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Tackling Healthcare Spending – One Percent at a Time

One Percent Steps Adding Up to Something BIG?In healthcare, there is plenty of waste…and this waste is enormously costly to those who pay. This unnecessary spending is baked into the outrageous health insurance premiums we pay. In 2019, I estimated that ANNUAL waste baked into Iowa premiums for single and family coverage averaged $2,400 and $6,600 respectively. This translates into nearly 34 percent of all healthcare costs as non-value-added. 

Now, to be fair, there are those who make a living from this waste. Waste becomes a paycheck. Removing this unnecessary payroll, however, will most likely erupt into anguished rebellion. Justifications can always be made by various healthcare stakeholders about the necessity of their ‘value’ in a highly-convoluted and dysfunctional system. Admittedly, some may have a point. 

Six Domains of Waste

In the broadest sense, waste is found in six ‘domains’ of healthcare – as identified by Donald Berwick and Andrew Hackbarth in a 2012 study:

  1. Overtreatment (low value care)
  2. Failures of care coordination
  3. Failures in execution of care processes
  4. Administrative complexity
  5. Pricing failures
  6. Fraud and abuse

Using each of these six broad buckets of waste, my aforementioned 2019 blog provided the estimated impact of waste to health insurance premiums. Eliminating too much unnecessary spending at one time, however, will most likely create a backlash of stakeholder opposition. This may result in missed opportunities to actually fix the expensive leaks in our healthcare ‘system’.

How can costs be incrementally reduced to make a sizeable impact to payers?

One Percent Steps for Health Care Reform Project

According to a February article in Health Affairs, authors Zack Cooper and Fiona Scott Morton discuss implementing a series of one percent solutions that could collectively lower healthcare costs by hundreds of billions of dollars. If you are an employer that offers health coverage, this should grab your attention.

The authors explain their reasoning on using the one percent solutions:

Rather than speaking about health spending via abstractions, we should view high U.S. health care costs as the result of a series of discrete problems that each incrementally raises health spending by a percent or two — so-called ‘one percent problems’. While each problem is unremarkable in isolation, the collective impact of a series of one percent problems can help explain why the U.S. spends more than other nations.

The vastness of healthcare issues require new approaches that disrupt the status quo from being replayed into the future. Doing so begins with smaller steps that make sense. Cooper and Morton prescribe 16 steps that economists and policymakers can take to reframe healthcare spending as a series of one percent problems. These problems, they argue, can be used as a road map for cost reduction. 

If implemented, the following 16 steps would decrease overall annual healthcare spending by nearly nine percent. This amount of savings may not sound impressive, but when nearly nine percent can be lopped off from the health system that absorbs $3.8 trillion of costs, it is an impressive beginning. Each step does not serve as a silver bullet, but rather, an incremental solution that makes sense.

These 16 evidence-based steps are ranked by their projected annual savings as a share of national health spending:

  1. Regulating healthcare provider prices: 1.89 percent
  2. Addressing surprise medical bills: 1.67 percent
  3. Increasing the efficiency of claims adjudication: 1.25 percent
  4. Addressing vertical integration of hospitals and physicians: 0.91 percent
  5. Introducing smart provider networks: 0.83 percent
  6. Addressing hospital consolidation: 0.69 percent
  7. Improving health insurance plan choice: 0.63 percent
  8. Improving plan auto-assignment in Medicaid managed care: 0.24 percent
  9. Reforming how Medicare reimburses biosimilars: 0.21 percent
  10. Addressing orphan drugs: 0.15 percent
  11. Reducing fraud in home health: 0.12 percent
  12. Reforming the payments for long-term care hospitals: 0.11 percent
  13. Decrease cost barriers for living kidney donations: 0.08 percent
  14. Expanding preferred pharmacy networks: 0.04 percent
  15. Eliminating prescription copay coupons: 0.03 percent
  16. Expanding kidney exchanges: 0.02 percent

Zack Cooper, Associate Professor at the School of Public Health and the Department of Economics (Yale), discusses the ‘one percent’ approach in a ‘Creating a New Healthcare’ podcast. He can also be found on Freakonomics Radio, “How to Fix the Hot Mess of U.S. Healthcare.”

As we fight the daily battles of the Covid-19 pandemic, we are reminded that many inherent problems continue to persist in our costly healthcare system. Without action, these problems will not go away. Will market solutions be able to fix many of these issues? The clock continues to tick – and healthcare costs continue upward.

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Estimated Waste in Iowa Employer Health Premiums:
$2,400 Single/$6,600 Family

Imagine walking into a restaurant and being seated. Sometime after your meal, you receive the check and find an additional charge that was not indicated on the menu or previously mentioned by your waiter. The charge – before your gratuity is determined – is a 34 percent markup simply labeled, ‘Surcharge.’ After prodding the waiter, the sheepish but honest response is whispered to you: “The restaurant industry is bloated and inefficient requiring additional costs, and because of this, we must pass on this surcharge to our patrons.”

Truth be known, we are all paying this ‘surcharge’ in the healthcare that we purchase, as it is baked into our health insurance premiums and the out-of-pocket expenses we incur and pay. What is different from the hypothetical restaurant example, however, is there’s no transparency on how much these costs add up in healthcare. Opaqueness of this information allows this surcharge to be included on the final price tag – and the purchaser is no wiser.

In healthcare, it’s buyer beware – on steroids.

Healthcare Waste in the U.S.

To begin, defining healthcare ‘waste’ is somewhat tricky, but nonetheless important. Waste is defined by many in the industry to be resources that are expended in services, money, time, and/or personnel that do not add value for the patient, family or community. In fact, this non-value waste can actually harm patients, which adds more cost to the system.

