Is more than 30% of US healthcare spending waste?

Question

National healthcare spending in the USA consumes more than 18% of GDP and is growing rapidly. Europeans criticise the expense and relatively poor quality of the US system (for example, see this question: Is the US Newborn Mortality Rate higher than 40 Countries?); Americans seem to like it, though, and the majority seem opposed to anything that restricts choice. As a recent economist article put it:

TO SUGGEST curbing an American’s health care is like threatening to kidnap his child. More care, he believes, must be better care. On Mr Obama’s watch new attempts have been made to weigh evidence for different treatments. But the notion that evidence might be used to limit care remains heretical.http://www.economist.com/node/21556928

The article goes on to discuss how other countries judge which treatments are effective but claims, in passing, that a large proportion of US spending is waste (my bold highlight in the following quote):

To an outsider, it might seem helpful to know which services are worthwhile. America, after all, spends 18% of its GDP on health, far more than other rich countries. About one-third of that spending is waste.

But it isn't just the Economist making such claims. A recent BBC story contains the following passage (my bold highlights a quote from Dr Brent James, Chief Quality Officer of Intermountain Healthcare in Utah):

In America, the rising cost of healthcare has the capacity to bankrupt the nation.

National healthcare expenditure is expected to top $3tn in 2012. Some estimates see it reaching $4.6tn by 2020.

But Dr James claims that a little under 50% of that is technically waste, through a combination of inefficient payment mechanisms and poor quality control.

So that is two recent claims that much US health spending is waste. Does the evidence support these views?

NB a clear definition of what constitutes waste will probably make for a better answer.

Answer 1

Short answer: Yes. Annual waste estimates of between 21% and 47% are supported.

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The OED defines waste, n. as a...

Useless expenditure or consumption, squandering (of money, goods, time, effort, etc.).

The following categories of waste in US Health Care fit this definition :

• Failures of Care Delivery: the waste that comes with poor execution or lack of widespread adoption of known best care processes, including, for example, patient safety systems and preventive care practices that have been shown to be effective. The results are patient injuries and worse clinical outcomes. Better care can save money. We estimate that this category represented between $102 billion and $154 billion in wasteful spending in 2011.

• Failures of Care Coordination: the waste that comes when patients fall through the slats in fragmented care. The results are complications, hospital readmissions, declines in functional status, and increased dependency, especially for the chronically ill, for whom care coordination is essential for health and function. We estimate that this category represented between $25 billion and $45 billion in wasteful spending in 2011.

• Overtreatment: the waste that comes from subjecting patients to care that, according to sound science and the patients' own preferences, cannot possibly help them—care rooted in outmoded habits, supply-driven behaviors, and ignoring science. Examples include excessive use of antibiotics, use of surgery when watchful waiting is better, and unwanted intensive care at the end of life for patients who prefer hospice and home care. We estimate that this category represented between $158 billion and $226 billion in wasteful spending in 2011.

• Administrative Complexity: the waste that comes when government, accreditation agencies, payers, and others create inefficient or misguided rules. For example, payers may fail to standardize forms, thereby consuming limited physician time in needlessly complex billing procedures. We estimate that this category represented between $107 billion and $389 billion in wasteful spending in 2011.

• Pricing Failures: the waste that comes as prices migrate far from those expected in well-functioning markets, that is, the actual costs of production plus a fair profit. For example, because of the absence of effective transparency and competitive markets, US prices for diagnostic procedures such as MRI and CT scans are several times more than identical procedures in other countries. We estimate that this category represented between $84 billion and $178 billion in wasteful spending in 2011.

• Fraud and Abuse: the waste that comes as fraudsters issue fake bills and run scams, and also from the blunt procedures of inspection and regulation that everyone faces because of the misbehaviors of a very few. We estimate that this category represented between $82 billion and $272 billion in wasteful spending in 2011.

Source: Eliminating Waste in US Health Care, JAMA, 2012

This interview with Matthias Rumpf of the OECD has some information as to why Americans might be resistant to change (other than general politics)...

NEWSHOUR: How do Americans compare with other nations in terms of general health?

MATTHIAS: The United States has the highest proportion of adults -- 90 percent -- reporting that they are in good health, far above the OECD average of 69 percent.

...snip...

NEWSHOUR: Are there any health care areas in which the U.S. system is faring better than other countries?

