Why It’s So Hard to Cut Waste in Health Care

Cutting waste while preserving critically important treatment is the holy grail of health care policy. The coronavirus pandemic has shown why that goal has been so stubbornly difficult to achieve.

One of the pandemic’s startling effects is that despite the overwhelming need for Covid-19 treatments and vaccinations, health care spending in the United States has declined sharply. That’s because people have been reluctant or unable to get medical care that isn’t connected to the coronavirus. My own calculations, based on government data, show that overall total care expenditures dropped 10 percent in the first nine months of 2020, compared with the same period a year earlier.

This indiscriminate reduction in spending closely resembles the unfortunate effects of an array of policies over the past half-century intended to reduce unnecessary medical care. These too cut essential and inessential care alike.

Consider what has happened during the pandemic. Essential health care visits have plummeted: Hospital admissions for severe heart attacks and strokes and visits for routine childhood vaccinations have fallen sharply. Those reductions could have grave consequences.

At the same time, some types of care that are often overused — and can produce unnecessary follow-up treatments, anxiety and spending — also declined in frequency during the pandemic. This includes radiological scans and routine cancer screenings. Indeed, a broad spectrum of medical care has declined at roughly comparable rates, as patients avoided in-person visits and medical providers cut availability.

In short, the pandemic has pushed two basic levers used in strategies to limit wasteful medical care. These strategies aim to decrease patient demand and to restrict the availability of treatment by health care providers. And they tend to have indiscriminate effects, reducing treatment that is critical, along with care that is not essential.

The economic importance of reducing wasteful spending is hard to overstate. The health care sector accounts for almost one-fifth of the U.S. economy, and one-quarter or more of this spending is wasted, a range of studies have shown. Excessive administrative costs, high prices and inappropriate medical care are the three major culprits in wasteful spending, driving insurance premiums and taxes without helping patients.

For decades, the driving principle behind reducing needless medical care has been that if patients or their providers have financial “skin in the game,” they will make prudent decisions. To encourage patients to make good decisions, insurers make them pay some share of their medical costs. High-deductible health insurance plans, in which the patient herself pays the first thousand (or more) dollars of any medical spending for the year, are one increasingly common example.

The economic theory is simple: If something becomes more expensive, people will buy less of it. And the empirical evidence is overwhelming: When patients have to pay more, they use less medical care.

The problem is they use less of all types of care. Introducing a high-deductible plan, for example, reduces scans for nonspecific low back pain and antibiotics for respiratory infections, as intended. But high deductibles also tend to reduce use of mental health services and of prescription drugs for managing chronic diabetes and high cholesterol, which can have negative consequences.

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My own research shows covering uninsured individuals with Medicaid is a similarly blunt instrument for encouraging people to get critically important care. Medicaid increased preventive care, which was intended, but also increased emergency room visits, which was not. Even more targeted insurance that lowers only the price of specific and valuable care has modest effects at best, in encouraging the desired outcome.

Similarly, financial incentives that encourage physicians and hospitals to refrain from superfluous treatments may also jettison some indispensable care. Traditionally, these providers were reimbursed piece-rate, billing separately for each test and procedure, so that the more they did, the more they were paid.

To encourage only essential care, there has been a widespread shift to paying a fixed fee for a patient, regardless of what treatment is provided. A hospital might be paid $25,000 for a patient’s knee replacement, for example, and then have to absorb all the associated costs, including the hospital stay, surgeon’s fees and post-discharge rehabilitative care. Or a network of health care providers might be paid $10,000 a year for all of a patient’s health care needs.

That way, the medical provider is on the hook for the costs of treatment. But such incentives are a double-edged sword: What encourages cost-consciousness can discourage optimal care.

Countries around the world are grappling with these issues. A recent study of health care in 10 countries — including several with single-payer systems — concluded that, to one degree or another, they all are rife with inefficient and unnecessary care.

One reason it is so hard to trim waste is that physicians and regulators have already eliminated so many demonstrably harmful or useless treatments. Patients are no longer offered patent medicines, routine bloodlettings or lobotomies.

Reducing unnecessary administrative costs and curbing high prices is similarly difficult. Some red tape is purposeless, but not all of it is. Lowering prices can imperil the availability of valuable treatment. An adage about advertising applies to health care: Half of spending is wasted; we just don’t know which half.

Low-value doesn’t mean no-value-ever. That’s presumably why Choosing Wisely, a campaign to reduce unnecessary care, identified a large number of tests and procedures that patients and physicians should “question” but not eliminate. We don’t “question” whether it’s wise to stick a finger in an electric socket. We warn that you shouldn’t do it. But most medical procedures are different. They are a matter of judgment.

Ordering a computerized tomography, or C.T., scan for a patient the first time she complains of a nondescript headache is generally not a wise move. Neither is getting married after a first date. But occasionally that unnecessary scan catches a life-threatening problem before it’s too late much as, once in a while, a whirlwind marriage leads to happily-ever-after. Unlikely isn’t the same as never, which can make it hard for a well-intentioned physician or a hopeless romantic to resist.

That doesn’t mean we should stop trying to cut waste. But a simple, miracle cure for excising most unnecessary medical care? Don’t buy it, with or without insurance coverage.

Amy Finkelstein is the John and Jennie S. MacDonald professor of economics at M.I.T.

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