Wasted Healthcare Spending: A $750 Billion Opportunity

Blog post by Colin Hung.

According to a 2012 report by the Institute of Medicine (IoM), $750 Billion USD of healthcare spending is wasted annually in the United States. That staggering amount is 187 times the combined starting salaries for every Major League Baseball team in 2017 and is the same amount spent on medical care for all veterans for the past 51 years! Yet, the focus over the past five years has been on reducing all healthcare costs, not just the amount wasted. This has led to reductions in clinician headcount, consolidation of healthcare facilities, increased prices and reductions in coverage – all of which are hotly contested. Instead, what if we focused on reducing healthcare waste? Surely we can all agree to make cuts in this area?

The IoM report identified several key areas of wasteful spending:

What I found particularly interesting was:

  • $105 Billion – Prices that are too high
  • $75 Billion – Fraud

In researching this week’s chat, I was surprised to learn how much wasted medication is costing the healthcare system. In some cases, drug makers have increased the size of containers so that there is more medication than is needed for a single patient. The excess medication is disposed of – through an expensive medical waste incineration process. Marshall Allen put it best in his Washington Post article:

Vials of cancer drugs are also made too large, which one study said wastes about $1.8 billion a year in the valuable medication. Earlier this year, one drug company switched from a multiuse vial, which could be shared by patients, to a single-use vial that could not be shared, thereby increasing the amount of wasted cancer medication. The change would make the supply chain more reliable worldwide, the company said. But one cancer center calculated that the change would cost each patient an average of $1,000 in waste per infusion. Imagine: You’re fighting cancer and then get billed an extra thousand dollars for medication they toss in the trash.

Allen also cites the waste caused by medication “expiration dates”. Hospitals and pharmacies are mandated to dispose of any drug that is past their expiration date. However, studies have repeatedly shown that many medications remain potent well beyond their marked dates. In some cases years beyond their expiration. It turns out that the expiration dates are set to “the point in time where the Food and Drug Administration and the pharmaceutical company guarantees the effectiveness”. The result is upwards of $800 Million worth of viable medications are dumped by hospital pharmacies each year.

Not all medication-related waste is because of pharmaceutical company greed. Long-term care facilities often throw away the remaining medications of patients who have passed away or who move to other facilities and who do not return for their medications. When Iowa stat legislators learned of this practice, they created the SafeNetRx program to recover these medications and donate them to those who cannot otherwise afford the medications. Over $15 Million in free medication and supplies have been donated to 70,000 patients since the program’s inception in 2007.

If the healthcare organizations were more conscientious in how they use and dispose of medications, millions of dollars each year could be saved. In addition, if the industry as a whole demanded that medication be dispensed in usage-sized does rather than super-sized single-use containers then additional millions could be saved. I say *could* because I suspect that companies would simply raise prices to ensure their profit margins remain intact.

High healthcare prices are also the result of opaque pricing policies. Anyone who has received a medical bill knows how confusing it is to determine the exact reason for each line item on the bill (if you even get an itemized bill). For decades healthcare pricing was kept in the shadows and prices have run amok because of it. As an example, a family in Colorado was charged $1,877 to pierce their 5yr old’s ears. In another case, a man’s insurance company was billed over $14,000 for a 45min visit to the ER to stitch up a cut on his hand. The bill included a $3,523 charge for “re-arranging skin tissue” and $4,560 to repair his tendon which was not harmed.

Because the majority of medical payments were handled by insurance companies directly with healthcare providers, many patients did not pay attention to these outrageous prices and incorrect bills. Now that patients are shouldering more of the cost of care, healthcare pricing has suddenly be thrust into the spotlight. It will likely take years for pricing to stabilize, but I am optimistic that transparency and outrage will drive down prices.

Healthcare fraud has long been a pet peeve of mine. There is no reason why $75 Billion should be lost each year to fraud. The technology already exists to combat several common types of fraud:

  • Unbundling – where a healthcare organization creates separate claims for services that should have been grouped together
  • Submitting double bills – where two or more bills for the same service are submitted
  • Providing unnecessary care – to maximize the billing allowed under certain diagnosis codes

For all three cases, technology can be used within EHRs and by claims processors in their validation step to detect this type of fraud. However not many EHR vendors have built this capability into their systems (perhaps due to lack of incentive or user demand). Claims processors do not have the personnel to investigate each potential case of fraud and often only spot check the large dollar cases. The rest just sail through.

In Fiscal Year 2015, the US government recovered $2.4 Billion through its Health Care Fraud and Abuse Control Program. Since 2007, the program has recovered $29.4 Billion in Medicare funds and laid charges against 2,536 individuals. Although this effort is laudable, it represents just a small fraction of the estimated $40-$60 Billion in Medicare fraud that happens each year (approximately 2-3% of Medicare’s annual budget). Would you trust a bank or insurance company that had a fraud rate north of 1%?

