The United States Does Not Waste a Third of its Health Spending

One of the most significant problems in all public policymaking is having accurate, credible, trustworthy data and strong research designs that create that data.  Unfortunately, in health care as elsewhere, we frequently see poor research results, data taken out of context and misunderstood study conclusions used to frame the discussions on issues.  We spend a lot of money on health care in the United States, more than most other developed nations.  There are many reasons for the level of our health spending, and at bottom, it may just be that people in this country want to spend that much on their health.  Undoubtedly not all of our health spending is appropriate, likely patients don’t get any real improvement from some of the medical services and products they receive.  A myth has circulated for several years now, however, that a third of all health care spending in the United States is “wasted” or somehow could be avoided.  This myth was most recently repeated in the absurd Evolent Health IPO documents.  People use this supposed “fact” to support the idea that if we just crack down on utilization all our problems will miraculously be solved.

As with all myths, it is useful to recall the origin.  This “one-third of health care is wasted” notion comes from a Milliman study suggesting that if its care guidelines were applied to the delivery of all care in the United States, a third of it wouldn’t be appropriate.  Milliman came to this conclusion by running the guidelines against a claims database.  While I have the greatest respect for the work of Milliman and actuaries in general, this is on its face a flawed approach and a bogus conclusion, not to mention that it is now dated by almost a decade.  Any set of care guidelines, in the abstract, might result in a lot of denied care, but the reality is that when any guidelines are applied to real cases, most of the time there are valid reasons for exceptions to or deviations from the strict application of the guideline.  Health care is still driven by clinician judgment and patients are individuals, with individual biochemistries and individual circumstances that make the application of guideline-driven health care not just difficult, but often inappropriate.  If you looked at the real life experience of health plans using the Milliman guidelines, I would be very surprised if more than 5% to 10% or so of requested care spending really ends up being denied or shifted to another treatment modality

One way to test the idea that a third of health care spending is wasted is to conduct the following thought experiment.  A huge percent, likely a majority, of Americans’ health care is paid for by a few plans–UnitedHealth, Aetna, Cigna, Anthem, Humana, HCSC and other large Blues Plans.  They cross all plan types–individual, employer-based, Medicare Advantage, Medicaid.  Do you really think that these plans pay a third of their of medical costs for inappropriate or unnecessary services?  It is obvious that this is not the case, at this point, these organizations probably would feel that less than 5% of what they pay for wasn’t appropriate.  And if all these large plans are managing care effectively, for the rest of the population 75% or more of care would have to be wasted to get to the one-third percent for all US health spending.

For years, and especially recently, study after study has shown that the cause of high health spending and spending growth in the United States is not utilization, it is unit price.  And in international comparisons, we generally fare very well in regard to utilization metrics, especially for high-cost categories like inpatient hospitalizations.  And I constantly feel it necessary to point out that for all the supposed over-utilization in this country, there is an equal amount of under-utilization–examples in which patients don’t get the care they need.  It is always worth ensuring that each patient receives all the health care appropriate to their medical needs, and no more.  But the relentless promulgation of the myth that a third of health care spending is wasted deters focus from the bigger problem–unit prices.