakers and medical device makers to prioritize quantity, not quality, of care. 

"The idea is that for decades the U.S. health system has paid doctors for delivering health services. As a result, the incentives have been aligned to deliver more services to patients," Shrank said. 

Fraud and abuse, such as overbilling, results in between $58 billion and $84 billion in excess spending, the study found.

"I don't know any other industry in which it's this onerous, and where it's taking money right out of the wallets of patients and families who are bearing greater and greater burdens of payment. It's a serious problem," Berwick said. 

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