Let Us Reduce Health Care Spending by 25 Percent

The rising costs of health care have generated a continuous, at often times, passionate debate from the halls of Congress to kitchen tables across the country. 

We are right to be concerned about these high costs, given what we spend on health care and the wave of chronic disease that has driven our health care spending. The health care industry constitutes 18 percent of the U.S. economy, or $3.6 trillion a year. Yet what is most disconcerting is not just what we spend on health care, but what we waste on health care. 

We can do better, but we need to know where to focus.

Back in 2012, the Journal of the American Medical Association published a landmark study by Donald Berwick and Andrew Hackbarth, which found that 34 percent of the total amount spent on U.S. health care in 2011 could be categorized as waste. The authors focused on six key areas: failure of care delivery, failure of care coordination, overtreatment/low-value care, pricing failure, fraud and abuse, and administrative complexity.

Recently, along with colleagues from Humana and the University of Pittsburgh School of Medicine, we published an update to Berwick and Hackbarth’s original study in JAMA. In our study, we found that approximately 25 percent of all U.S. health care spending, or $760 billion to $935 billion, can be classified as waste across these six key areas.

The numbers illustrate the severity of the problem. Despite the advances made in health information technology, administrative complexity accounts for more than $265 billion of that waste. We waste nearly a quarter-trillion dollars annually due to pricing failures — inefficiencies in our marketplace. In overtreatment, we found that the industry wastes between $75.7 billion and $101.2 billion a year.

We also studied the evidence regarding interventions to reduce waste in each category. We found that by scaling proven effective strategies nationwide, we have a transformational opportunity to save $191 billion to $282 billion a year, a 25 percent reduction, by improving care.

We have a significant opportunity to reduce our high health care costs, which will also empower us to allocate resources to the areas of care that need it the most. In our study, we found three key areas where we can focus to reduce wasteful health care spending: 

Administrative complexity represents the greatest source of waste at over a quarter of a trillion dollars a year. By leveraging value-based payment models (aligning reimbursements for providers to reward higher-quality care, better outcomes and lower costs, rather than simply rewarding doctors for the number of services they offer) that align the interests of health plans and clinicians, we should be able to massively reduce this complexity. Moreover, the Centers for Medicare and Medicaid Services and the industry are building momentum to deliver the data interoperability that will reduce administrative complexity, which will help rein in costs.  

— Pricing failures represent the second-greatest source of waste. Prices for health services and products tend to be much higher in the United States, particularly for medications. Efforts to advocate for policies that promote greater competition in the marketplace and price transparency for patients should drive considerable savings. As we have seen with the Medicare Advantage program, competition reduces costs and improves patient health outcomes.

— Implementing effective clinical models to improve care can help drive down costs. The three areas where care failed are a significant opportunity to reduce wasteful health care spending by $150 billion. Evidence shows us that scaling effective clinical strategies and programs across the country can help achieve these savings — for example, providing care coordination, health coaching and proactive outreach to patients with diabetes or congestive heart failure.

Health plans, providers and government must seize the opportunity to address the waste that has hindered our ability to deliver a consumer-centric, simple, high-quality health system.

Collaboration between these groups can drive better care at lower costs. As we debate the optimal structure of the health care system, we should first consider opportunities to improve on the chassis that we have. Reducing waste could easily produce the savings needed to insure all Americans while improving on the strengths that we have in our health care system.

This is not the time to start over: The future of a high-quality, high-value health system is ours if we can take the necessary steps to improve care, reduce waste and focus on fostering a simpler, caring and aligned way to promote a healthier nation.


William Shrank, MD, is the chief medical and corporate affairs officer at Humana.

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