United States: How to Reduce Wasteful Healthcare Spending

Last Updated: March 30 2017
Article by Ron M. Present, CALA, CNHA, LNHA, FACHCA

As of this writing, the Trump administration and Republicans in Congress continue to grapple with how to repeal and replace the Affordable Care Act (ACA). Meanwhile, private sector analysts are busy offering their own ideas on how employers can manage health care costs more effectively.

A recent report by the American Health Policy Institute and VBID Health focuses on how to reduce wasteful spending. The report, entitled Using Data-Driven Disruption to Reduce Wasteful Healthcare Spending, concludes that about 20% of health care expenditures by the 35 companies studied are wasteful. Your own organization might be wasting more or less. But, even if less, the amount is likely substantial, the study suggests.

Investigative Approach

The study divided health care spending into four segments:

  1. Pharmacy
  2. Inpatient
  3. Outpatient and professional services
  4. Administration

It then estimated levels of wasteful spending in each of the four, along with average per-member-per-month (PMPM) expenditures for active employees. (For specific dollar amounts and percentages, see "Estimated Wasted Spending by Health Care Segment.")

Granted, the 35 companies examined in the study are large and, therefore, might be investing more money in their health care plans than smaller employers. But the trends revealed are informative nonetheless.

Typical Areas of Waste

Let's take a closer look at the study's findings regarding typical areas of waste within each of the four segments:

  1. Pharmacy. In this realm, among the biggest culprits for misspent dollars is nonadherence to drug regimens. This generally means that patients don't take all of the pills they're supposed to or fail to take medication at the prescribed intervals.

In either instance, and certainly in both, the therapeutic benefits of the drugs aren't fully realized. Hence, the money spent on the medications is squandered. Overprescription of antibiotics (such as for treating viral infections) is another big challenge, as is prescribing the wrong drug for other conditions.

  1. Inpatient care. Wasted dollars here often take the form of delivery of treatment on a costly inpatient basis when more economical outpatient treatment would have been sufficient. Indirect costs associated with hospital stays include accidents and infections patients suffer or pick up in the hospital.
  2. Outpatient care and professional services. This segment accounts for the largest share of estimated waste. According to the study, major problem areas include:
  • Inappropriate treatment of chronic illness
  • Unnecessary and inappropriate use of emergency room care
  • So-called "defensive medicine"

The last point refers to nonessential tests and procedures performed to give legal ammunition to medical providers should a medical error occur. The objective is to demonstrate that the provider took every possible measure to assure a positive outcome.

  1. Administration. The principal sources of administrative waste identified in the report are:
  • Inefficient claim processing
  • Staff turnover
  • Operational complexity
  • Ineffective use of information technology

These are all good examples of how it's not just the provision of health care that triggers waste, but the intricacies of documenting and reporting it.

Suggested Measures

So what can employers do to reduce wasteful spending? If solutions were easy, they would have been implemented long ago. One obstacle employers face, according to the report's authors, is that "wasteful spending is someone's income (primarily the providers of low value care) and employers can expect push back on any efforts that can reduce someone's income."

Still, the stakes are high. The report calls for technology-based reforms through a process it calls "data-driven disruption." A concerted effort by health care purchasers and specialized data analysis tools and consultants "can lead to desired changes to the health care status quo," resulting in bending the "cost curve without cost-shifting to employees, while at the same time improving health status and worker productivity."

Here are more of the report's recommendations:

  • Implement payment approaches that shift away from fee-for-service in favor of value-based payments to providers.
  • Revise plan designs to encourage healthy behavior and discourage unnecessary and inappropriate care.
  • Use predictive modeling to identify high-risk patients by disease type and cost ranking.
  • Use specialized software to: 1) assess spending at micro levels on a PMPM basis, 2) develop specific PMPM spending targets, and 3) analyze the results of particular plan, provider and medical procedural changes.
  • Combine forces with other employers to maximize purchasing leverage to obtain the most competitive pricing on administrative services.

Smaller employers with limited staffs and budgets probably won't be able to push ahead on all of these fronts. But they can discuss the report's analysis and recommendations with their consultants, brokers and third-party administrators. From there, organizations should be able to determine which steps they can take to help cut costs.

Productive Dollars

The report concludes with the observation that "there is no 'one size fits all' solution to excessive healthcare spending." But it does contend that "a customized solution is available to virtually any plan sponsor willing to disrupt the status quo."

Remember, when your organization reduces wasteful spending, it can deploy those saved dollars elsewhere. You may also be able to channel formerly wasted money into productive health care spending that, one hopes, results in healthier, more productive employees.

Source: Using Data-Driven Disruption to Reduce Wasteful Healthcare Spending sponsored by American Health Policy Institute, VBID Health

If you have questions about healthcare spending, please contact Ron Present, Partner and Health Care Industry Group Leader, at rpresent@bswllc.com or 314.983.1358.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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