Waste

V. Key Health Policy Issues >> B. Health Spending >> Waste (last update: 7.13.16)

Overview

Types of Waste in Health Care

Berwick and Hackbarth codify 6 broad components of waste (avoidable health care expenditures).

Failures of Care Delivery. This category includes poor execution or lack of widespread adoption of best practices, such as effective preventive care practices or patient safety best practices. Delivery failures can result in patient injuries, worse clinical outcomes, and higher costs.

Uncoordinated Care. These problems occur when patients experience care that is fragmented and disjointed–for example, when the care of patients transitioning from one care setting to another is poorly managed. These problems can include unnecessary hospital readmissions, avoidable complications, and declines in functional status, especially for the chronically ill.

Overtreatment. This category includes care that is rooted in outmoded habits, that is driven by providers’ preferences rather than those of informed patients, that ignores scientific findings, or that is motivated by something other than provision of optimal care for a patient.  This includes defensive medicine.

Administrative Complexity. This category of waste consists of excess spending that occurs because private health insurance companies, the government, or accreditation agencies create inefficient or flawed rules and overly bureaucratic procedures.

Pricing Failures. This type of waste occurs when the price of a service exceeds that found in a properly functioning market, which would be equal to the actual cost of production plus a reasonable profit.

Fraud and Abuse. In addition to fake medical bills and scams, this category includes the cost of additional inspections and regulations to catch wrongdoing.

Behavior-related Avoidable Care. This is not a category used by Berwick and Hackbarth, but it is conceptually similar in that it represents spending that could be avoided were individuals to behave in a more optimal manner. This category accounts for one-fourth to more than one-third of total spending attributable to waste according to PricewaterhouseCoopers estimates (see below).

Aggregate Estimates of the Cost of Waste in Health Care

Berwick and Hackbarth estimate that in 2011, $558 to $1,263 billion was lost to waste in health care (21-47% of all health spending).

Institute of Medicine. IOM’s report The Healthcare Imperative: Lowering Costs and Improving Outcomes: Workshop Series Summary (2010) analyzed health spending for 2009, showing that the U.S. health system wastes an estimated $765 billion (30% of annual health spending), including $210 billion in unnecessary services, $190 billion in paperwork/unnecessary administrative services, $130 billion on inefficiently delivered services, $75 billion on fraud, $55 billion on missed prevention opportunities.

PricewaterhouseCoopers. A PWC report, The Price of Excess (2010) summarizes the following components of waste in U.S. health care. The year is not stated, but the report indicates that waste represents $1.2 trillion out of $2.2 trillion in total health spending, which is consistent with the expenditure level reported by CMS for the year 2006:

PwCWaste21

        • McKinsey Global InstituteAccounting for the Cost of U.S. Health Care: A New Look at Why Americans Spend More (December 2008). Even after adjusting for higher GDP per capita, in 2006, the U.S. spent $650 billion (31.0%) more than its OECD peers on health care. This updates an earlier MGI study (2007) showing that in 2003, U.S. health spending was $477 billion (28.1%) more than its OECD peers after adjusting for wealth (GDP per capita).

Comparative Estimates of the Cost of Waste in Other Sectors

Food Produce. The Guardian reports (7.13.16), “By one government tally, about 60m tonnes of produce worth about $160bn (£119bn), is wasted by retailers and consumers every year – one third of all foodstuffs. But that is just a “downstream” measure. In more than two dozen interviews, farmers, packers, wholesalers, truckers, food academics and campaigners described the waste that occurs “upstream”: scarred vegetables regularly abandoned in the field to save the expense and labour involved in harvest. Or left to rot in a warehouse because of minor blemishes that do not necessarily affect freshness or quality. When added to the retail waste, it takes the amount of food lost close to half of all produce grown, experts say….Globally, about one-third of food is wasted: 1.6bn tonnes of produce a year, with a value of about $1tn.

