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The Staggering Cost of Waste in U.S. Healthcare

An estimated $760 billion doled out by hard-working Americans for healthcare each year winds up the waste basket.

Healthcare is expensive. For many, it’s a large individual expense. As a nation, we spend a ton on it. $3.8 trillion in annual spending, which is 18 percent of the nation’s GDP, according to a recent 2019 JAMA study. So if there’s any kind of a problem resulting in wasted money, it’s likely an expensive problem – and it could represent a major hole that needs to be fixed.

Turns out, there is quite a bit of waste in healthcare spending. Specifically, an estimated $760 billion annually. This represents around 25 percent of total healthcare spending in the U.S. 

The United States spends more than any other country on medical services and healthcare. Approximately twice as much as any other high-income country, and more than $10,000 per individual, according to an analysis of economic data in 2018.

The JAMA Study took a deeper look at the wasted money in actual dollars and cents, and divided it into categories. Here’s what the study found, along with some of the ways that it impacts you directly as a consumer.

Administrative Complexity

Estimated cost of waste: $266 billion annually

The biggest category contribution to waste found in the JAMA study was administrative costs. Specifically, inefficient and excessively complex administrative processes. Administrative complexity happens when government, insurance payers, and others develop rules and requirements that are needlessly complex. 

As an example, this could include forms that aren’t standardized across insurance agencies, meaning doctors and their billers have to spend extra time navigating each one. The costs involved in billing and coding results in a double whammy on both ends: resulting in both a physician administrative burden and insurance administrative burden.

The root cause? Fragmentation in the healthcare system.

Interventions: Helpful interventions (that have produced positive results in the past and therefore produce more in the future) include streamlining processes, simplify billing and coding, better payer collaborations, and getting rid of the processes that don’t improve care.

A co-author of one editorial on the JAMA study, Ashish Jha of the Harvard Global Health Institute and the Harvard T.H. Chan School of Public Health, remarked: “We should focus our energies on administrative simplification, not whether it’s in a single-payer system or not.””

Pricing Failure

Estimated cost of waste: $231 billion to $241 billion

The second largest culprit to healthcare waste is pricing failure. This kind of waste happens when prices are way above actual cost plus a fair profit. Inflation in this category spans prescriptions, testing, procedures, and durable medical equipment, such as wheelchairs and walkers. High brand drug prices are also a major contributor to this particular type of waste. 

As a shocking example, the U.S. price tag on MRI and CT scans are several times more the same procedures in other countries. The nature of the problem highlights the absence of transparency, and the need for it.

Interventions: Insurance companies can focus on offering value-based benefits, standardizing the practices of services, and negotiations for services, according to the study. 

Pharmacies can focus on value-based contracting and drug price negotiations. 

For the patients, a call for nationwide cost transparency initiatives. 

Some good news on this front as a recent price transparency rule was passed that will require hospitals and health insurers to publish their negotiated prices for health services, numbers that are typically kept secret.

Ultimately, no single policy is likely to suffice; a coordinated policy effort is needed to create long-standing change that will meaningfully reduce waste resulting from pricing failure.

Failure of Care Delivery

Estimated cost of waste: From $102 billion to $166 billion

Failure of care happens when healthcare facilities fail to adopt preventive care practices, and instead treat a problem on the backend once it emerges. These preventive care measures could include addressing obesity, smoking, diabetes, and cancer causes. The failure of care category also includes not implementing best care practices, such as taking proactive measures to prevent patients acquiring infections while receiving care at a hospital.  

Interventions and potential for savings include bundling payment models so standard procedures aren’t billed as multiple separate codes. Prevention initiatives, such as programs to increase doctor efficiency, and initiatives aimed at reducing hospital-acquired infections, would be beneficial as well.

Failure of Care Coordination

Estimated cost of waste: $27 billion to $78 billion

This category of waste happens when patients fall through the cracks. The sad results include avoidable complications, hospital admissions and readmissions, and services that provide little to no benefit. As a result, patients experience functional declines and increased provider dependency.

Intervention: Approaches to eliminate waste in this area include reducing ER visits by replacing them with urgent care, telehealth, and primary care. Other measures include a move toward care coordination with accountable care organizations (ACOs).

Overtreatment or Low-Value Care

Estimated cost of waste: $75.7 billion to $101.2 billion

Overtreatment: The JAMA study’s category of overtreatment occurs when patients are subjected to care that is utterly unable to help them. Overtesting or overdiagnosis happens when science is ignored, outmoded habits are still used, and behaviors are driven by supply instead of patient need. You may have seen this occur with overuse of antibiotics, or a choosing procedure when “watching and waiting” could produce a better and less costly outcome. 

Low-value: Waste also happens in this category when low-value testing, procedures, and medication are used.

Interventions: Practical solutions to avoid future waste include shared decision-making and ACO interventions that address overtreatment or low-value care.

Fraud and Abuse

Estimated cost of waste: $59 billion to $84 billion

This final category only represents 10% of healthcare waste according to the JAMA study, but is still staggering. Essentially, it’s the few causing monstrous issues. This includes scams, fraudulent pricing tactics and fake bills. 

But the waste cost also encompasses the increase in regulation that everyone is subjected to because of the misbehavior of fraudsters. The costs of fraud and abuse add to billing and coding costs by increasing the administrative burden for doctors and insurance companies.

Interventions: Measures that address the costs of fraud and abuse include government-based interventions, such as legislative, administrative, and integrity strategies. Other savings categories explore the recovery process from fraud settlements and convictions. 

How Can We Prevent it? 

In addition to the sheer volume of dollars wasted, patients bear the additional burden of unnecessary anxiety and stress, lower patient satisfaction and decreased trust in the healthcare system.

The system is broken. The issues revealed call for system-based reform. Are any changes coming? In short, yes. Policy makers are working to affect change. Because healthcare waste comes from many different sources, no single policy will fix it. It will take time and advocacy to change it.

In the meantime, there are steps that you can take personally to monitor and reduce your own healthcare expenses. Here are some great tips on how to spot medical price fraud, and how to understand your medical bills and know when to fight back. 

HealthLock’s free download, audit and verify service is another great tool to help you keep your medical bills in check. Learn more about it here.

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