A new study published in the Journal of the American Medical Association estimates that about 25% of all health care spending in the U.S. is attributable to waste in the system.

The study, conducted by health insurer Humana and the University of Pittsburgh School of Medicine, estimated that between $760 billion to $935 billion of health care spending in the country is wasteful.

The study is eye-opening and reflects the need for new approaches in the health care system and how medical care and pharmaceuticals are paid for. It also reflects the tremendous waste caused by complex administrative procedures, which again cries out for changes in the health insurance and care delivery models.

The researchers identified wasteful spending in the following six areas:

Failure of care delivery: $102.4 billion to $165.7 billion

Failure of care coordination: $27.2 billion to $78.2 billion

Overtreatment or low-value care: $75.7 billion to $101.2 billion

Pricing failure: $230.7 billion to $240.5 billion

Fraud and abuse: $58.5 billion to $83.9 billion

Administrative complexity: $265.6 billion

“This study highlights the opportunity to reduce waste in our current health care system,” William Shrank, MD, lead author and Humana’s chief medical and corporate affairs officer, said in a prepared statement. “By focusing on these opportunities, we could make health care substantially more affordable.”

With that much waste in the system, the industry is crying out for more efficiency in hospitals, medical services delivery, health insurance and administration across the spectrum.

The researchers said that if the industry worked on concrete solutions, it could reduce waste by up to $282 billion a year.

They identified the most promising areas for reducing waste, and said that value-based care and reimbursement models represent a major opportunity to reduce the greatest source of waste: administrative complexity.

Value-based care

They said that value-based care models could improve administrative coordination in the system, which is currently severely lacking. The researchers wrote:

“In value-based models, in particular, those in which clinicians take on financial risk for the total cost of care of the populations they serve, many of the administrative tools used by payers to reduce waste (such as prior authorization) can be discontinued or delegated to the clinicians.”

That, they said, would reduce complexity for physicians and give them incentives to reduce waste and improve value in their treatment decision-making.

Using value-based care in which all parties share some in the financial risk would benefit insurers, employers who sponsor health insurance for their workers, hospitals, doctors and patients.

More and more insurers are experimenting with value-based care, which is primarily a payment model that offers financial incentives to physicians, hospitals, medical groups and other health care providers for meeting certain performance measures.  Essentially, they are paid based on patient health outcomes.

Value-based care differs from a fee-for-service or capitated approach, in which providers are paid based on the amount of health care services they deliver. The “value” in value-based health care is derived from measuring health outcomes against the cost of delivering those outcomes.

Other waste

To further reduce waste, the researchers also recommended:

  • Addressing the high cost of pharmaceuticals (especially for high-cost specialty drugs).
  • Implementing hospital price transparency.
  • Implementing market competition policies.
  • Improving payer-provider collaboration to reform care coordination, safety and value.
  • Implementing new measures aimed at reducing fraud and abuse.