Resources

  • Bentley, Tanya G.K., Rachel M. Effros, Kartika Palar, and Emmett B. Keeler. Waste in the US Health Care System: A Conceptual Framework.” Milbank Quarterly 86, no. 4 (2008): 629-59.
  • Berenson, Robert A. and Docteur, ElizabethDoing Better by Doing Less: Approaches to Tackle Overuse of Services (January 5, 2013). Timely Analysis of Immediate Policy Issues (RWJF/Urban Institute), January 2013 . This paper provides a summary of the problem of overuse in the U.S. health care system. The analysis gives an overview of the provision of medically inappropriate and unnecessary services that drive up health care spending without making a positive impact on patients’ health outcomes. It also describes approaches that have already been used to address overuse of health care services and outlines the broader payment reforms needed to minimize incentives to overdiagnose and overtreat.
  • Berwick, Donald M., and Andrew D. Hackbarth. Eliminating Waste in US Health Care. JAMA 307, no. 14 (April 11, 2012): 1513-6.
  • Farrell, Diana, Eric Jensen, Bob Kocher, Nick Lovegrove, Fareed Melhem, Lenny Mendonca, et al., Accounting for the Cost of US Health Care: A New Look at Why Americans Spend More. McKinsey Global Institute, December 2008.
  • Kelley, Robert. Where Can $700 Billion in Waste Be Cut Annually from the US Healthcare System? Thomson Reuters, October 2009.

Failures of Care Delivery

Total. Berwick and Hackbarth estimate that in 2011, $102 to $154 billion was lost to failure of care delivery (3.8 to 5.7% of all health spending), with no further breakdown by component. Similarly, the Institute of Medicine analyzed health spending for 2009, showing that the U.S. health system wastes an estimated $130 billion (5.1% of annual health spending) on inefficiently delivered services; an additional $55 billion (2.2%) was spent because of missed prevention opportunities for a total of 7.3% of spending.

Medical Errors. PWC estimates $17 billion in 2006 (0.8% of spending) is due to medical errors [Medical Error costs are calculated at $17 billion in savings of preventable medical errors based on the study in To Err Is Human: Building a Safer Health System by the Institute of Medicine, 1999]. Further information on medical errors is available at Medical Tort System under Health Care Regulation (U.S. Health Policy Gateway).

PWC additionally estimates that in 2006, $3 billion was spent (0.1% of spending) was wasted on avoidable hospital-acquired infections [Hospital-acquired Infection costs are calculated at $3.1 billion based on documented analysis in the New Research Estimates MRSA Infections Cost U.S. Hospitals $3.2 Billion to $4.2 Billion Annually, prepared for Infection Control Today Magazine, May 2005].

Missed Prevention Opportunities. The Institute of Medicine estimates that in 2009, $55 billion (2.2% of spending) was spent because of missed prevention opportunities.

Failure to Follow Clinical Practice Guidelines. A 2003 RAND Corporation study found that only 55% of patients receive recommended care. PWC estimates that in 2006, $22.9 billion (1.0% of spending) was wasted due to poor diabetes management [Poorly managed diabetes costs are calculated at $22.9 billion in cost savings based on State of Diabetes Complications in America by the American Association of Endocrinologists, 2007].

Inefficient Operations. The Institute of Medicine estimates that in 2009, $130 billion (5.1% of annual health spending) was wasted on inefficiently delivered services. PWC estimates $81-88 billion (3.7-4.0% of spending) was wasted in 2006 due to ineffective use of IT, $21 billion (1.0%) due to staffing turnover and $4 billion (0.2%) due to use of paper rather than electronic prescriptions.  McKinsey Global Institute calculates that excess spending due to low hospital occupancy accounted for $11 billion (0.5%) in excess spending in 2006 (Exhibit 30).

Uncoordinated Care

Berwick and Hackbarth estimate that in 2011, $25 to $45 billion was lost to uncoordinated care (0.9 to 1.7% of all health spending), with no further breakdown by component. A recent study estimated that medical device interoperability – the ability of medical devices and health care systems to seamlessly communicate and exchange information – could be a source of more than $30 billion a year in savings and improve patient care and safety.

