Waste and Cost Effectiveness in Health Care Spending

This column takes a fascinating look at waste and cost effectiveness in health care spending. The authors point out that the oft-repeated notion (see here and here) that half of health care spending is wasted is not very likely,

But whether the waste is one-third or one-half consider this: If we only wasted 5 percent (never mind 33 percent) of the over $2.2 trillion we currently spend in our medical care system, we could save $110 billion — enough to pretty much provide medical care coverage for the uninsured.

Let me say, a key challenge facing our health care system is information. Doctors and the medical system gain when we consume their services, whether we need them or not. Patients often don’t know enough to judge whether a visit, proceedure, or test is worth the cost. This imbalance in information makes it hard to make effective and efficient decisions. Those with medical coverage probably tend to err on the side of caution and so we spend more on health care than what is needed to improve our health. To bring our health care spending in line, the system needs to develop better ways to manage these information problems, so patients and medical care providers can figure out which things are worth spending the money on in each individual case. It is hard to see how current proposals to increase government management and provision of health care is going to help improve information or allow radical ideas like markets for organs where demand far exceeds supply.

So, back to the column. The authors do a nice job at examining what really constitutes waste in health care spending, and the challenges in identifying it. More important they broach the tricky problem of making cost effectiveness a real criteria in medical decision making.

Is it even reasonable to ask about cost when discussing extending one’s life? One of the real geniuses in the field of evaluating the costs of medical care was John Eisenberg, who said, that “to suggest that medical decision making can be divorced from consideration of cost denigrates the complexity of patient care” and that “almost all clinicians would agree that, at some point, the extra money spent on tiny improvements in clinical outcomes is not worthwhile and represents inappropriate practice.” David Eddy helps us further: “In a field filled with uncertainty and doubt, the difference between ‘when in doubt, do it’ and ‘when in doubt, stop’ could easily swing $100 billion a year.”

Adrian Moore

Adrian Moore, Ph.D., is vice president of policy at Reason Foundation, a non-profit think tank advancing free minds and free markets. Moore leads Reason's policy implementation efforts and conducts his own research on topics such as privatization, government and regulatory reform, air quality, transportation and urban growth, prisons and utilities.