MATTHIAS: When we look at the quality of cancer care, the United States stands out as having excellent results. Screening rates for breast and cervical cancer are excellent, so problems can be diagnosed early on. Your chances of living five years after being diagnosed with breast cancer, or cervical cancer, or indeed several other cancers, are better in the United States than almost anywhere else in the world.

Source: Why Does Health Care Cost So Much in the United States?, PBS Newshour, 2011.11.25

Of course this does not negate the known problems as mentioned above, but it does at least have a hint of reason.

In sum...

Claims of "a little under 50% of that is technically waste" and "About one-third of that spending is waste." are supported (and without invoking "Death-panels" no-less:).

Answer 2

Perfect data for this would answer the question. It would show us how much is spent per country on primary treatment (physicians, nurses, pharmaceuticals, medical procedures), and how much on overhead (administration, fees, insurance overhead, etc.). Unfortunately this information is hard to come by - though it is probably out there.

To answer this question in the absence of perfect data, a hypothetical metric that may provide a useful comparison is the ratio of results : spending. Results may be one of e.g. life expectancy, population free from morbidity and premature mortality, and others. Spending should be per-capita, normalized to account for variables such as demographics (i.e. a country with an aging population should have higher healthcare costs, and these costs would not be considered a "waste" since they are accounted for in the higher cost of caring for the elderly population).

If the United States spends more than 30% more than a demographically equivalent country, and achieves results equal or less than those of that other country, in the absence of other benefits arising from the higher healthcare costs-per-capital I believe the conjecture would be demonstrated to a reasonable degree.

One of the best sources of information is the OECD. They produced this chart:

Although dated, I do not expect that there has been significant deviation since 2008. As you can see, the USA spends approximately 40 - 50% more than peer countries per capita, yet has lower life expectancy and significantly higher infant mortality.

Insofar as life expectancy and infant mortality are barometers of the effectiveness of the healthcare system, they show that healthcare in the USA is at a quality less than those of peer countries. One way to visualise the OECD number is shown below and this appears to clearly show how exceptional the USA is and how much less value the country gets from its healthcare spending.

There are some problems with such direct comparisons, however. For a recent discussion see this blog by Lane Kenworthy. As he says:

The inference is problematic, however, because America differs from the other countries in a number of ways that may affect health outcomes. It has a higher murder rate. It has more obesity. The U.S. population is more spatially dispersed than those of most other countries, so rural residents may live farther away from medical providers. Given these and other differences, how confident can we be that health spending is less effective in the U.S. than elsewhere?

But this author also points to a comparison that is much less subject to the problems of an analysis at a single point in time. This is shown below:

As he says:

The United States still stands out, and in a big way. Our gain in life expectancy per additional health spending is much smaller than in other countries, particularly after the early 1980s when we reached expenditures of about $2,500 per person (in 2005 dollars) and life expectancy of around 74-75 years.

The advantage of analyzing country differences in change is that it takes constant nation-specific factors out of play. It’s not a foolproof analytical strategy, but it reduces the likelihood of mistakenly inferring causation from correlation.

Statistics on life expectancy and infant mortality do not address the question of qualify of life. Healthcare spending that improves the quality of life by relieving morbidity is not waste. Unfortunately there is a spectrum of what one would consider useful through waste; it is a somewhat subjective consideration, and I am not sure what data one would wish to look at.

At one end of the spectrum of quality of life is cosmetic appearance. It is possible that the USA spends a significant amount of healthcare costs on cosmetic procedures. These costs may, or may not, be considered "waste", and they may or may not be considered "healthcare". In any case, I could not find the data on this.

I recall reading a study, but cannot find it offhand, that also indicated that the poorest Canadians have a higher life expectancy than the wealthiest Americans. If true, this is also an indicator that the healthcare system is ineffective, and arguably the money spent on it is "waste" since it is not even able to satisfy the needs of those who have no financial barriers to healthcare (i.e. the higher mortality is not accounted for by poverty and lack of public healthcare).

All to say, in the absence of an explanation as to where the cost-per-capital of healthcare for the USA goes, it would appear that the claim that the USA is wasting healthcare costs of more than 30% is supported by the data available from the OECD because the USA is spending quite a lot more money and achieving significantly worse results. If the money spent on healthcare were used in a more efficient way, one would expect the USA ought to be able to achieve the results seen in its peer countries.