Avoidable Hospital Readmissions. PWC estimates $25 billion (1.1% of spending) was wasted in 2006 due to avoidable hospital readmissions [Preventable hospital readmission costs are calculated at $25 billion based on savings in preventing readmissions based on rate of potentially preventable readmissions in Promoting Great Efficiency in Medicare, prepared by MedPac Report to Congress, June 2007].

Hospitalizations for ambulatory care sensitive conditions can be a symptom that patients have not gotten adequate or timely primary/preventive care services. A report by National Quality Measures Clearinghouse, Ambulatory Care Sensitive Conditions Measure Summary, provides a thorough description of this measure and its use.

Overtreatment

Berwick and Hackbarth estimate that in 2011, $158 to $226 billion was lost to overtreatment (5.9 to 8.4% of all health spending), with no further breakdown by component. IOM estimated that in 2009, $210 billion (8.4%) was spent on  unnecessary services. Adding all the components of overtreatment reported individually, the PWC analysis shows that $234 billion (10.6% of spending) was wasted on overtreatment in 2006.

Defensive Medicine. PWC estimates $210 billion (9.6% of spending) was wasted in 2006 due to defensive medicine [Defensive medicine costs are calculated at $210 billion based on 10% of all healthcare spending as documented in The Factors Fueling Rising Healthcare Costs 2006, prepared for America’s Health Insurance Plans, January 2006].

Inappropriate Care. There is substantial variation in the level of inappropriate use across different health care services. Research shows that the rates at which particular procedures, tests, and medications were performed or prescribed when clinically inappropriate ranged from a low of 1 percent to a high of 89 percent. After adjusting for differences in disease prevalence and examining differences in procedures per 1,000, McKinsey Global Institute calculates that excess spending on cardiac procedures and knee replacements alone accounted for $21 billion (1.0%) in excess spending in 2006 (Exhibit 27).

Geographic practice variations are often used to deduce areas of the country with disproportionately high levels of inappropriate care since these variations generally have not been associated with either health status (high-use regions don’t have sicker patients) or with better health outcomes.  More discussion of the extensive literature on variations is at Variations (Health Affairs topics page) and Geographic Variations at Health Expenditure Patterns (U.S. Health Policy Gateway). PWC estimates that in 2006, $10 billion (0.4%) was wasted on treatment variations [Treatment variation costs are calculated at $10 billion based on savings of $40 billion in 4 years in New Study Shows Need for a Major Overhaul of How United States Manages Chronic Illness by Dartmouth Medicine, 2006].

PWC estimates another $1.2 billion (0.05%) on overprescribing antibiotics [Over-prescribing of drugs costs are calculated at $1.2 billion based on savings in correcting the overuse of antibiotics in the HEDIS 2006 Draft Measures Focus on Overuse; Monitoring, Follow-up Visits Also Addressed, prepared by NCQA , 2005].

Cost-Ineffective Care. While inappropriate care is cost-ineffective by definition (since it will produce zero or negative health benefits), there also are procedures which may be appropriate for patients, but which are cost-ineffective. There is no standard threshold for determining what is cost-ineffective. The Tufts CEA Registry is a continuously updated database that assembles from the literature cost/QALY estimates related to medical and non-medical (e.g., traffic safety) interventions that would affect mortality risk.

