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Healthcare System Wastes $850 Billion Annually

John Commins, for HealthLeaders Media, October 26, 2009

A new independent study released this morning appears to support President Barack Obama's claims that the nation's $2.3 trillion healthcare system is fraught with waste.

The study by the Healthcare business of Thomson Reuters estimates that between $600 billion and $850 billion—about one-third of the nation's total healthcare bill—is wasted each year through a combination of fraud, administrative inefficiency, unnecessary or redundant care, avoidable complications, errors, and lack of care coordination.

"You read and hear a lot about how much waste there is in healthcare," says Robert Kelley, vice president for healthcare analytics at Thomson Reuters. "We wanted to be relatively sure that when we say how large the opportunity is we are able to back that up with statistics and informed expert opinion about very specific types of waste and where they occur."

The study, based on analysis of hospital financials, insurance claims data, government data, and a review of existing literature, identified unnecessary care as the largest driver in wasted healthcare dollars. The over-use of prescription antibiotics and the use of diagnostic lab tests performed to protect against malpractice exposure accounts for between $250 billion and $325 billion—as much as 40% of the overall wastage—in annual healthcare spending.

"In the healthcare debate, there are all these issues about how we are going to pay for extending services and access to those that don't have it. We are hearing: 'You are going to take healthcare away from me. There are going to be death panels because that is the only way you can come up with the money,'" Kelley says. "So it became relevant for us to say, 'Is there really a lot of money available in the system where we can redirect resources to provide services for people who don't have them and not have a negative impact on the rest of us?'"

Other major waste drivers include:

  • Fraud (19% of healthcare waste): Healthcare fraud accounts for approximately $125 billion to $175 billion in annual healthcare spending, manifesting itself in everything from fraudulent Medicare claims to kickbacks for referrals for unnecessary services.
  • Administrative inefficiency (17% of healthcare waste): The large volume of paperwork in the U.S healthcare system accounts for $100 billion to $150 billion in annual healthcare spending.
  • Provider errors (12% of healthcare waste): Preventable treatment errors, ranging from complications because of procedure-related injuries to treatment of adverse drug reactions account for $75 billion to $100 billion in annual healthcare spending.
  • Preventable conditions (6% of healthcare waste): Approximately $25 billion to $50 billion is spent annually to treat preventable conditions, such as uncontrolled diabetes.
  • Lack of care coordination (6% of healthcare waste): Inefficient communication between providers, such as duplication of tests and inappropriate treatments resulting from a lack of access to medical records between providers, costs between $25 billion and $50 billion annually.

Kelley concedes the estimates in his study are similar to those put forward by the White House and other advocates for healthcare reform.

"The number of around $700 billion has floated around for a while, but not with a whole lot of detail backing it up," he says. "When I started looking at this, that number was the target I had in mind."

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