I hope that is a somewhat useful post. For more reading, here is a useful site:

• Health Spending: Do countries get what they pay for when it comes to health care?

Answer 3

Yes, this is the case - for some definition of 'waste'

The New England Journal of Medicine ran a study to determine the overhead costs of the US and Canadian healthcare system.

After exclusions, administration accounted for 31.0 percent of health care expenditures in the United States and 16.7 percent of health care expenditures in Canada. Canada's national health insurance program had overhead of 1.3 percent; the overhead among Canada's private insurers was higher than that in the United States (13.2 percent vs. 11.7 percent).

This from The Denver Post:

The U.S. has the most bureaucratic health care system in the world. More than 31 percent of every dollar spent on health care in the U.S. goes to paperwork, overhead, CEO salaries, profits, etc. The provincial single-payer system in Canada operates with just a 1 percent overhead.

Now technically not all administration is waste. Some administration has to be done, and even the most efficient hospital needs a couple of accountants and probably a lawyer. However if a healthcare system can be run with 1% overhead, then there is a reasonable argument that the 30% difference between that and the US figure is unnecessary administration - i.e. 'waste'

There are some slightly more optimistic figures, from the New York Times:

One thing Americans do buy with this extra spending is an administrative overhead load that is huge by international standards. The McKinsey Global Institute estimated that excess spending on “health administration and insurance” accounted for as much as 21 percent of the estimated total excess spending ($477 billion in 2003).

Answer 4

We can be sure there is waste in the US system by looking at the variation among US regions in spend and outcomes

Short Summary: There is plenty of internal evidence that the US healthcare system overtreats patients to the point of harming them and doesn't inform them well enough to make informed tradeoffs about their care. In short, it spends a lot on activity that doesn't benefit the patient, in other words too much activity is waste.

Comparisons of different countries healthcare systems suggest that the USA has a lot of waste. But there are a lot of confounding factors that complicate such comparisons (as the other answers here discuss). But there are analyses of the regional variations present in the US healthcare system that come to similar conclusions and that don't suffer from the problems of international comparisons. This answer summaries some of those studies and concludes that internal evidence shows that there is significant waste in the US system.

It is worth being clear what we mean by waste. A useful definition is spending that doesn't benefit the patient, though we have to be careful what we mean by this. Some commentators and politicians any spending not on "front line staff" (i.e. on administration and management) is waste because it doesn't directly benefit the patient. This isn't the definition of waste required here not least because any effective healthcare system needs some level of management to be coordinated and well organised. There is even evidence linking lower death rates with the quality of management in hospitals (see the pdf available on the London School of Economics site; NB this is a download link).

This definition of waste recognises that not all medical activity is useful and points to the sort of evidence that might help decide whether a particular type of activity is good for the patient. The american public sometimes seems to believe that more medical activity is always good (see the skeptics questions here Does screening for prostate cancer save lives? and here Is routine screening for breast cancer for asymptomatic women worthwhile?). This definition also avoids the issue of value for money. The issue isn't whether it is worth spending a large amount to get a small benefit, but whether there is any benefit at all from doing more medical activity.

The reason why analysis of the variations in activity levels in the USA are useful is because they allow a good statistical comparison of both activity rates, outcomes and patient perception. The most thorough analysis is the result of the ongoing work of the Dartmouth Atlas Project (website here). And a major conclusion of their work is that a disturbingly large proportion of healthcare activity in the USA is waste by the definition above.

The bottom line of much of the Dartmouth work is summarised here (my emphasis):

...studies comparing similar patients have found that those in higher-spending regions are more likely to be admitted to the hospital, spend more time in the hospital, receive more discretionary tests, see more medical specialists, and have many more different physicians involved in their care. The extra care does not produce better outcomes overall or result in better quality of care, whether one looks at measures of technical quality (such as providing appropriate medication to heart attack patients), or survival following such serious conditions as a heart attack or hip fracture. Higher spending also does not result in improved patient perceptions of the accessibility or quality of medical care.

So by the definition of waste given above, this suggests there is a lot of waste. One estimate of how much was given by Wennberg (one of the founders of the Dartmouth Project) in a BMJ article in 2011:

If the whole of the US followed the practice patterns of high quality, low cost regions served by organised systems such as Mayo Clinic and Intermountain Healthcare, Dartmouth atlas benchmarks suggest it would save 40% of resources spent on chronic illness.