        • According to the Tufts CEA Registry: “In the US, $50,000/QALY is frequently cited as an acceptable cost/QALY. However, most commentators acknowledge that in the real world, most health care innovations that cost less than $100,000/QALY, and frequently those with higher cost/QALY ratios are adopted.”
        • Ryen L. and Svensson M.(2014), The Willingness to Pay for a Quality Adjusted Life Year: A Review of the Empirical Literature, Health Econ., doi: 10.1002/hec.3085. There has been a rapid increase in the use of cost-effectiveness analysis, with quality adjusted life years (QALYs) as an outcome measure, in evaluating both medical technologies and public health interventions. Alongside, there is a growing literature on the monetary value of a QALY based on estimates of the willingness to pay (WTP). This paper conducts a review of the literature on the WTP for a QALY. In total, 24 studies containing 383 unique estimates of the WTP for a QALY are identified. Trimmed mean and median estimates amount to 74,159 and 24,226 Euros (2010 price level), respectively. In regression analyses, the results indicate that the WTP for a QALY is significantly higher if the QALY gain comes from life extension rather than quality of life improvements. The results also show that the WTP for a QALY is dependent on the size of the QALY gain valued.
        • Braithwaite RSMeltzer DOKing JT JrLeslie D, Roberts MS (2008)What Does the Value of Modern Medicine Say About the $50,000 per Quality-Adjusted Life-Year Decision Rule? Medical Care. 2008 Apr; 46(4):343-5. Based on changes in health spending and quality-adjusted mortality gains between 1950 and 2003, authors estimate the average cost-effectiveness of health spending in 2003 dollars was $109,000 per QALY.  Authors also estimated the incremental cost-effectiveness of unsubsidized health insurance versus self-pay for nonelderly adults (ages 21– 64) without health insurance using differences in spending/use to calculate the cost-effectiveness of obtaining employer-based coverage (compared to having no coverage) was $297,000 per QALY. Thus, Americans implicitly appear willing to pay far more than $50,000 or $100,000 per QALY for medical care.
        • Patient-Centered Outcomes Research Institute. The Affordable Care Act created the PCORI to stimulate comparative efffective research. The ACA specifically states that: “The Patient-Centered Outcomes Research Institute … shall not develop or employ a dollars-per-quality adjusted life year … as a threshold to establish what type of health care is cost effective or recommended.”  However, some have pointed out that this does not preclude PCORI from using costs in its analysis and that once a CER is completed, it is relatively straightforward to plug in the costs of each intervention to determine cost-effectiveness of each option compared.

Non-Urgent Emergency Room Use.  ER’s are generally the most expensive setting in which to obtain medical care. PWC estimates $14 billion (0.6% of spending) was wasted in 2006 due to unnecessary ER visits [Unnecessary ER visit costs are based on the “National Hospital Ambulatory Medical Survey: 2005 Emergency Department Summary” from the CDC, there were 115.3 million people who visited the ER, with 13.9% of those individuals who were prioritized with “non-urgent care”. Costs were calculated based on Wellmark Blue Cross Blue Shield estimate of ER at $1,049 and $153 for average cost of a physician visit].

        • American College of Emergency PhysiciansCost of Emergency Care Fact Sheet. Emergency care represents less than 2 percent of the nation’s $2.4 trillion in health care expenditures while covering 136 million people a year. Non-urgent patients make up less than 8 percent of all emergency patients. [This would imply non-urgent use of ERs accounts for no more than 0.16% of health spending].
        • Cunningham, PeterNonurgent Use of Hospital Emergency Departments (May 11, 2011). Statement before the U.S. Senate, Health, Education, Labor and Pensions Committee, Subcommittee on Primary Health and Aging. Hearing on ―Diverting Non-urgent Emergency Room Use: Can It Provide Better Care and Lower Costs?
        • Raven MCLowe RAMaselli JHsia RYComparison of presenting complaint vs discharge diagnosis for identifying ” nonemergency” emergency department visitsJAMA. 2013 Mar 20;309(11):1145-53. doi: 10.1001/jama.2013.1948. Although only 6.3% (95% CI, 5.8%-6.7%) of visits were determined to have primary care-treatable diagnoses based on discharge diagnosis and our modification of the algorithm, the chief complaints reported for these ED visits with primary care-treatable ED discharge diagnoses were the same chief complaints reported for 88.7% (95% CI, 88.1%-89.4%) of all ED visits. Of these visits, 11.1% (95% CI, 9.3%-13.0%) were identified at ED triage as needing immediate or emergency care; 12.5% (95% CI, 11.8%-14.3%) required hospital admission; and 3.4% (95% CI, 2.5%-4.3%) of admitted patients went directly from the ED to the operating room.

