Study Claims U.S. Health Care System Wastes $700 Billion Annually

[media id=10502] In the wake of its shocking assessment that employer-provided health insurance now covers only 54.6% of the American people, Thomson

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In the wake of its shocking assessment that employer-provided health insurance now covers only 54.6% of the American people, Thomson Reuters released a disturbing assessment of wasteful spending in the U.S. health care system. Echoing the estimates of Obama OMB chief Peter Orszag and others, the analysis highlighted by Keith Olbermann Tuesday concluded that the United States wastes up to $700 billion a year - a third of the nation's total $2 trillion health care spending.

As Robert Kelley, vice president of healthcare analytics at Thomson Reuters and author of the white paper, put it:

"The bad news is that an estimated $700 billion is wasted annually. That's one-third of the nation's healthcare bill. The good news is that by attacking waste, healthcare costs can be reduced without adversely affecting the quality of care or access to care. That's the point of this report - to identify areas in the healthcare system that can generate game-changing savings."

Those game-changing savings, TR found, could be found across a broad range of health care spending. Between $600 billion and $850 billion, it estimated, is wasted on:

  • Unnecessary Care (40% of healthcare waste): Unwarranted treatment, such as the over-use of antibiotics and the use of diagnostic lab tests to protect against malpractice exposure, accounts for $250 billion to $325 billion in annual healthcare spending.
  • Fraud (19% of healthcare waste): Healthcare fraud costs $125 billion to $175 billion each year, manifesting itself in everything from fraudulent Medicare claims to kickbacks for referrals for unnecessary services.
  • Administrative Inefficiency (17% of healthcare waste): The large volume of redundant paperwork in the U.S healthcare system accounts for $100 billion to $150 billion in spending annually.
  • Healthcare Provider Errors (12% of healthcare waste): Medical mistakes account for $75 billion to $100 billion in unnecessary spending each year.
  • Preventable Conditions (6% of healthcare waste): Approximately $25 billion to $50 billion is spent annually on hospitalizations to address conditions such as uncontrolled diabetes, which are much less costly to treat when individuals receive timely access to outpatient care.
  • Lack of Care Coordination (6% of healthcare waste): Inefficient communication between providers, including lack of access to medical records when specialists intervene, leads to duplication of tests and inappropriate treatments that cost $25 billion to $50 billion annually.

But in its catalog of health care spending horrors, however, Thomson Reuters may have understated potential savings in one area while overstating them in another.

When it comes to "preventable conditions," over time the United States may be able to realize far greater cost savings than the $25 to $50 billion TR estimated. For example, other studies have gauged the impact of the American obesity epidemic alone at $147 billion a year. (The cost of treating the diabetes with which it is often related run as high as $190 billion a year.) An August 2009 study by PriceWaterhouseCoopers claimed that risky behavior such as smoking, obesity and alcohol abuse combined produced a $493 billion annual price tag for the United States. For its part, Thomson Reuters in its report acknowledged the unmeasured impact of individual behaviors:

It is also important to note that, although not included in our estimate of a total range, the waste associated with treating a level of disease prevalence that could be significantly reduced through modified individual behavior, is significant. Although the responsibility for pursuing a healthier lifestyle is ultimately a personal one, the healthcare system has an opportunity to encourage better individual choices.

But in pegging the waste due to "unwarranted use" of health care services as high as $325 billion per year, Thomson Reuters may have overshot the target by a large margin.

Key to its analysis (contained in the full report available separately from Thomson Reuters) is an inflated assessment of the "defensive medicine" practiced by hospitals and physicians due to fears of malpractice litigation. As the New York Times' David Leonhardt detailed, Harvard economist Amitabh Chandra put the tab at $60 billion annually (3% of total spending) for the extra procedures, tests, doctor referrals and hospitals visits physicians order just to protect them from potential future lawsuits. And earlier this month, the Congressional Budget Office calculated that an onerous package of tort limitations would yield annual savings of $11 billion.

Sadly, Thomson Reuters like Sarah Palin and the National Review referred to the same 1996 study by Daniel Kessler and Mark McClellan to produce a whopping $200 billion price tag for defensive medicine. Looking only at Medicare heart patients in hospital settings, the paper concluded that "malpractice reforms that directly reduce provider liability pressure lead to reductions of 5 to 9 percent in medical expenditures without substantial effects on mortality or medical complications." Extrapolated to the entire $2 trillion U.S. health sector, the hypothetical savings from that magical 9% would catapult to $200 billion a year.

For the mouthpieces of the right (and even some, like Bill Bradley, on the left), that figure became the gospel truth. For her part, Sarah Palin lifted the fuzzy math directly from Dr. Stuart Weinstein, with the American Academy of Orthopedic Surgeons:

"If the Kessler and McClellan estimates were applied to total U.S. healthcare spending in 2005, the defensive medicine costs would total between $100 billion and $178 billion per year. Add to this the cost of defending malpractice cases, paying compensation, and covering additional administrative costs (a total of $29.4 billion)."

But as FactCheck.org, Media Matters and a host of others documented, both the GAO and the CBO itself long ago rejected that very extrapolation. The Congressional Budget Office previously found "no evidence that restrictions on tort liability reduce medical spending" and concluded:

"In short, the evidence available to date does not make a strong case that restricting malpractice liability would have a significant effect, either positive or negative, on economic efficiency."

(That earlier assessment was updated in the recent CBO scoring for Utah Republican Senator Orrin Hatch. For more details and data, see "Republican Malpractice Myths.")

Regardless, the implication of the Thomson Reuters study is clear. The United States spends almost double the percentage of GDP on health care as other advanced economies. But while Americans are unnecessarily hemorrhaging cash for health care, they have nothing to show for it.

(This piece also appears at Perrspectives.)

About Jon Perr

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