Wennberg's book, Tracking Medicine, is a good source for the background, history and conclusions of the project.

These figures are easier to understand in the light of their causes. Two in particular seem to be major factors driving variation in the US system: preference sensitive care and supply sensitive care.

Preference sensitive care occurs when the different patients may choose different trade-offs when weighing up treatment options. But the Dartmouth analysis reveals large degrees of variation that depend on medical practice not patient choices. As they summarise (my emphasis):

Even when evidence exists as to outcomes, surgery rates can vary dramatically from place to place. This is the case in early stage breast cancer. Studies show that mastectomy and lumpectomy achieve similar long-term survival, but women generally differ sharply in their attitudes toward these treatments. Yet in an early Dartmouth Atlas study, we found regions in which virtually no Medicare women underwent lumpectomy, while in another, nearly half did. We see dramatic variations in rates of surgical treatment for other conditions where multiple treatment options are possible, such as chronic angina (coronary bypass or angioplasty), low back pain (disc surgery or spinal fusion), arthritis of the knee or hip (joint replacement), and early stage cancer of the prostate (prostatectomy). Such extreme variation arises because patients commonly delegate decision-making to physicians, under the assumption that doctors can accurately understand patients’ values and recommend the correct treatment for them. Yet studies show that when patients are fully informed about their options, they often choose very differently from their physicians.

We know that adequately informed patients often choose lower rates of intervention. As the conclusion of this study reports:

Decision aids have a variable effect on decisions. They reduce the use of discretionary surgery without apparent adverse effects on health outcomes or satisfaction.

Supply sensitive care occurs when the capacity of system seems to drive the level of activity in it. This sounds like a good thing to those who assume more medicine is always good, but if the extra activity doesn't result in better results for patients, it is waste. This, again, is what the Dartmouth studies find:

Simply put, in regions where there are more hospital beds per capita, patients will be more likely to be admitted to the hospital. In regions where there are more intensive care unit beds, more patients will be cared for in the ICU. More specialists will result in more visits to specialists. And the more CT scanners are available, the more CT scans patients will receive. The Dartmouth Atlas has consistently demonstrated these relationships.

In regions where there are relatively fewer medical resources, patients get less care; however, there is no evidence that these patients are worse off than their counterparts in high-resourced, high-spending regions. Patients do not experience improved survival or better quality of life if they live in regions with more care. In fact, the care they receive appears to be worse. They report being less satisfied with their care than patients in regions that spend less, and having more trouble getting in to see their physicians. Most studies have found that mortality is no better in higher in high-spending regions, almost certainly because the benefits to some patients are counterbalanced by the harms to others. Hospitals can be dangerous places, where patients face the risk of medical error, adverse events, and hospital-acquired antibiotic-resistant infections. As more physicians get involved in a patient’s care, it becomes less and less clear who is responsible, and miscommunication and mistakes become more likely. Greater use of diagnostic tests increases the risk of finding -- and being treated for -- abnormalities that are unlikely to have caused the patient any problem. Patients who receive care for conditions that would have never caused a problem can only experience the risk of the intervention.

I'd also recommend dipping into two other books for more detailed discussion of the evidence: Testing Treatments and Better Doctors, Better Patients, Better Decisions. The first chapter of the second book starts by quoting two extraordinary examples where the US health system overuses screening in expensive and damaging ways:

Almost ten million U.S. women have had unnecessary Pap smears to screen for cervical cancer--unnecessary because, having already undergone complete hysterectomies, these women no longer have a cervix. Original JAMA paper here

Every year, one million U.S. children have unnecessary CT scans. An unnecessary CT scan equates to more than a waste of money: an estimated 29,000 cancers result from the approximately 70 million CT scans performed annually in the United States. NEJM reference here

(Note: I quoted these examples in an to the question answer here: Are the vast majority of medical procedures routinely used by physicians ineffective and unproven? but they are even more relevant to this question).

In summary: there is plenty of internal evidence that the US healthcare system overtreats patients to the point of harming them and doesn't inform them well enough to make informed tradeoffs about their care. In short, it spends a lot on activity that doesn't benefit the patient, in other words too much activity is waste.

NB This should no be considered an attack on the US system. Other systems also show this sort of variation and waste. See for example the NHS Atlas of Variation for a similar analysis in the (supposedly) more centrally controlled English NHS.