Resources

  • Canadian Deprescribing Network (CaDeN). CaDeN is a group of health professionals, policy makers and patient advocates who are committed to improving the health of Canadians by reducing the use of potentially inappropriate medicines and enhancing access to non-drug alternatives.
  • Deprescribing.org. Website maintained by CaDeN devoted to sharing and exchange information about deprescribing approaches and deprescribing research with the public, health care providers and researchers. Site is used by doctors in U.S. and Canada.

Administrative Complexity

Excess Administrative Costs. Berwick and Hackbarth estimate that in 2011, $107 to $389 billion (4.0 to 14.5% of all health spending) was wasted due to administrative complexity, with no further breakdown by component. IOM estimated that in 2009, $190 billion (7.6%) was spent on  excess administrative costs. PWC estimates $126-315 billion (5.7-14.3% of spending) was wasted in 2006 due to operational inefficiency, including excess claims processing, ineffective use of IT, staffing turnover and reliance on paper prescriptions [Johns Hopkins Health System, Impact of Administrative Complexity (2006)]. McKinsey Global Institute calculates that administrative costs account for $91 billion (4.3%) of excess spending above wealth in 2006, but $30 billion of this amount was attributable to profits and taxes on private health insurers, which some may argue should not be considered waste.

  • Claims Processing. PWC estimates $21-210 billion (5.7-14.3% of spending) was wasted in 2006 due to operational inefficiency [Claims Processing costs are calculated based on for every 1% reduction in administration overhead $21 billion is saved (up to 10% and $210 billion can be achieved based on the PNC consumer survey) in Automated Billing/Payment Process Can Reduce U.S. Health Care Costs Without Sacrificing Patient Care by the PNC Bank]. McKinsey Global Institute calculates that selling, general and administrative costs for private health insurers account for $33 billion (1.6%) of excess spending above wealth in 2006.
  • Profits and Taxes. McKinsey Global Institute calculates that profits and taxes for private health insurers account for $30 billion (1.4%) of excess spending above wealth in 2006.
  • Public Administration. McKinsey Global Institute calculates that public administration costs for Medicare, Medicaid and other public programs account for $28 billion (1.3%) of excess spending above wealth in 2006.
  • Ineffective Use of IT. PWC estimates $81-88 billion (3.7-4.0% of spending) was wasted in 2006 due to operational inefficiency [Lack of IT Integration costs are calculated at $81 billion in cost savings based on Rand Study Says Computerizing Medical Records Could Save $81 Billion Annually and Improve the Quality of Medical Care by the Rand Corporation, September 2005. Lack of IT integration costs are calculated at $88 billion in cost savings based on Bending the Curve, Options for Achieving Savings and Improving Value in U.S. Health Spending by The Commonwealth Fund, December 2007.
  • Excess Staffing Turnover. PWC estimates $21 billion (1.0% of spending) was wasted in 2006 due to excess staffing turnover [Staffing turnover costs are calculated at $21 billion based on What Works, Healing the Healthcare Staffing Shortage, a study by the Health Research Institute, 2007].
  • Reliance on Paper Prescriptions. PWC estimates $4 billion (.02% of spending) was wasted in 2006 due to reliance on paper rather than electronic prescriptions  [Paper prescription costs are based on savings at $1 for each paper prescription converted to electronic prescriptions at $3.7 billion in total savings in Beyond the Sound Bite, by the Health Research Institute, 2007].

For further discussion of administrative expenditures, see Administration under Expenditures by Function (U.S. Health Policy Gateway). An NCPA study (2009) includes a section on Are Administrative Costs Higher for Private Insurance Than Public Insurance?

Excess Regulatory Costs. In Christopher J. ConoverHealth Care Regulation: A $169 Billion Hidden TaxCato Institute, October 4, 2004, the net costs of health services regulation (calculated as the difference between total costs and total benefits) was calculated to be $169 billion in 2002, 10.3% of reported spending that year.  For further detailed discussion of the benefits and costs of health services regulation, by component, see Health Care Regulation (U.S. Health Policy Gateway).

