7 Ways Money Gets Wasted in Healthcare

Published February 13, 2018

Imagine a business that wasted one out of every five dollars spent. Take Toyota, for example. If Toyota wasted 20 cents of every dollar they expended to make cars, they would go out of business in their first year of operation.

And yet, this is exactly what happens in healthcare. Waste in healthcare (sometimes generously referred to as “low-value healthcare”), is defined as medical services that provide little or no benefit to the consumer, or as avoidable overspending on services that could be more efficiently delivered. According to the Organization for Economic Co-operation and Development (OECD), wasteful spending is pervasive in the US and its magnitude is increasing every year. The sources of healthcare wasteful spending can be classified in at least seven categories.

1. Failure to deliver services

When a consumer pays for, but does not receive a product or service, we say they are a victim of fraud. Yet this is exactly what happens when a rehab hospital or physician bills a third-party payer (or the government) for a service they do not provide. The US Department of Justice reported that losses to fraud in 2014 alone amounted to $272 billion.

2. Failure to coordinate care

When more than one doctor or clinic takes care of the same patient’s needs after hospital discharge, duplication of service is bound to happen. There are several reasons for this, not least a failure for healthcare providers, and particularly medical records systems, to communicate with one another. This is sometimes referred to as the “interoperability problem.” Take the example of a patient who gets an MRI at a community treatment center, and then gets a referral to see a specialist in the city. Then the patient shows up at the specialist, who orders another MRI. Because the referring physician and the specialist did not communicate effectively, a costly test was repeated… for no reason other than failure to coordinate care.

3. Over-treatment

This category of waste is more difficult to define than the others. Over-treatment is commonly confused with misdiagnosis and other forms of medical error. Patients who are over-treated are actually correctly diagnosed, it’s just that the patient receives therapy for that diagnosis that will not make them healthier or live longer. For example, patients with mildly elevated blood pressure do not necessarily benefit from taking blood pressure-lowering medications. To the contrary, these medications may end up lowering a patient’s blood pressure too much, causing falls and other preventable accidents.

4. Administrative costs

Our complex healthcare delivery system needs the participation of more managers and administrators than it needs doctors and nurses. According to the OECD, the U.S. leads the world in administration costs. Over 8% of healthcare spending in the US was spent on administration in 2016. The next highest country was France, at 6%.

5. Pricing failures

In most economic transactions, the buyer usually knows what she wants to buy and where she wants to buy it. She also has a pretty good idea of what the product or service will cost her. In healthcare, the consumer knows none of these things. This is commonly referred to the problem of “price transparency” in healthcare. It is difficult to find the best quality care at the best price if you cannot see the price of the service. But the problem is worse than this: the seller, in this case the doctor or hospital, often does not know how much they are charging for their service. This is because third-parties (health insurance providers and the government) calculate prices and payments according to complicated algorithms that leave both buyer and seller scratching their heads. The result of the lack of price transparency in healthcare is always the same: the price ends up being higher than it should, resulting in wasteful spending.

6. Errors

To err is human, and mistakes inevitably happen in any human endeavor. Medical errors happen in long-term care facilities, pharmacies and in doctor’s offices. Many of these errors are preventable. Measuring the financial impact of medical error turns out to be difficult. In fact, the last year for which we have reliable data on the cost of medical error is 2008. In that year, approximately $19.5 billion was lost on account of errors. Although we can say for certain, as costs have risen sharply elsewhere in the healthcare industry, it is reasonable to assume that costs due to errors have risen as well.

7. Prevention failures

“An ounce of prevention is worth a pound of cure.” When Benjamin Franklin said this in 1736, he did so in the context of a warning to his fellow Philadelphians that they had better do something about the risk of fire in the city.  The context of Franklin’s quip, however, should give us pause. Clearly, early 18th-century Americans understood that it is far more cost-effective to prevent a problem than to address it later. But early 21st Americans are much better at preventing fires than at preventing disease. A report from the Milken Institute suggests that if we made a serious effort to combat chronic disease, the U.S. could save $220 billion annually.

The healthcare industry is not the automobile industry. We may be able to get by without a Toyota, but we cannot live without healthcare. We would be wise to heed the advice of the OECD and similar organizations before the cost of waste in healthcare reaches catastrophic proportions.