Introduction to utilization health waste in the U.S. healthcare marketplace

The American healthcare system is experiencing rapid change, largely driven by the recognition by both public and private payors that the trajectory of healthcare spending growth must be slowed. Despite the recent slowdown in healthcare spending growth, which many attribute to the recession, efforts to transform benefit design and payment systems are proceeding rapidly. For example, public payors are both cutting payment rates and experimenting with bundled and global payment models. Private payors are adopting similar payment models and developing more sophisticated benefit designs that encourage patients to seek care from low-cost and maybe high-value providers, and to avoid expensive and maybe low-value services.

In this environment it is crucial to try to eliminate waste. The new payment models allow providers to share some of the savings if utilization of wasteful services can be curtailed. The challenge of course is identifying which services are wasteful. The fact that waste exists in the healthcare system is widely accepted. Berwick and Hackbarth (2012) estimate there is about $200 billion in waste that is due to overtreatment in the U.S. healthcare system, almost 10% of total spending.

But eliminating that waste may be a challenge. Like everything in healthcare, the waste is likely to vary across geography and, more importantly, across providers. Identifying which providers to focus on is a challenge. More fundamentally, aggregate measures of waste are not necessarily helpful to providers. Detailed, operational measures that can be applied to provider systems are needed. Fortunately, there has been a recent increase in effort to identify wasteful services. A number of lists exist. Perhaps the most prominent of these efforts is the Choosing Wisely campaign, sponsored by the American Board of Internal Medicine Foundation, which challenged specialty societies to identify wasteful practices. Other panels, such as the U.S. Preventive Services Task Force, have identified services that might be wasteful. Thus clinically meaningful knowledge of what is wasteful exists.

Translating the knowledge of what is wasteful into tools that can be applied to identify that waste at the system level is difficult. Claims data is not ideal in many cases to identify waste. Often the measures of waste depend on patient history. Clinical knowledge and information technology (IT) expertise are needed. Academic efforts to quantify waste using subsets of available measures are just beginning. For example, using a limited number of services, Schwartz et al. (2014) find that 0.6% to 2.7% of Medicare spending may be wasteful and between 25% and 40% of beneficiaries have received at least one low-value service. Moreover, they found that there was significant regional variation in spending on low-value services, suggesting some providers are more prone to use them than others. Finally, different measures of low-value services were correlated across regions, suggesting that measures of them based on a small number of services may be indicative of broader patterns of waste.

Commercial tools to quantify practice patterns will be crucial to many cost containment activities. Data can help focus efforts on reducing waste and thereby improve value. Such tools could be used to support payment reform, provider education, tiered benefits, or even value-based insurance designs. One way or another, spending growth must be contained. Our goal must be to do so in a way that improves value.

This article first appeared at Milliman MedInsight.

To learn more about identifying and eliminating waste in the healthcare system, join MedInsight’s next webinar:

Spending Growth, Cost Containment, and Elimination of Waste in the Healthcare System
September 17, 2014, 2:00-3:00 p.m. ET

Although spending growth has slowed recently, pressure to continue to hold the line on spending has increased. Competition in the exchanges, increasing fiscal pressure from employers, and government reduction in payment to health plans all suggest insurers must devise new ways to control spending. For providers, new payment systems such as global and bundled payment models impose economic and clinical accountability in which financial success requires elimination of waste—because greater volume is accompanied by greater cost but not greater revenue. This new environment requires new measurement systems. The MedInsight webinar will focus on policy issues related to spending trends and will present ways to help payors and providers quantify waste in their system.

Michael Chernew, PhD, VBID Health, Harvard Medical School
Dr. Chernew is a founding partner of VBID Health, a professor at Harvard Medical School, serves as the co-editor of the American Journal for Managed Care, and as editor of The Journal of Health Economics. He is a member of the Congressional Budget Office’s Panel of Health Advisors as well as a research associate of the National Bureau of Economic Research.

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