We know that healthcare spending continues to grow at an unsustainable rate. Each election cycle, we expect policy makers to find meaningful ways to slow that growth and ultimately reduce spending – while maintaining quality and access.
As mentioned in our previous blog “Time to Move Upstream and ‘Invest’ in our Health” co-authored with Dr. Yogesh Shah, the prudent approach is to simultaneously move upstream and address the social determinants of health. This thinking might sound ‘pie in the sky’ to some, but controlling costs cannot happen without addressing the environment in which we live, learn, work and play.
In addition, there is another culprit that must be eliminated – healthcare waste. If we are successful in eliminating this waste, by most national estimates, we can reduce our costs by 18 – 40 percent. The midpoint of waste is about 30 percent of healthcare costs. Per the Robert Wood Johnson Foundation, this waste comes in many different categories:
- Failures in Care Delivery – poor execution or lack of widespread adoption of best practices, including effective preventive care practices or patient safety practices.
- Failures of Care Coordination – Fragmented and disjointed care of patients when transitioning from one care setting to another.
- Overtreatment – Care that ignores scientific findings, perhaps due to outmoded habits. Defensive medicine is an example, such as unnecessary tests or diagnostic procedures to guard against malpractice lawsuits. Here is just one example.
- Administrative Complexity – Having multiple ‘administrators’ with divergent protocols and practices, such as the government, insurance companies or accreditation agencies who create inefficient and overly bureaucratic procedures.
- Pricing Failures – This waste is baked in to our healthcare ‘system’ because the price of a service exceeds what would be found in a properly-functioning marketplace. In healthcare, we lack appropriate competition at the right levels and have little transparency on cost and outcomes.
- Fraud and Abuse – This is the cost due to fake medical bills and scams, in addition to the cost of inspections and regulations to thwart any wrongdoing.
Iowa Healthcare Component Costs
Based on the population of 3.033 million Iowans in 2009, the cost per capita in Iowa for healthcare was $6,921, totaling almost $21 billion. The largest portion of this cost comes from hospital care, which consumes about 39 cents of every dollar spent on healthcare ($2,713 per capita). This amount includes the total net revenue (gross charges minus contractual adjustments, bad debts, and charity care). Assuming the midpoint waste average in Iowa is 30 percent, and we have little reason to believe it is measurably different from national norms, the total annual amount considered to be wasted on hospital care would be $814 per Iowan.
Using a similar waste factor of 30 percent for each of the nine health components, the total waste per capita would amount to $2,076 (see graph below). Because many of the components are interconnected with one another, it is extremely difficult to cull out the actual waste factor within each component. Some components may have much lower inherent waste, while others may not. Costs such as insurance program administration, research and construction expenses are not included.
The following graph provides the total healthcare costs (in $) for each of the nine components, in addition to the potential wasted spending. Again, using hospital care as an example, if 30 percent of waste was eliminated in Iowa hospitals, the price tag could have dropped from $8.2 billion to $5.7 billion – resulting in a $2.5 billion ‘savings’ – or unnecessary overpayment.
Healthcare Waste of $6.3 Billion
I share this information for a reason. Much like the individual choices made daily in our lives, there are opportunity costs for the choices we make, or fail to make. The notion of opportunity cost plays a crucial role in attempts to ensure that scarce resources are used efficiently. If the midpoint assumption of 30 percent waste occurs in healthcare delivered in Iowa, then overspending $6.3 billion annually (and growing due to increased costs) is a huge opportunity cost for Iowans. Think about it, what other ‘opportunities’ can we invest in and receive much better ‘returns?’
Most Americans detest waste – especially when it affects our pocketbooks and the potential impact it has on our health and well-being.
Waste is anything that doesn’t add value to the end product. In manufacturing, waste can be rooted out by using different proven programs, such as lean manufacturing. Doing so allows the manufacturer to build higher-quality products at a more competitive cost. The same process can be used in healthcare. Having the right kind of incentives to change the willpower and behavior of those providing (and paying) for this care, is crucial.
Community Needs in Iowa
In Iowa, communities have a myriad of health needs that go unmet, but most often have limited resources to address these problems. According to Mid-Iowa Health Foundation’s website, there are many community needs for our youth that require attention and affect the social determinants of our health and well-being:
- 20 percent of children in Iowa lack adequate food
- Roughly 7,000 school age children in Iowa are homeless
- Over one-third of Iowa fourth graders read at or above the proficient level
- Over 13 percent of youth in Iowa are exposed to drug use in their home
- Approximately 12,000 children are victims of abuse and neglect
- About 10 percent of central Iowa children say they do not live in a happy home
- Almost 13 percent of Iowa youth had serious thoughts about killing themselves in the last year
- More than 20,000 children are living below the poverty level in Polk County
- 80 percent of Iowa children with mental health needs never receive treatment
- Only 45 percent of youth in the Des Moines community are hopeful for the future
This list represents just a small sampling of social determinants that eventually affect the healthcare we pay. By smartly eliminating waste in our healthcare system, and thoughtfully re-directing the ‘savings’ in areas that matter most to our communities, we can further stem our healthcare-cost epidemic. Imagine the sizeable dent we make in our communities by culling out billions of dollars annually from the waste we pay. The discussion of displaced healthcare jobs and the potential ‘economic impact’ requires further exploration in a later post.
Following the election, we will continue to debate the fate of Obamacare – who will pay and how much – but this discussion is being made with greatly inflated dollars. We would be well-served to dedicate equal energy to squeeze the waste from healthcare and redirect resources to benefit our communities.
We know the waste is there. But what about our willingness to eliminate it?
To stay abreast of healthcare-related issues, we invite you to subscribe to this blog.