A Quarter of Healthcare Spending Goes to Waste: Tips for Reducing Unnecessary Care

The cost of care continues to be a concern for both patients and providers. In 2017, the U.S. spent about $3.5 trillion, which accounts for around 18% of GDP, on health expenditures. That’s more than twice the average among other developed countries.

Yet, nearly a quarter of that spending goes to waste, estimated at $760 billion to $935 billion, according to a new report published in the Journal of the American Medical Association (JAMA). Around 25% of healthcare services performed are either medically unnecessary or poorly executed, forcing patients, providers, and payers to pay more for care.

If you’re looking to reduce wasteful spending, learn more about why costs are getting out of control and how you can use funds more efficiently.

Why So Much Spending Goes to Waste

Researchers collected healthcare spending data from 54 published reports and studies. They divided incidents of wasteful spending into 6 different categories, including:

  • Failure of care delivery
  • Failure of care coordination
  • Overtreatment or low-value care
  • Pricing failure, which includes medication pricing, payer-based health services pricing, and laboratory-based and ambulatory pricing
  • Fraud and abuse
  • Administrative complexity

According to the results, administrative complexity accounts for the largest share of wasteful spending, estimated at $265.6 billion. Pricing failure came in at number two in terms of wastefulness, representing anywhere between $230.7 billion and $240.5 billion. The annual cost of waste from failure of care delivery was estimated from $102.4 billion to $165.7 billion. Failure of care coordination, overtreatment, low-value care, and fraud and abuse were each estimated at less than $100 million.

While administrative complexity deserves the lion’s share of blame, industry analysts are also raising alarm over the cost of prescription medications, a major part of price fixing. Drug manufacturers often retain the exclusive rights to sell certain medicines for at least seven years, which limits competition in the market. The high cost of prescription drugs can quickly inflate the overall cost of care. In 2016, the U.S. spent $329 billion on prescription drugs alone.

Experts want to lower the cost of prescription drugs by changing the FDA approval process and increasing competition in the marketplace by bringing in generic drugs and those made in other countries. However, these issues and concerns are often left to state and federal lawmakers.

Tips for Reducing Administrative Complexity

The healthcare industry isn’t known for its simplicity. The federal government has enacted numerous restrictions that regulate the quality of care. These regulations contribute to administrative complexity, driving up the cost of care. For example, you need to have the Center for Medicare & Medicaid Services, the largest payer in the healthcare industry, approve certain procedures and services ahead of time to ensure your facility gets reimbursed. While much of this “red tape” is beyond the control of your facility, there are still ways to reduce complexity within your facility.

Keep these tips in mind to simplify administrative processes throughout your facility.

  • Bundled Care

You can try switching to a bundled pricing system for certain healthcare services. Under a bundled care model, your facility will be reimbursed for healthcare services based on the expected costs for clinically defined episodes of care. This means healthcare providers will need to think more strategically when recommending certain procedures and services to their patients. Bundled care models discourage unnecessary care. It also spreads risk between payers and providers, so both parties have a vested interest in bringing down costs.

  • Capitation

You can also try switching to a capitation model of care. Under capitation, your facility will receive a lump sum per patient regardless of how many services the patient receives. Your facility will be reimbursed at a higher rate when caring for healthy patients compared to caring for sicker patients. Some have criticized this model for discriminating against sicker patients, but it may help reduce the overall cost of care in certain areas. Providers will also have a vested interest in treating patients for less money, as opposed to recommending lots of different tests and procedures, some of which may not be medically necessary.

  • Value-Based Care

Under a value-based system of care, reimbursement rates are determined by the overall clinical value of services rendered. If certain services will not ultimately benefit the health of the patient, your facility will not get reimbursed. This model of care is designed to increase provider accountability. Providers will need to consider the wellbeing of the patient when prescribing certain services and procedures in order to improve reimbursement rates.

  • Listing the Price of Care

As a final resort, you can also try listing the price of certain healthcare services and procedures on your website. This gives consumers more control over where they receive care and how much they’ll have to pay. Consumers will compare the cost of certain services with the overall value of care they receive, boosting innovation and price competition in the local market.

Reducing wasteful spending isn’t always easy. Switching to new models of care requires full administrative and staff buy-in, otherwise these programs may not get off the ground. Talk to your colleagues about reducing wasteful spending, so you can make the most of every dollar you spend.

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