To make health care reasonably profitable for private payers and more affordable for patients, those who manage health care must focus on reducing cost, which is far easier than increasing the health benefit or medical loss ratio.
See: "How the U.S. Health-Care System Wastes $750 Billion Annually," by Brian Fung, pub. Atlantic Mobile, 9/7/12
As Dr. Berwick and Hackbarth point out, however, "programs to contain costs use cuts, such as reductions in payment levels, benefit structures, and eligibility. A less harmful strategy would reduce waste, not value-added care." The authors are adamant that the opportunity is huge and far greater than one could possibly achieve from "more direct and blunter cuts in care and coverage."
Reducing the cost of doing business is usually preferable to spending tons to generate new business or spending with reckless abandon--over testing, for instance, what some call 'shotgun medicine.' Waste management, by definition improves efficiency and cost-effectiveness; once that is a core competency, it is easier to strategically invest scarce resources in making marginal if not major improvements in access and quality.
"In just 6 categories of waste—overtreatment, failures of care coordination, failures in execution of care processes, administrative complexity, pricing failures, and fraud and abuse—the sum of the lowest available estimates exceeds 20% of total health care expenditures."
Caveat: Cutting into waste can be disruptive as we are all too used to 'just do it' thinking in health care (that is, until it's your own dollars). Be careful: the consequent marketplace economic dislocations can be rather severe.
Berwick D, Hackbarth A. "Eliminating Waste in US Health Care" Published online in JAMA, March 14, 2012 [Free full text, available; just click on Abstract]
Update Dec. 5, 2013:
The Condition: Waste, Duplication, Inefficiency and Fraud
According to the Washington Post, an estimated $2.6 trillion was spent on health care in 2012—1/6th of our total spending in the United States; of that, 1/3rd is in the “fraud,” “inefficiency and waste” buckets
The National Academy of the Sciences’ Institute of Medicine (IOM) put inefficiency and waste to $750 billion per year (more than is spent on Defense, incidentally).
The Christian Science Monitor recaps the IOM’s report, defining the biggest problems in funds lost to medical waste in six categories, from largest to smallest (See above, "In just 6 categories of waste"- Berwick for comparison):
- Unnecessary services, medically-speaking—$210 billion,
- Excess administrative expenditures—$190 billion,
- Inefficiently delivered services—$130 billion,
- Over-inflated prices—$105 billion,
- Fraud*—$75 billion
- Missed opportunities for prevention—$55 billion
*second-smallest (~ 10% of the total)
According to the IOM, one of the largest sources of waste is incentive misalignment, specifically the way physicians are compensated. For example, instead of being paid on the basis or quality or outcomes, doctors are largely paid on a fee-for-service basis (in most hospitals and elsewhere), or by procedure (piece-work), instead of being salaried. ‘The incentive in piecework is to generate pieces’ (C. Esselstyne, Claverack, NY mid-‘60’s), doctors have an incentive to do more.
According to the UK’s Daily Mail, the IOM report makes ten recommendations, including payment reforms to reward quality results instead of reimbursing for each procedure, improving access and sharing of digital medical records, better coordination among different kinds of service providers, leveraging information technology to reinforce sound clinical decisions and educating patients about the choices they can make regarding their care.