How Much Health-Care Spending Is Wasted? Lots.

Last week, two important reports underscored the potential for improving the value of health care in the U.S.

The first of these, “Best Care at Lower Cost: The Path to Continuously Learning Health Care in America,” issued by the Institute of Medicine, highlights two crucial facts. The first is that the health system provides a great volume of care that doesn’t help patients. The authors write “there is evidence that a substantial proportion of health care expenditures is wasted, leading to little improvement in health or in the quality of care. Estimates vary on waste and excess health care costs, but they are large” -- possibly amounting to more than $750 billion in a single year.

As the report notes, that is enough to pay the full salaries of all the nation’s firefighters, police officers, and emergency medical technicians for more than a decade.

Second, medicine is becoming so complex that it is virtually impossible for an individual doctor to keep pace -- especially without help from computers, the institute says. Consider that the number of medical journal articles has risen to more than 750,000 a year, from 200,000 in 1970. “Diagnostic and treatment options are expanding and changing at an accelerating rate, placing new stresses on clinicians and patients, as well as potentially impacting the effectiveness and efficiency of care delivery,” the report concludes.

Photographer: Ben Baker/Bloomberg

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Photographer: Ben Baker/Bloomberg

Computerized Medicine

This report reaches well beyond diagnosis, however. It recommends sensible steps to move us toward a “continuously learning” health system. One of these is to give doctors and other providers expanded real-time access to the latest knowledge through the widespread use of clinical-decision- support computer software, bolstered by continuously updated data on clinical experience.

A second set of recommendations involves health-care payment policies, which, as the institute argues, “strongly influence how care is delivered.” The U.S. needs to move faster away from paying providers a fee for each service and instead pay for what they accomplish toward helping patients. The report also calls on health-care leaders to promote and develop a culture of learning among doctors, while also empowering patients by giving them more information about their own medical decisions.

The second important health-care report last week, published in Health Affairs, is based on a comparison of health- care costs and quality among various regions. Although a vast body of previous research has explored the wide variance within Medicare -- and has shown that there is no apparent correlation between cost and quality -- this analysis used data from the private insurer UnitedHealth.

The private-insurance data also show tremendous variation. For common chronic conditions, for example, the least-expensive costs per medical episode (those at the 10th percentile of all episodes) were about one fifth to one third less than the median, while the most expensive costs per episode (at the 90th percentile) were three to five times the median. In other words, the highest costs are more than 10 times the lowest -- for treating the same condition. The team also found significant variation both within and across regions.

This variation might be understandable if the higher spending bought better results. However, according to the researchers, “for the conditions that we analyzed, we found essentially no correlation between average costs and the measured level of care quality across markets.”

The evidence thus suggests that in both Medicare and in private-insurance markets, higher costs are not associated with better quality. That underscores the opportunity identified by the Institute of Medicine: By reducing the very high costs that are not generating better quality, the U.S. could reduce total spending without diminishing the quality of care people receive.

Quality Focus

Like the Institute of Medicine, the UnitedHealth team made suggestions for how to capture that opportunity -- and the recommendations from both groups are broadly consistent. The UnitedHealth team argues that we need to continue to improve quality measures; expand the use of shared data; move away from fee-for-service payment (but in a manner that reflects providers’ differing abilities to handle more risk immediately); and modify the culture of medicine.

As I have said before, the next decade is crucial. The U.S. can either move more aggressively to change the information that providers have and boost their incentives to give better care, or waste another decade and trillions more in excess health-care costs.

(Peter Orszag is vice chairman of corporate and investment banking at Citigroup Inc. and a former director of the Office of Management and Budget in the Obama administration. The opinions expressed are his own.)

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To contact the writer of this article: Peter Orszag at orszagbloomberg@gmail.com

To contact the editor responsible for this article: Mary Duenwald at mduenwald@bloomberg.net

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