There’s Not Enough Waste and Inefficiency in Healthcare

Posted on July 15, 2009
Filed Under General Rationing Issues, Healthcare economics |

Here’s a Podcast of this post:

 
icon for podpress  There's Not Enough Waste and Inefficiency in Healthcare [15:34m]: Play Now | Play in Popup | Download (371)

____________

Note to readers: In honor of his gig later this week at the National Press Club, DrRich is re-running this post from 6 months ago.  In this upcoming forum on Healthcare Reform, he expects to hear quite a bit about how we can can avoid healthcare rationing by making a concerted effort to eliminate waste and inefficiency.  As much as DrRich deplores the tremendous waste and inefficiency we see in our healthcare system, he feels compelled to show, once again, and with Actual Math no less, why getting rid of it just won’t be enough.  Rationing, in one form or another, remains an economic imperative.

____________

In what is quickly becoming a bad habit, DrRich once again provides a misleading title. Obviously, there’s plenty of waste and inefficiency in our healthcare system, enough to suit almost any taste, and DrRich deplores every bit of it.

Indeed, DrRich strongly suspects that at least 20 to 30% of all healthcare spending is completely wasted, and has seen claims (masquerading as proof) that the actual value is as high as 50%.  So again, despite the title of this post, no matter how you look at it there is plenty of waste and inefficiency to go around.

It’s just that there’s not, well, enough.

Before you go away mad, let DrRich quickly explain (quickly, at least, for DrRich) what he means here. Healthcare reform is in the air, and we all know that any effective healthcare reform is going to have to find a way to control healthcare spending.  And a central assumption of any reform plan yet proposed is that we can control spending by eliminating - or at least substantially reducing - the vast amount of waste and inefficiency in the healthcare system. Some propose to do this by incorporating the efficiencies of the marketplace (though these individuals have now been run out of town and won’t be bothering us anymore), some by adopting and enforcing stricter regulations, others by introducing a single payer healthcare system, and still others by mandating new technologies such as electronic medical records. But one way or another, each scheme for reforming healthcare proposes to bring spending under control by reducing waste and inefficiency.

Another way of describing what the reformers are telling us is: There is so much waste in the system that we can avoid healthcare rationing by getting rid of it. Most Americans believe this. Most policy experts believe this. DrRich suspects that even most of his loyal readers believe this, despite what he’s been telling you all this time.

But this is unfortunately false. No matter how much waste and inefficiency you think might be plaguing our healthcare system today, there’s not enough to explain the uncontrolled rise in healthcare spending we have been seeing for decades, and therefore, not enough to allow us to avoid rationing altogether.

And in this sense, there is not “enough” waste and inefficiency in healthcare.

DrRich has tried to explain this before, but he will now try to do it better, because it’s important. He will do it using one of the three universal languages, the language of Math (the other two being the language of Love and  the language of Healthcare Rationing, both of which are encumbered by expressions of impassioned pledges, heartfelt exaggerations, and other blandishments, and are thus unsuited to a sober discussion of unpleasant truths).

But first, there is an underlying concept we must agree upon, a concept our political leaders are loath to address. To wit: The real fiscal problem with our healthcare system is not simply that we’re spending a lot of money on healthcare, or even that we’re spending a large proportion of our GDP on healthcare. Surely, if we simply had to live with continuing to spend 15% of our GDP on healthcare, we could figure out a way to do that. But that’s not really the problem. The real problem is that healthcare expenditures are growing at a double digit rate of inflation, several multiples faster than the overall inflation rate, such that, over time, an ever larger proportion of our annual GDP is being consumed by healthcare expenditures. Unless this disproportionate rate of growth is stopped, eventually healthcare spending will consume our entire economy. (Rather, what will actually happen is that it will grow to the point of producing societal upheaval, sending us back to a more typical era  for mankind, where healthcare is a little-thought-of luxury, and not a necessity or a right. This will happen well before healthcare consumes 100% of the economy.)

To reiterate, it’s not the amount of spending on healthcare that is creating a fiscal crisis, it’s the rate of growth of that spending.

There are only two things that can possibly account for this excessive inflation in healthcare expenditures.  Either it is caused by unrelenting growth in wasteful spending (as we are assured by our political leaders), or it is caused by unrelenting growth in useful healthcare spending. If it is the latter, then in order to get spending under control we must ration. So therefore (we all fervently pray), the rate of growth must be caused by wasted spending.

This desired conclusion, unfortunately, leads to mathematical absurdities, and therefore (for anyone who eschews magical thinking) turns out to be utterly false.

DrRich is going to show you data from a spreadsheet. It illustrates what would have to happen in order for wasteful spending to account for our current healthcare inflation.  The spreadsheet is based on the following four assumptions:

Assumption 1) The proportion of healthcare spending today that is wasteful is taken as 25%. The actual number, of course, is not possible to discern with any real confidence. It depends, for one thing, on who gets to define “wasteful.” If I’m a 92-year-old man who gets a $12,000 stent procedure to eliminate my angina, I and my doctor might consider it money well-spent, while you might consider it wasteful. DrRich has arbitrarily chosen a number that falls within the range of popular estimates. But it’s a spreadsheet. If you don’t like 25%, substitute your own estimate. You will find that the rate of wasteful spending we assume for Year 1 in this spreadsheet has little effect on the outcome.

