Most of the major proposals to overhaul the healthcare industry assume that costs can be significantly reduced by “cutting the fat” i.e. by identifying and eliminating the waste. A new study suggests that waste in healthcare can be as high as $700 billion annually.

But first, let’s clarify what is meant by waste. Waste is commonly defined as healthcare spending that can be eliminated without reducing the quality of care. So any dollar spent in healthcare that does not contribute to the quality of healthcare services, the outcomes of care or the health status of the population, is considered to be waste.

In the above-mentioned study, six main categories of waste were examined:

  1. administrative system inefficiencies
  2. provider inefficiency and errors
  3. lack of care coordination
  4. unwarranted use
  5. preventable conditions and avoidable care
  6. fraud and abuse

Administrative system inefficiencies are mainly due to the fragmentation of healthcare providers (hospitals and doctors) and the large number of payers (Medicare, Medicaid, private insurance plans, etc.) in the U.S. It is estimated that waste due to unnecessary administrative costs is around $100-$150 billion per year.

Provider inefficiencies include inefficient use of nurse practitioners and physician assistants, low utilization of expensive machines such as MRIs, inefficient scheduling of operating rooms (ORs), unnecessary and extended hospital admissions, and overutilization of some tests and intensive care units (ICUs). Provider errors, on the other hand, are very costly because they lead to extended hospital stays to treat avoidable complications, readmission to the hospital shortly after discharge, admission to the hospital to treat complications for an error done outside the hospital, and treatments for errors in prescribing and giving drugs. This category of waste is estimated to be around $75-$100 billion per year.

Lack of care coordination occurs for example when different providers do not communicate appropriately about a patient and end up duplicating tests or procedures. Also, if primary care doctors are not available or are too busy, patients end up using the emergency room for non-emergency conditions and thus costing the system unnecessary expenditures. Lack of care coordination is estimated to contribute $20-$25 billion in waste annually.

In my next post, I discuss the last three categories of waste (unwarranted use; preventable conditions and avoidable care; and fraud and abuse) and report the estimated cost in dollars for each category.