A painful fact about the U.S. health system is that roughly one third of health costs and spending are wasted. A study in the Journal of the American Medical Association (JAMA) found that wasted health spending could reach from about $500 billion to almost $1 trillion each year. And neither of those figures includes fraud and abuse, which cost Medicare and Medicaid up to $100 billion each year and siphons at least that much from private health plans.

The JAMA researchers – former Centers for Medicare and Medicaid Services (CMS) administrator Donald M. Berwick and RAND Corporation analyst Andrew D. Hackbarth – estimated that Medicare and Medicaid wasted spending accounted for one third of the total. Those programs will need to work hard on cost containment because both will grow significantly in coming years, thanks to an aging population and the Affordable Care Act (ACA) Medicaid expansion. Check out two previous posts to read my thoughts on those issues:

Five Types of Wasted Health Spending

Many of the common culprits of wasteful health care spending are widely known: tests and procedures that do not make people healthier, hospital readmissions, poor quality, medical errors, and in general a payment system that rewards quantity of services over quality.

To put those issues into neat categories, readers can turn to a recent brief from the Robert Wood Johnson Foundation (RWJF). The brief, published in Health Affairs, distinguishes between five different types of wasteful spending, and includes estimated costs for each one.

A quick summary, starting with the most costly type of waste:

1) Administrative Complexity

Often, providers deal with multiple payers for claims processing. Multiple payers – Medicare, Medicaid, and private health plans – means multiple systems and forms to file claims. Such bureaucracy adds anywhere from $107 billion to $389 billion in unnecessary health costs each year, the largest single source of waste. The problem is particularly bad for small physician practices, which have fewer staff resources to navigate administrative complexities.

2) Overtreatment

Overtreatment is probably the most infamous kind of wasteful health care spending, causing as much as $226 billion in unnecessary costs each year. It includes superfluous and ineffective care, as well as end-of-life care and misuse of prescription drugs, such as antibiotics. Fear of medical liability, over diagnosis, and the adherence of providers to outdated medical science are the main causes of over treatment.

3) Pricing Failures

In a competitive market, the price of a good will be roughly what it costs to produce. Yet a number of medical devices and services, such as magnetic resonance imaging (MRI), can be much more expensive because of a lack of market competition among providers. The brief calls those cases pricing failures, and says they account for up to $178 billion in unnecessary health care spending each year.

4) Failures of Care Delivery

Preventable medical errors increase costs by giving patients additional injuries and producing worse health outcomes. For example, a report from the U.S. Department of Health and Human Services (HHS) Office of Inspector General (OIG) found that 27 percent of hospital admissions for Medicare patients led to care-related injuries, or adverse events. Also in the brief’s “failures of care delivery” category are the lack of widespread implementation for best practices in prevention and patient safety. In sum, those factors add up to an estimated $154 billion in unnecessary health spending annually.

5) Failures of Care Coordination

Care coordination can help patients get better care and avoid unnecessary medical care. Breakdowns in coordination are most common when patients go from one type of care setting to another. A common example is when a patient leaves the hospital but does not get follow-up care with a physician, leading to an expensive and avoidable hospital readmission. Failures of care coordination cause up to $45 billion in wasted health spending each year.

More on Care Coordination, the ACA, and Dual Eligibles:

Care coordination has become a hot topic recently and is found throughout the health reform law. For example, the ACA established a Center for Medicare and Medicaid Innovations at CMS, charged with testing new models that improve care and reduce costs. Among the models, patient-centered medical homes (PCMH) and Accountable Care Organizations (ACO) heavily emphasize care coordination.

CMS, using ACA money, also recently offered state Medicaid agencies up to $15 million to support state demonstration programs that integrate care for Medicare-Medicaid dual eligibles. The nation’s 9.4 million dual eligibles have complex health needs, such as chronic diseases or severe disabilities, and account for more than a third of spending in both Medicare and Medicaid, roughly $350 billion per year. Special Needs Plans for Dual Eligibles (D-SNP), part of Medicare Advantage, have played an important role in the state demonstration programs and will continue to do so.

Mike Fox and Kip Piper of Sellers Dorsey recently gave a presentation on the risks and opportunities health plans, especially Medicaid health plans, should consider when deciding whether to enter the Medicare-Medicaid plan business. You can watch the 90-minute briefing online for free.