Assumption 2) The annual overall rate of growth of healthcare spending (i.e., healthcare inflation) is 10%.

Assumption 3) The annual growth rate of useful (i.e., not wasted) healthcare spending is economically well-behaved. That is, it matches the rate of overall inflation. The spreadsheet therefore assumes a 3% annual inflation rate for useful healthcare spending. (We must make this assumption if we would like to avoid healthcare rationing, because if useful healthcare spending were not economically well-behaved, that is, if the growth rate for useful healthcare expenditures were substantially higher than the overall rate of inflation, then no matter what the rate of growth for wasted healthcare spending, we would still have disproportionate healthcare inflation - and rationing would be unavoidable.)

Assumption 4) The difference between the “well-behaved” growth of useful healthcare spending and the overall rate of healthcare inflation is accounted for by spending on waste and inefficiency. This of course, is the assumption that underlies all proposals for healthcare reform.

(Note: If you would like to play with the actual spreadsheet itself, e-mail DrRich and he’ll send it to you: DrRich at covertrationingblog dot com)

Year

Index of overall Dollars Spent per year

% wasteful spending

% of annual increase due to useful spending

% of annual increase due to wasteful spending

1

100

25%

-

-

5

146

42%

18%

82%

10

236

59%

13%

87%

20

612

78%

7%

93%

We see from this table several things. First, as expected, the amount of money we’re spending on healthcare, assuming a rate of healthcare inflation of 10%, is doubling roughly every 8-9 years, a growth rate that is ultimately unsupportable.

Second, in order to account for this unsupportable growth in healthcare spending by invoking waste and inefficiency, the proportion of healthcare spending that is caused by waste must increase to ridiculous proportions very rapidly, such that (for instance) by the 10th year we will have more than doubled (59%) the proportion of all healthcare expenditures that are wasteful; and by the 20th year, nearly 80% must be wasteful. Similarly, the proportion of the annual increases in healthcare spending that would have to be due to waste and inefficiency rapidly climbs to equally ridiculous proportions. By year 5, wasteful spending will have to account for 82% of the annual increase in healthcare expenditures, and that proportion continues to climb, eventually approaching 100%.

To DrRich, these numbers seem absurd on their face. But if you still need to be convinced, consider that in real life, runaway healthcare inflation has already been taking place for decades - so our position on such a spreadsheet would not be at year 1, but at year 20 (or higher).  And no matter what value for wasteful spending we might have plugged in at year 1, by year 20 wasteful spending would have to be well above 80%, and more likely approaching 100%.  In order for waste and inefficiency to account for the situation in which the American healthcare system finds itself today, therefore, one would have to believe that virtually all healthcare spending is wasteful.  (And if you believe that, then what does it matter that tens of millions can’t afford healthcare?)

Now let us illustrate the same point in a slightly different way.  This time, let’s assume that as recently as 2006, our healthcare system was 100% efficient. That is, only three years ago there was no waste whatsoever.  Then let’s allow that the remaining three assumptions given above are still operative. The following table results:

Year

Index of overall Dollars Spent per year

% wasteful spending

% of annual increase due to useful spending

% of annual increase due to wasteful spending

2006

100

0%

100%

0%

2007

110

7%

30%

70%

2008

121

15%

28%

72%

2009

133

17%

26%

74%

We can see from these results that, even if only three years ago we had a completely efficient healthcare system, in order for waste to account for the excess growth in healthcare spending we’ve experienced since that time, then as much as 74% of today’s annual increase in spending has to be due to waste and inefficiency.  Indeed, unless at some point within the second term of George W. Bush we actually had a completely efficient healthcare system (which seems doubtful), this spreadsheet tells us (again)  either that our fervently held belief that waste and inefficiency accounts for healthcare inflation is completely wrong, or that today virtually all of our annual increase in healthcare spending must be due to waste and inefficiency, and none due to useful healthcare.

Play with the spreadsheet yourself. You will quickly see that as long as we insist that wasteful spending must account for the unsustainable growth we’re seeing in healthcare costs, then whatever our assumptions may be regarding the current proportion of wasteful healthcare spending - whether we say it’s 20% or 50% or 0% - we very quickly encounter the same mathematical absurdities.

One can only surmise from this analysis (done, DrRich reminds you, with actual Math) that our desired conclusion is wrong. A substantial proportion of our growing healthcare expenditures must necessarily be coming from real, honest-to-goodness, useful healthcare. And if we’re going to substantially curtail that growth, we’re going to have to curtail useful spending. Which means we have to ration.