I recently watched an Institute for Healthcare Improvement (IHI) webcast, “Let’s Get to Work on Waste in Health Care.” In addition to a wonderful Call to Action’ piece, IHI provided great examples of healthcare waste within the ‘Trillion Dollar Checkbook.’ The IHI used ‘trillion’ in this piece because the healthcare industry in the U.S. is about one-fifth of the nation’s economy (and growing), and the annual spend in healthcare during 2018 was $3.65 trillion. Healthcare waste in the U.S. is generally believed to be a comfortable one-third of the total spend – roughly one trillion dollars – about the size of Mexico’s economy. Click here for the audio and video of this webcast.

The IHI referred to a JAMA article published in 2012 by Dr. Donald Berwick, a highly-respected physician and health policy expert, and Andrew Hackbarth of the RAND Corporation. The article, “Eliminating Waste in US Health Care,” aptly describes that escalating healthcare costs is debilitating other worthy government programs, cheap drugs, erodes wages, and undermines the competitiveness of the overall U.S. industry. The percentage of waste that is built into healthcare costs, according to this paper, ranges from 21 percent to 47 percent, with 34 percent being the midpoint.

‘Litter Box’ of Healthcare Waste

So what healthcare waste is found in the litter box hidden from the public?  Plenty. A ‘less harmful strategy’ described by the JAMA authors would be to reduce waste that does not add value to care. They cite six categories of waste briefly summarized below, beginning with the largest estimated waste to the smallest:

  1. Administrative complexity – Government, private payers, and others create inefficient or misguided rules for providers. By comparison, in 2015, the U.S. spending on healthcare administration dwarfs the OECD countries. One example is that payers fail to standardize forms, consuming limited physician time in having to deal with onerous billing procedures. Multiple payers do not coordinate their efforts with those providing care. Estimated waste in 2011: Between $107 billion and $389 billion.
  2. Overtreatment – Subjecting patients to care that cannot possibly help them – based on sound science and patient preferences. This care is “rooted in outmoded habits, supply-driven behaviors, and ignoring good science by providing excessive and inappropriate care. Examples include using excessive antibiotics and opioids, performing surgery when watchful waiting makes better sense, and unwanted intensive care at end-of-life for patients who don’t want this. Estimated waste in 2011: Between $158 billion and $226 billion.
  3. Fraud and abuse – Issuing fake bills and running scams to get paid by government and private payers. Estimated waste in 2011: Between $82 billion and $272 billion.
  4. Pricing failures – Well-functioning markets produce reasonable prices that come from actual costs of production plus a fair profit. In healthcare, due to lack of transparency and competition, prices are several times more than identical procedures in other countries. Pricing failure includes payer-based health services pricing, medication pricing, in addition to laboratory-based and ambulatory pricing. Estimated waste in 2011: Between 84 billion and $178 billion.
  5. Care delivery failures – This includes poor execution and lack of widespread adoption of known best care processes, such as for patient safety systems and preventive care practices and are known to be effective. Better care saves money. Estimated waste in 2011: Between $102 billion and $154 billion.
  6. Care coordination failures – Care in the U.S. is fragmented, meaning that patients fall through the cracks, resulting in complications, hospital readmissions, and declines in functional status requiring increased dependency. Estimated waste in 2011: Between $25 billion and $45 billion.

New JAMA Study Released about Waste

A new study published in JAMA finds that roughly 20 to 25 percent of American healthcare spending is wasteful. Although this finding is slightly less than findings mentioned above, the estimated waste is considered to be an astounding $760 billion to $935 billion per year – comparable to government spending on Medicare. This waste exceeds national military spending and total primary and secondary education spending. This study also addresses the same six categories of waste explained earlier.

Waste in Iowa Employer Health Insurance Premiums

In our recent 2019 Iowa Employer Benefits Study©, we found the average annual single and family health insurance premiums are now $7,017 and $19,335, respectively. Using the midpoint of 34 percent waste (a number from the Berwick study), the annual waste built into the Iowa single and family premiums are $2,386 and $6,574, respectively. This estimated waste reflects the amount employers and their employees overpay which generates income for providers, healthcare industry vendors, health systems, and health plans.

Applying the midpoint for each of the above six categories of waste, I was able to estimate each of the six cost components for the health insurance premiums paid by Iowa employers and their employees. Below is a graphic that depicts the total estimated waste found in both the single and family premiums based on the six waste categories described earlier.

Summary

By tolerating waste, we unknowingly create and sustain a rising burden of out-of-pocket expenses, suppressed take-home pay, delays of care and other side-effects that harm our care and well-being. As mentioned in the IHI’s ‘Call to Action,’ “…it’s not just money that’s being wasted. The most precious resources – the workforce’s time, spirit and joy – are being unnecessarily drained by wasteful processes every day…No matter how many medical breakthroughs achieved…if we don’t remove waste in health care, our health systems cannot thrive.”

Healthcare waste comes from many different sources, which require multiple strategies to reduce at least a fraction of waste described above. Berwick believes that healthcare waste must be attacked through political means, such as simplification of administrative services and pushing back on irrational pricing. Others believe that enhancing regulation of healthcare monopolies can also greatly help.

Frankly, too many ‘insiders’ are afraid to speak critically about their wasteful piece of the healthcare system, fearing loss of promotion, employment or obtaining lucrative consulting contracts. This fear allows the status quo to remain largely unchallenged.

Whatever the solutions, we must begin to have an honest national discussion about the massive waste we pay to others who see this as their revenue and income. A logical start is for voters to ask candidates how they propose to cut waste and simplify our healthcare system.

With 20 to 47 percent of our health insurance premium and out-of-pocket costs considered to be ‘wasteful’, I’m ready to have this discussion.  Are you?

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