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Waste in Health Spending, How Much is There Really?

By April 21, 2015Commentary

People have claimed that as much as a third of American health spending is “wasted”, which generally seems to mean it was unnecessary or inexpensive care, or perhaps that a less expensive procedure, drug or device, or provider could have been used.   In a new paper at the National Bureau of Economic Research, the authors focus on the frequent observation that there are wide geographic variations in patterns of care, which often seem uncorrelated with outcomes.  (NBER Report)   They used a strategy of examining patients taken to different hospitals by ambulances for acute care.  The hospitals often have different treatment patterns and in these situations, the patients didn’t select the hospital, so selection bias may be minimized.  Looking at one-year mortality rates after the hospitalization, the researchers sought to link treatment patterns to those rates.  The study population was solely Medicare beneficiaries and covered years 2002 to 2011.

Building on earlier work, the researchers found that hospitals with higher total spending during a 90 day episode period beginning with the hospitalization do not have better survival rates, but hospitals with larger costs for the actual hospitalization, have lower mortality rates.  Decomposing this further, they find that patients who go to hospitals with high amounts of spending after the hospitalization have higher mortality rates and in particular that large spending at skilled nursing facilities is associated with higher mortality.  All the results are statistically significant but not demonstrating large effects.  Although the authors risk-adjust their analyses, as is usually the case, we cannot be completely comfortable that they are capturing all the differences between patients at different hospitals; differences would could account for the need for more skilled nursing care and for higher mortality.  And while improving post-hospitalization care could save money, it is certainly not going to save 30% of our health spending, the amount often claimed to be wasted.  And since higher spending during a hospitalization is associated with better mortality, that is an offsetting larger cost.

I have always been exceptionally skeptical about these studies claiming there is a huge amount of waste in the system and that we would save trillions if we could just eliminate it.  I have no doubt that unnecessary or inappropriate care is delivered, but the estimates of the amount are not methodologically rigorous, and they ignore the element of legitimate physician and patient choices regarding care, given the highly individualized biochemistry and health needs and preferences of consumers.  The people highlighting the waste in the system and how much we could save by eliminating it generally fail to note the high level of unmet need in our country–people who should be getting more health care and aren’t.  I suspect the reality is that these two tendencies roughly balance out.  Our first goal should be to assure that everyone is getting health care that is appropriate to their needs and that maintains or even improves their health.  Secondarily, we can worry about how much should be paid for that health care and who is going to pay it.


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