But, once again, we’re Americans and Americans don’t ration. Which is why we’ve commissioned the big insurers and the government to do the rationing covertly, a task they have accepted with great gusto. DrRich is compelled to point out, once again, that waste and inefficiency is the sine qua non of covert rationing. Disguising all the rationing activity as something other than rationing fundamentally requires opaque procedures, unnecessary complexity, bizarre incentives, Byzantine regulations arbitrarily and variably enforced or ignored, and the diversion of healthcare dollars to non-healthcare ends (such as corporate profits, expanding layers of government bureaucracies, and other massive bureaucracies within the healthcare system created to defend against government bureaucracies). Covert rationing multiplies waste and inefficiency, and does so systematically. To reduce the necessary rationing to the smallest amount possible, we will have to figure out a way to do the rationing openly, and not covertly.

In the meantime, DrRich does not kid himself that exposing the mathematical absurdity of the chief assumption espoused by our political leaders, in their brave efforts to reform healthcare, will change hearts and minds.  American political partisans, not to mention the American media, eat mathematical absurdities for lunch.  And magical thinking amongst the populace, at least when it comes to the exuberant accumulation of household (and national) debt and the application of medical science, far from being discouraged, is actively promoted.

Comments

8 Responses to “There’s Not Enough Waste and Inefficiency in Healthcare”

  1. Annie on January 14th, 2009 4:21 pm

    Brilliant! Except where is the QED? The math isn’t done until you write QED. I’m sure of it.

    And you forgot the other universal language - of music.

    So when you present the Math as a romantic comedic musical titled, Covert Rationing (The Grand Unification Theory of Healthcare), you will singlehandedly fix the economy, revitalize musical theatre, heal the masses, and receive the President’s Medal of Honor (I just made that last one up), and bring home a Tony for Best New Musical/Drama, I also foresee a Nobel Prize for Economics in your future.

  2. DrRich on January 14th, 2009 6:28 pm

    Annie,

    You are too kind.

    And how can I have forgotten music?

    Rich

  3. Stewart (Red Baron) on January 15th, 2009 11:37 am

    Rich, I really think it is easier to see this problem thru the lens of fractals and scale invariance.

    Do you have an email address I can send a power point I made for some colleagues to explain the fractal nature of health care spending?

  4. DrRich on January 15th, 2009 1:25 pm

    Sure, Red.

    You can e-mail me at DrRich@covertrationingblog.com.

    I knew, however, that I never should have invoked Math in a public forum of any kind. People who actually know something about math might want me to, I don’t know, comment on scale invariance or something.

    I’ll be happy to see your powerpoint, but can’t guarantee I’ll be able to make anything useful of it.

    Rich

  5. Legacy Flyer on July 17th, 2009 1:10 am

    I agree that health cost savings are going to require rationing in one form or another.

    I watched some of the House hearings on health care reform and was struck by how many of those testifying were lawyers. The whole situation reminds me of an attempt that was made to split the cost of a pizza when we were in college.

    According to one of my fellow “Pizza Consumers” who later went on to be a lawyer: “If we do this right, everyone will come out ahead”. Much of what I hear about health care reform from the enthusiastic health care reformers reminds me of that “classic” statement.

  6. Praveen on July 17th, 2009 12:53 pm

    If you define wasteful spending as any spending that doesn’t add to the QALY of patients, then it’s possible that the percentage of wasteful spending in the US health care system is rapidly rising over time.

    Our per-capita spending on health care rises faster than anywhere else, and yet our public health statistics stay roughly in place. So left unchecked, wasteful spending could asymptotically approach 100% of all healthcare dollars. This is the same as when you look at CBO graphs of Medicare as a % of the US budget, and it asymptotically approaches 100% of all US spending in 75 years or something.

    Of course in reality, this is impossible. The US government will collapse in hyperinflation before health care consumes all of gdp, and so wasteful spending will never grow to the point where it crowds out useful health care.

    But you never know - bubbles last far longer than is rational before finally bursting.

  7. irradiated on July 19th, 2009 10:07 pm

    Praveen is right. Health care will need to be rationed in the future to curb wasteful spending. You just cannot keep every overweight, diabetic, hypertensive American alive until the bitter end just because the technology to keep people alive is readily available in most major hospitals in the US. These people don’t all die of out-of-hospital sudden cardiac death (which is much cheaper and less taxing on the system when the patient is pronounced dead at home). With fancy new heart assist devices, ventilators, dialysis machines, etc., we can keep anyone alive for weeks or months for hundreds of thousands of dollars before pulling the plug. That is the American way right now. I hope physicians are protected from lawsuits when the government forces them to start telling patients and their families “no more.” This might be one of the few good things that comes out of Obamacare.

  8. Nurse Fred on September 17th, 2009 5:40 pm

    Dr Rich,putting political will-bending, finger pointing, and cheering aside…can we as one of the richest nations on earth provide basic healthcare to our population? If Americans are not as “healthy” as say our European counterparts despite greater spending per capita, is healthcare even the correct arena for this discussion? Why not focus on socialogical factors like an afternoon nap, diet, family…etc. instead of chasing our tails letting the healthcare industry fix our ills (pun intended, the same industry which profits from a sick population!!! I agree with your analysis, but are you asking the correct questions?

Leave a Reply