Catalyst for Payment Reform

Overly-complex, inefficient, ineffective. How the health care industry wastes nearly a trillion dollars a year.

Overly-complex, inefficient, ineffective. How the health care industry wastes nearly a trillion dollars a year.

$935 billion.

It’s hard to imagine what that number really means. It’s approximately the amount the United States spends on Medicare, it exceeds our national military spending, and it’s more than what we spend on primary and secondary education combined. So while we debate the military industrial complex, and share on social media how our public schools are failing us, we burn something between $760 – $935 billion a year on health care administrative burden, clinical waste, and pricing failure. Altogether, this waste equals 25% – 30% of total national health spend. What other part of your life would you willingly pay a 30% upcharge for no tangible improvement to the good or service? You’d hope that the entity responsible for unnecessarily inflating costs would be fined, shift direction to save their bottom line, or that those in positions of power would act to prevent such behavior, and yet here we are. This is our reality, paying haute couture prices for pain, sickness, and preventable death.   

What exactly is “health care waste”? It’s broadly defined as “low value” spending, and is usually caused by factors such as unnecessarily complex administrative practices, monopolistic behavior, and poor execution of care delivery. These behaviors, as well as fee-for-service payment structures, encourage inefficient practices and deliver low-value services meaning higher cost for worse health outcomes.  In America, we already spend an unfathomable amount of our GDP on health care- almost 18% of our economy and over $10,000 per person- and we lose nearly $142 billion on productivity due to the overly complex nature of our health benefits system. Compared to other OECD countries, the United States spends twice as much on health care, has the highest rate of people with multiple chronic conditions, and our life expectancy is three years less than the OECD average.          

Before we jump into the three main culprits behind health care waste (administrative burden, clinical waste, and pricing failure), let’s talk solutions. If the system were reconfigured based on evidence, the United States could save upwards of $200 billion a year, and put that savings towards providing health insurance for three-quarters of the currently uninsured population, or investing in preventive care measures to preempt people from getting sick in the first place.

So, what is “the evidence” for systemic change? Well here at Catalyst for Payment Reform you probably won’t be surprised to hear that we support, you guessed it, payment reform! For example, in a value -based payment model, especially one in which clinicians take on financial risk for the total cost of care, much of the administrative complexity (like prior-authorization) could be discontinued, reducing complexity and aligning incentives for providers to reduce waste and improve value through their decision-making. Large scale value-based payment adoption could have a domino effect, reducing administrative burden and oversight for payers, hospitals, and providers.

Alternatively, simplification, standardization, and integration in administrative practices would have a major impact on health care cost waste. David Cutler, the Otto Eckstein Professor of Applied Economics in the Department of Economics at Harvard University, testified before the Senate Committee on Health, Education, Labor and Pensions in 2018 to address health care cost reduction, specifically in administration. He made the following recommendation:

  • “The Department of Health and Human Services, working with health care organizations, should develop and implement a plan to reduce administrative costs in health care by 50 percent within five years. The plan should include payment simplification, standardized pre-authorization policies, and integrated medical record and billing systems.”

Cutler argued that, historically, administrative costs change only when the dominant players in the market demand standardization. The largest purchaser of health care in the United States is the federal government, so it must push for reforms if they are to be adopted widely. Given that administrative burden is the most egregious of the three factors contributing to health care waste, it’s a good place to start.

Let’s dig in to the three most wanted in the health care waste wild, wild west: administrative burden (which includes administrative costs), pricing failure, and clinical waste.

  • According to Cutler, administrative burden is a type of “arms race” where payers introduce requirements providers must fulfill before they can get paid, which causes providers to hire additional personnel to maximize reimbursement. In order to limit paying for additional claims, insurers beef up rules again, causing the providers to take on additional personnel. The result is an escalation of administrative costs on both sides, with no benefit to the patient and no net benefit to the payers or providers. To give you an order of magnitude on how much the United States spends on administrative costs compared to a list of twelve OECD countries, we spend $1,055 per capita on administrative costs, while the next highest level was Germany with $306 per capita.
  • Clinical waste accounts for up to $470 billion or approximately 18% of overall projected national health spending. Clinical waste can be defined as failures of care delivery, care coordination, and overtreatment. Failure of care delivery includes errors and adverse events, or not providing care that is known to be effective. Care coordination is communication between providers, typically through electronic health records (EHRs), with failure being defined as “the waste that comes when patients fall through the slats in fragmented care”. With more than half of medical treatments lacking solid evidence of effectiveness, overtreatment and unnecessary treatments adds up to nearly half of all clinical waste spending.
  • Finally, pricing failures contribute to health care cost waste, with estimates ranging from $231 to $241 billion. The Health Care Cost Institute found that commercial US health spending per enrollee increased by 21.2% between 2017 and 2021, with rising service prices accounting for two-thirds of that growth. Prices at monopolistic hospitals are on average 12% higher than those in markets with four or more competing hospitals. In 2022 there were 53 announced mergers, fewer than in prior years, but a larger percentage of “mega-mergers” (health systems with revenues exceeding $1 billion). What does that mean? More mergers equal higher prices leading to more health care cost waste.

Exiting the mire of health care waste is a complicated puzzle requiring political buy-in, implementation of value-based payment models, and administrative streamlining that may disrupt the record-breaking profits of those who benefit from a broken and burdensome system. As James Baldwin said, “not everything that is faced can be changed, but nothing can be changed until it is faced.” Let’s sound the call far and wide that health care cost waste is not acceptable. If we have the knowledge and resources to rid ourselves of overly complex, inefficient, and burdensome systems then it is imperative that we change or at least attempt to change systemically, or else we accept crippling the American people with unnecessary debt and limiting our potential as a nation. With health care costs expected to balloon 8.5% next year, now is the time to embrace systems change through a mix of payer and provider action, value-based payment adoption, and policy.

CPR’s Marketing and Operations Manager, Torie Nugent-Peterson wrote this blog post.

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