Cost reductions may have benefits beyond saving money
As the presidential and congressional campaigns this year apply political diagnoses to the 2010 federal health care law, a stunning report by the independent and widely respected and influential Institute of Medicine has provided a financial diagnosis to vastly improve health care.
According to the report, which was complied over the course of 18 months, about 30 cents of every dollar spent on health care is wasted - $750 billion every year. That is more than the amount of the U.S. defense budget and a little bit less than the federal bailout of failing banks in 2008. As noted by The New York Times, the amount wasted is enough money to provide health coverage to about 150 million people.
Clearly, the amount of waste poses an opportunity to make progress on the single most difficult part of health care reform - cost control. Reducing the vast amount of waste reported by the IOM would make it far easier to provide coverage for many more people without driving up costs.
For example, the report identified $210 billion in unnecessary costs for unneeded services, including duplicated diagnostic tests. Unnecessary administrative costs and redundant paperwork add about $190 billion to the systems costs, with inflated prices not justified by outcomes contributing $150 billion, fraud adding $75 billion more and missed opportunities for disease prevention contributing another $55 billion, the report found.
Insurers, many providers and the Affordable Care Act have begun to address some of the waste. Led by Medicare, insurers have begun to tweak reimbursement formulas to emphasize quality outcomes rather than the quantity of services delivered, for example. The leading effort in that regard is Medicare's refusal to reimburse hospitals for some re-admissions of patients who acquire infections while hospitalized.
As Harvard health care economist David Cutler told the New York Times, the money wasted doesn't buy anything. "A lot of cost reductions, if we do them the right way, would mean improved health, not worse health," he said.
Systemically, the report points to payment for quality health care services rather than quantity, a foundational change that will produce exponential savings throughout the system.