Pricing Failures

Berwick and Hackbarth estimate that in 2011, $84 to $178 billion was wasted due to pricing failures (3.2 to 6.6% of all health spending), with no further breakdown by component. IOM estimates that in 2009, prices that are too high added $105 billion (4.2%) to health spending.

McKinsey Global Institute calculates that in 2006, physician specialists were paid $49 billion (2.3% of health spending) more than expected relative to OECD after accounting for differences in per capita GDP; MD generalists were paid $29 billion more than expected (Exhibit 15). U.S. nurses are paid 1.5 times GDP vs. the OECD average of 1.1 times GDP (Exhibit 28).  The U.S. spends $26 billion more than expected on medical devices, which much of this accounted for by implantable cardiac and orthopedic devices (Exhibit 29).

Fraud and Abuse

Berwick and Hackbarth estimate that in 2011, $82 to $272 billion was lost to fraud and abuse (3.1 to 10.1% of all health spending), with no further breakdown by component. IOM estimated that in 2009, $75 billion (3.0%) was spent on  excess administrative costs.

Lifestyle-Related

More than half of personal health expenditures (i.e., excluding administration, research and construction) is related to lifestyle/behavior.  Since personal health spending accounts for 84% of total national health spending, this implies that lifestyle/behavior accounts for at least 42% of all spending. However, because much of this spending overlaps with the six other categories of waste, it is difficult to say the net amount that lifestyle-related spending adds to overall health spending once such overlap is taken into account.  PWC estimates that in 2006, $303-493 billion (13.8-22.4% of total spending)  in spending was attributable to behavior, including obesity, smoking, prescription drug non-adherence and alcohol abuse (see individual estimates below).

        • Further discussion of individual diseases is at Health Promotion and Behavioral Health (U.S. Health Policy Gateway).
        • The figures cited here relate only to health expenditures, but behavior creates other costs including other direct costs (e.g., non-medical costs of alcohol-related automobile accidents or smoking-related fires), morbidity losses (earnings losses resulting from illness-related earnings losses due to sick days or lower on-the-job productivity) and mortality losses (earnings losses due to premature death). Additional estimates that include all direct (medical and non-medical), morbidity and mortality losses for a number of behavior-related conditions may be found at COI by Condition.

Obesity. PWC estimates that in 2006, $200 billion (9.1%) was wasted due to obesity [Overweight and Obesity is calculated at $200 billion in savings in National Medical Spending Attributable To Overweight And Obesity: How Much, And Who’s Paying? By Health Affairs, 2003].

Smoking. PWC estimates that in 2006, $0.5 to $191 billion (8.7%) in health spending is attributable to smoking [Smoking costs are calculated at enhancing smoking cessation at 10% of a total estimation of savings 2.7% of the National Health Expenditures at $567 million with prevention and wellness based on the AHIP Appendix by PricewaterhouseCoopers Review of AHIP Savings Estimates, 2008. Smoking costs are calculated by a raise taxes to $2 on cigarettes and the additional revenue being used to support national tobacco control programs at a total of $191 billion by 2017 based on Bending the Curve, Options for Achieving Savings and Improving Value in U.S. Health Spending by The Commonwealth Fund, December 2007].

Prescription Drug Non-adherence. PWC estimates that in 2006, $100 billion (4.6%) was wasted due to prescription drug non-adherence [Non-Adherence to Drug Regimens is based on savings of $100 billion as the overall cost of non-compliance in Disease Management and Drug Adherence by Datamonitor, June 2007].

Alcohol Abuse. PWC estimates that in 2006, $2 billion (0.09%) in health spending was related to alcohol abuse [Alcohol Abuse costs are based on a $2 billion savings in healthcare expenditures attributed to the treatment of alcohol abuse cases in hospitals in Hospitalizations for Alcohol Abuse Disorders by the Agency for Healthcare Research and Quality, 2006].

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