Wasteful Health Care Spending

 by Timothy Taylor, Conversable Economist

The high costs of health care are not just an issue for the United States, but for countries all over the world. The OECD addresses the issue of How to Tackle Wasteful Health Care Spending in a January 2017 (which can be ordered or read online for free here).

Here’s a taste of the findings from the “Foreword”:

Across OECD countries, a significant share of health care system spending and activities are wasteful at best, and harm our health at worst. One in ten patients in OECD countries is unnecessarily harmed at the point of care. More than 10% of hospital expenditure is spent on correcting preventable medical mistakes or infections that people catch in hospitals. One in three babies is delivered by caesarean section, whereas medical indications suggest that C-section rates should be 15% at most. Meanwhile, the market penetration of generic pharmaceuticals – drugs with effects equivalent to those of branded products but typically sold at lower prices – ranges between 10-80% across OECD countries. And a third of OECD citizens consider the health sector to be corrupt or even extremely corrupt. At a time when public budgets are under pressure worldwide, it is alarming that around one-fifth of health expenditure makes no or minimal contribution to good health outcomes. … Actions to tackle waste are needed in the delivery of care, in the management of health services, and in the governance of health care systems.

There’s no magic bullet for reducing wasteful spending: instead, the strategy of the report is to pile up studies and examples until the sheer weight and number of opportunities to reduce health care spending is overwhelming. The report divides the evidence into three main categories: wasteful clinical care (care that either provides very low value or can even be counterproductive to health); operational waste (like paying excessively high prices or overusing expensive inputs like brand-name drugs); and governance-related waste (like ineffective or unnecessary administrative expenses). Here are a few words on each.

For example, Ian Forde and Carol Nader contribute a chapter on “Producing the right health care: Reducing low-value care and adverse events.”   They write (citations omitted):

Health care systems still struggle to quantify the true extent of low-value care, partly because of the lack of consensus on how to define it. … A rare exception to the lack of consensus on defining low value concerns births by caesarean section. The internationally accepted consensus is that the ideal rate for caesarean sections is between 10% and 15% of all births. No OECD countries fall within this band …

Looking at a range of studies and evidence, they offer this list of “common areas of overdiagnosis or overtreatment“:

• Imaging for low back pain.
• Imaging for headaches.
• Antibiotics for upper respiratory tract infection.
• Dual energy X-ray absorptiometry (used to measure bone mineral density).
• Preoperative testing in low-risk patients (electrocardiography, stress electrocardiography, chest radiography).
• Antipsychotics in older patients.
• Artificial nutrition in patients with advanced dementia or advanced cancer.
• Proton pump inhibitors in gastro-oesophageal reflux disease.
• Urinary catheter placement.
• Cardiac imaging in low-risk patients.
• Induction of labour.
• Cancer screening (cervical smear test, CA-125 antigen for ovarian cancer, prostate-specific antigen screening, mammography).
• Caesarean section.

The overview chapter of the volume, by Agnès Couffinhal and Karolina Socha-Dietrich, offers a short list of some overall evidence on wasteful clinical care:

• A recent report suggesting that medical errors might be the third cause of death in the United States starkly calls attention to the problem (Makary and Daniel, 2016).
• International studies indicate that adverse events in hospitals add between 13% an 16% to hospital costs (Jackson, 2009) and that between 28% and 72% of them are considered avoidable upon expert examination (Brennan et al., 1991; Rafter et al., 2016, among others).
• Data on primary care are scarce, but the Primary Care International Study of Medical Errors showed that approximately 80% of errors could be classified as “process errors”, the vast majority of which are potentially remediable (Makeham et al., 2002).

The idea that errors committed by US health care providers might be the proximate cause of death for tens of thousands or even several hundred thousand people each year may seem extreme, and it is often fiercely contested by health care providers, but it is a common finding in this literature. The study they cite is from Martin A. Makary and Michael Daniel, “Medical error—the third leading cause of death in the US,” BMJ 2016, 353, i2139. For a review of some earlier evidence, see my post on “How Many Deaths from Mistakes in US Health Care?” (November 12, 2015).

In the general area of operational waste, Karolina Socha-Dietrich, Chris James and Agnès Couffinha contribute a chapter on “Reducing ineffective health care spending on pharmaceuticals.” They summarize their article this way:

It starts with a discussion of perhaps the most intuitive case of waste, which occurs when prescribed pharmaceuticals (and other medical goods) are discarded unused. Next, the chapter proceeds to the foregone opportunities associated with not substituting originator drugs with cheaper therapeutic alternatives, such as generics or biosimilars. The final issue explored is whether lower prices for pharmaceuticals and other medical supplies could be obtained with more efficient procurement processes.

Chris James, Caroline Berchet and Tim Muir take up this theme in the context of hospital care, in their chapter on “Addressing operational waste by better targeting the use of hospital care.”  They write:

Hospitals are a crucial component of every country’s health care system, providing specialised and technical care that cannot be delivered in primary care settings. But this specialised nature means hospitals are also expensive to operate, with high personnel, equipment and other running costs. Indeed, spending on hospital inpatient care comprises an average 28% of total health spending in OECD countries. … A well-established evidence base shows that hospitals are used more than is necessary to provide services needed by the population. That is, the treatment of patients with a number of prevalent diseases can be delivered safely and effectively at the primary care level. …

Having timely access to care means that primary care services can respond to patient needs 24 hours a day, 7 days a week. However, this is rarely the case. Recent OECD analysis shows that a significant proportion of patients in OECD countries face barriers to accessing their PCP either because of a lack of out-of-hours (OOH) services or because of long waiting times during normal office hours. Such barriers not only lead to delays in care (and a consequent greater risk of health complications), but also higher ED [emergency department] visits and avoidable hospital admissions. Evidence suggests an inverse relationship between the ability of patients to access their PCP quickly and the likelihood of reporting an avoidable hospital admission. Indeed, access to primary care can reduce avoidable hospitalisation for chronic conditions. Conversely, poor availability to PCPs outside normal hours is the main cause of hospitalisation for ACSCs [ambulatory care sensitive conditions] …

In the general area of governance-related waste, the essay on “Administrative spending in OECD health care systems: Where is the fat and can it be trimmed?” by Michael Mueller, Luc Hagenaars and David Morgan, includes this interesting figure comparing administrative costs across countries. The right-hand figure is a comparison of administrative costs in government health insurance programs, while the left-hand side is voluntary private health insurance programs.

The tricky part of interpreting this figure is that administrative costs play a bigger role in private sector health insurance, and the the US has much more of its health insurance in the private sector than other countries. So if you put these together, it turns out that the US administrative expenses related to health insurance are substantially larger than in other countries.

It would of course be foolish to argue that all administrative costs are wasteful, and the report is far too sharp to make such a claim. But it is fair to say that one of the costs in the way that the US has chosen to organize its health care sector is higher administrative costs. And of course, the answer to high administrative costs often seems to be hiring another set of administrators to oversee utilization, promulgate rules for provision of care, double-check payments, and so on.

In many cases, decisions about what medical care to receive and how to deliver that care fall into a gray area. It’s often not 100% clear whether a certain procedure was needed, or not needed; not 100% clear that an error was made, or whether a reasonable judgment call was made; or whether a certain administrative act is wasteful, or whether it is reasonable oversight that reduces the risk of poor care and holds down costs. But the report makes a persuasive case that a substantial share of health care spending, not just in the US but in all advanced economies, is not doing much to improve health.