Study Puts Price Tag On Health Care Waste

By Jason Plautz  

NJ: How do you define waste in your paper?

Kelley: I thought it was very important that we try to focus on defining waste as health care services or administrative costs which don't add any value to the population's health. We wanted to stay away from the notion of controversy around rationing because people start thinking of rationing or cost containment, they start thinking about the possibility that you're actually try to going to draw a line that may in fact limit people's access to care that they need.

NJ: And where did you find that waste coming from?

Kelley: What we found was that the largest category was unnecessary or unwarranted care, followed closely by estimates of the amount that's spent simply due to fraud and abuse. Those were the two biggest categories.

Morris: We looked at this across the industry and we'd seen a lot of specific numbers and people would quote this and quote that, but we didn't see something that really pulled it all together and said this is a realistic estimate of waste in the system.

NJ: As a health care consumer, why do I want to know how much waste there is?

Kelley: I think it shows a significant opportunity for improvement if you think of this as being something like one-third of the dollars being spent and you're a consumer.... It suggest an opportunity and maybe some level of disappointment that we haven't really addressed this prior to this or taken any serious efforts at trying to minimize or reduce this level of waste. The idea is to communicate an opportunity.

NJ: Why haven't we gone after this?

Kelley: In many cases, it's been relatively recently that it's been identified. There hasn't been a major effort to identifying waste. I don't know if I would use the word "controversial," but it's been a difficult topic to get attention to.... There's been a lack of a financial imperative. The answers aren't simple. It's not easy. It takes a will and there needs to be a national will to make a change.

Morris: It's also a systematic thing, it's systemic. It's not one group of people.

NJ: As you say, there seems to be a systemic problem where patients expect every treatment and doctors say they are pressured to give as many tests as possible. How can you go about changing things with that kind of culture?

Kelley: If you go at this like an economist, you know there's a supply side and a demand side. There have been attempts to address this from the supply side. There have been attempts to constrain health care industry investment in new technology or equipment, and that hasn't been particularly successful because there has been no clear criteria to do that. There's been no support for making those supply-side controls.

There's very little control on the demand side. Patients believe they should get everything that might possibly get them some value even if they don't understand what that value is.

We see customers who approach it from both sides. If you look at the demand side, it's moving responsibility to the patient and making them feel more responsible and financially accountable for what they're spending money on. It's easy to come up with anecdotal examples. If someone actually had to pay for an MRI that a doctor suggested, they may in fact think otherwise.

On the supply side, you have issues around changing the incentives. Bundling care. We tried capitation a decade ago in managed care but lacked the will to make that successful. But you've got variants on that like bundled payments, episode-based payments that provide some incentive for the providers to better manage resources.

Morris: That's one thing we find a positive in some discussions we have now, that there is more push for electronic record keeping. With that information, we can do so many good pieces of analysis. The growth in that information and the continued access to that information is great.

Kelley: I'm not an expert on tort reform but there are a lot of people who believe that tort reform could have an effect on defensive medicine. I do talk about in the paper that there is evidence around what is basically wasted when it comes to defensive medicine. How long it takes to overcome that I'm not sure, because it comes a mindset on the part of physicians.

NJ: Do you think the reform bill is doing enough to move toward alternate payment programs?

Kelley: I'm encouraged that at least the thinking around these is moving relatively quickly. Even the idea of CMS [the Centers for Medicare and Medicaid Services] moving to pilot projects instead of demonstration projects. The old model was do a demonstration project, take three years and then nothing happens....

There's a significant amount of research expected on the impact of these new mechanisms. There's some funding for that and certainly a lot of interest in the academic community in those practical applications. We've got more data now than we used to have in terms of evaluating what the impact is, and we're using it to support coordinated care. Most providers want to coordinate care, it's just they need help doing it.

NJ: Why include preventable conditions in your study?

Kelley: The [preventable] diseases that we did include were conditions that could have been prevented by more appropriate care. I didn't include diseases or increases in costs associated with lifestyle decisions or personal behaviors. That was my call, to say basically, I'm looking for waste in the health care system, so these are things that can be attributed to the system, not to the patients and what they bring to the system.

But it is important to recognize the fact that the lack of coordination in the system and lack of access to preventive care actually increases costs by allowing diseases to progress to the point where they require more immediate and costly care. So the fact that a high percentage of diabetics actually develop complications is something that the system should be aware of and attempt to improve on.

NJ: Is the legislation doing enough to address these specific categories of waste?

Kelley: It doesn't appear to be very specific. It is addressing policies that relate to changing incentives, but it isn't necessarily -- yet -- focused down to the level of interventions that address the particular kinds of waste that we identified.

Morris: Generally there's an increasing sense that waste is a significant issue, and fraud and abuse is getting a lot of attention.

Kelley: Well, fraud and abuse is a no-brainer. Everybody can get on board that we want to get rid of fraud. There is no constituency that argues [against] that. If you define fraud as patients paying for care they didn't get, even patients won't complain about going after fraud. And it's big. And it's something you can address with data -- it's something you can look for and identify....

It also relates to this issue of fee-for-service payments. Fee-for-service basically enables fraud and abuse because you're paying for units of service that you're not actually ever seeing. The government writes a check and pays for something but they're not actually ever getting anything that they can say, I got what I paid for.

NJ: What can current legislation do to get more specific? Are you encouraged by the package of amendments from Virginia Senator Mark Warner and other freshmen that moves away from fee-for-service to a pay-for-value model?

Kelley: I think pay-for-value is right. The question then comes to how do you measure value and how do you implement it.... Everyone seems to be recognizing what these opportunities look like and the general approaches to addressing them. A guy like me gets frustrated when you don't see specific approaches but you see big numbers like, we estimate this will save this many billion dollars, based on macro-models rather than real-life experience of how did it work here and what didn't work. But that's my personal inclination as an analyst.

NJ: How quickly can you go about cutting it? Let's say the bill passes in January, when can we expect these numbers to go down?

Kelley: It's safe to say not as fast as people would like it.

Morris: Not fast enough.... At some level you can always do more.

Kelley: We've built this [health care system] over a long time and all of that, the system, is what encourages the level of waste that we experience today. We haven't seen the consolidation among providers that you would see in other industries because of the payment system. They haven't needed to because they didn't need it to survive. That doesn't change overnight.

NJ: Can we chalk up high health care costs to this kind of waste? If we cut, say, 50 percent of that waste, are we back to the levels people expect?

Kelley: I think people would be satisfied with that.

Morris: If you eliminated between 300 and 400 billion dollars... that would be a real achievement. We spend twice as much per capita as most other industrialized nations, so it wouldn't get us to parity level in that, but it would get us at least closer.

Kelley: And I think by the type of waste, people will have different expectations. You'd hope to get more than half of the fraud and abuse. You'd hope to get more than half of wasted administrative cost because again, that's a no-brainer. If we can improve administrative systems, who's going to complain about that?