So what can be done about healthcare waste? Is there anything that individuals can do? Or is this simply a case of a systemic problem requiring a system-wide solution? I believe there are several ways that clinicians and patients can help reduce healthcare waste:

  1. Get copies of all your test results, images and medical records. Provide these to your doctor the next time they order a test – you may not actually need it if there is a recent one in your history. This will save you $$$.
  2. Return unused medications to pharmacies that participate in recovery programs. Not only will this keep harmful chemicals from entering landfills and the water supply, but you will help patients in need.
  3. Communicate and ask questions of doctors. Work together to determine how likely the treatment will yield the desired result. For example, would you take the medication if there was an 80% chance it would clear up on its own with no long-term affects?
  4. Ensure accurate coding in EHRs. A combination of technology and people-power should be used to ensure the diagnosis codes entered into EHRs are correct and match the patient’s condition. Don’t let a training issue become hundreds of thousands of dollars in downstream costs.
  5. Incorporate fraud-detection technology into healthcare systems. HealthIT companies should think of fraud like they think of security and incorporate it into their software right from the design stage.

Eliminating wasted healthcare spending is an enormous opportunity but are we too focused on improving the efficiency of healthcare operations? What if we spent as much effort combatting the other forms of wasted healthcare spending? What could we do with several billions of extra money?

Please join me Tuesday July 17th at 8:30pm ET (for your local time click here) for a discussion on wasted spending in healthcare:

  • T1 What area of wasted healthcare spending are you most upset about? (wasted medications, unnecessary tests, admin burden, fraud, etc)
  • T2 What can/should clinicians, administrators and patients do to help reduce wasted spending in healthcare?
  • T3 How do you feel about rewarding clinicians, administrators, etc in proportion to $$$ saved/waste eliminated?
  • T4 Are there technologies or techniques that could help reduce wasted spending in healthcare? Provide examples (with links!)

References

Smith, Mark et al. “ Best Care At Lower Cost – The Path to Continuously Learning Health Care in America”, Institute of Medicine, 2013, https://www.nap.edu/read/13444/chapter/1, accessed 13 July 2018

Allen, Marshall. “A Prescription for Reducing Wasted Health Care Spending”, ProPublica, 21 December 2017, https://www.propublica.org/article/a-prescription-for-reducing-wasted-health-care-spending, accessed 13 July 2018

Mirza, Anzish. “Hospitals Waste Billions of Dollars in Medical Supplies” US News & World Report, 9 March 2017, https://www.usnews.com/news/healthcare-of-tomorrow/articles/2017-03-09/hospitals-are-wasting-billions-of-dollars-worth-of-medical-equipment, accessed 13 July 2018

Chase, Dave. “What the US Could Buy with Wasted Healthcare Dollars” Forbes, 27 October 2018, https://www.forbes.com/sites/davechase/2012/10/27/what-the-u-s-could-buy-with-wasted-healthcare-dollars/#134788f767c9, accessed 13 July 2018

Allen, Marshall. “Want to cut health-care costs? Start with the obscene amount of waste”, Washington Post, 28 December 2017, https://www.washingtonpost.com/news/posteverything/wp/2017/12/28/want-to-cut-health-care-costs-start-with-the-obscene-amount-of-waste/?utm_term=.cee80d20d26b, accessed 13 July 2018

Dionne, Evette. “One man’s ridiculous hospital bill sums up the problem with America’s healthcare”, Revelist, 3 November 2016, http://www.revelist.com/viral/hospital-bill-outrageous/5597, accessed 13 July 2018

Thornton, Dallas et al. “Categorizing and Describing the Types of Fraud in Healthcare”, Procedia Computer Science, 15 September 2015, https://www.sciencedirect.com/science/article/pii/S1877050915027295, accessed 13 July 2018

Kliff, Sarah. “8 Facts That Explain What’s Wrong with American Health Care” Vox, 20 January 2015, https://www.vox.com/2014/9/2/6089693/health-care-facts-whats-wrong-american-insurance, accessed 13 July 2018

Koukakis, Nasos. “Shocking truth: 20% of healthcare expenditures wasted in US and other nations”, CNBC, 13 January 2017, https://www.cnbc.com/2017/01/12/shocking-truth-20-of-health-care-expenditures-wasted-in-us-and-other-nations.html, accessed 13 July 2018

Gamlin, Ryan. “Administrative costs are killing US healthcare”, Medical Economics, 21 May 2016, http://www.medicaleconomics.com/medical-economics-blog/administrative-costs-are-killing-us-healthcare, accessed 13 July 2018

Himmelstein, David U et al. “A Comparison of Hospital Administrative Costs in Eight Nations: US Costs Exceed All Others by Far”, Health Affairs, September 2014, https://www.healthaffairs.org/doi/full/10.1377/hlthaff.2013.1327, accessed 13 July 2018

Blumberg, Yoni. “Here’s the Real Reason Health Care Costs so Much More in the US”, CNBC, 22 March 2018, https://www.cnbc.com/2018/03/22/the-real-reason-medical-care-costs-so-much-more-in-the-us.html, accessed 13 July 2018

“Medical Waste: Why American Health Care Is So Expensive”, Wharton, 18 August 2016, http://knowledge.wharton.upenn.edu/article/medical-waste-american-health-care-expensive/, accessed 13 July 2018

Kerr, Eve A and Ayanian, John Z. “How to Stop the Overconsumption of Health Care”, Harvard Business Review, 11 December 2014, https://hbr.org/2014/12/how-to-stop-the-overconsumption-of-health-care, accessed 13 July 2018

Image Credit

P6270990 – Taylor McKenzie https://flic.kr/p/4Zqcsf

One comment

  1. Colin, thank you for this incredibly insightful and poignant post. You make such a compelling and well-founded case that is based on credible sources. I hope to continue the conversation on this topic and to find real solutions to reducing healthcare waste.

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