Over Half of Healthcare Spending Identified as Waste
Wasteful spending has been considered one of the key factors in pushing healthcare costs to greater heights every year, but a recent study by PricewaterhouseCoopers’ Health Research Institute reveals that it may be a more significant factor than originally estimated. According to PWC’s study, The Price of Excess: Identifying Waste in Healthcare Spending, $1.2 trillion out of the $2.2 trillion spent nationally on healthcare can be classified as wasteful expenditures – that’s over half of all healthcare spending!
The study was comprised of interviews with over 20 health industry and government executives, a review of more than 35 studies, and a survey of over 1,000 consumers on wasteful healthcare spending. The authors define waste as “costs that could have been avoided without a negative impact on quality,” and sorted inefficient healthcare spending into three waste “baskets”: behavioral, clinical and operational. Within these baskets, the authors identified the top three areas of wasted spending as defensive medicine ($210 billion annually), inefficient claims processing (up to $210 billion annually), and care spent on preventable conditions related to obesity and weight issues ($200 billion annually).
The Three Waste Baskets
The costs related to obesity and weight fall into the category of behavioral waste, comprising anywhere from $303 billion to $493 billion of healthcare spending. The authors define behavioral waste as “individual behaviors shown to lead to health problems, and have potential opportunities for earlier, non-medical interventions.” In addition to obesity/weight issues, this category includes other preventable risk factors such as smoking, poor-adherence to drug regimens, and drug abuse. Behavioral waste is often recognized as one of the most controllable healthcare cost inflators for employers, and the identifying risk factors can be addressed through company-sponsored wellness programs.
The two common themes triggering clinical waste ($312 billion of healthcare spending) are a lack of quality information available to those providing or paying for care and the inability to utilize such information once it is available. Such factors often lead to waste in defensive medicine, preventable hospital readmissions, poorly managed diabetes, medical errors, unnecessary ER visits, treatment variations, hospital acquired infections and over-prescribing of antibiotics. Operational waste ($126 billion to $315 billion of healthcare spending) includes inefficiencies in claims processing, ineffective use of IT, staffing turnover, and paper prescriptions.
Employers should note that the $1.2 trillion of wasteful spending are only costs absorbed by the healthcare system. Other costs such as lost productivity, absenteeism and presenteeism can be 3-4 times higher.
Call to Action
Industry leaders interviewed for this study identified several barriers to reducing inefficiency including culture, politics, lack of incentives and funding, and lack of a coordinated focus. The top five consumer perceptions included lack of priority by US government, complex insurance payment administration, health industry unwilling to change business practices, political infighting and lack of wellness and preventive care. In order to address this issue, government, industry and the consumer population will need to work together to produce viable solutions.
The study identifies several steps that can be taken to reduce waste and improve efficiency. Among them are:
- Creating incentives that improve value on a system-wide basis and agree on how that value is determined.
- Focusing on investments that improve health status. Investing in wellness may initially increase costs by enabling people to live longer.
- Leveraging systems that deliver value. The success of initiatives to eliminate wasteful spending on healthcare is contingent on participation by other sections. Organizations that can succeed at collaboration will succeed in an increasingly networked industry.
Solving healthcare inefficiencies means developing system-wide goals and incentives to encourage partnerships and networks that work toward shared value. Employers can take an active role in this process simply by investing in their employees’ health and creating a more healthcare conscious workforce. If all sectors can work together toward this common goal, the combined efforts may not only reduce healthcare costs in the end, but also increase the quality of care for all Americans.
To download the entire PWC study, please click here.
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August 15, 2008
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