Why We Waste Healthcare Spending

The legendary physicist Enrico Fermi once (reputedly) asked, “Where is everybody?” Preserved as the Fermi Paradox, his question referred to extraterrestrial life. If, as he wondered, there are so many possible forms of life beyond the earth, surely some should have paid us a visit.

Somewhat similarly, the Fermi Paradox can relate to healthcare spending. Yes, we all know that healthcare dollars are wasted. So where is everybody?

What We Waste

How Much

According to two recent articles in JAMA (Journal of the American Medical Association), an estimated 20 to 25 percent of our healthcare spending is wasted. The waste could be close to all we spend annually on Medicare and Medicaid. It could be 18 percent of our GDP.

Where

The six areas that boost spending relate to care delivery, care coordination, and over treatment. They are about pricing failure and administrative complexity. And they also involve fraud. We could be doing a better job with preventive care and adverse hospital events. Fragmented care that results in unnecessary admissions and avoidable complications is a problem. Then, compounding it all, we have misguided regulations and fake billing.

Our Bottom Line: Incentive

A third JAMA article tells us that simple solutions don’t exist. And those that were implemented have been too complex and inconsistent. The result? A 2019 Gallup Poll indicated a widespread concern with healthcare costs.

Asked to choose between 10 percent more income and a freeze in healthcare expenses, the majority of survey participants chose the freeze. Correspondingly, the majority said people are paying too much for the healthcare they receive. And finally, between 40 and 50 percent of respondents expressed alarm over the cost of emergency room visits and a major health problem leading to a bankruptcy.

So, “where is everybody?” The answer is, “Everywhere.” We’ve got the patients, the pharmaceutical companies, the providers, the payers, and the politicians. And they all have different healthcare spending incentives that prevent us from finding a solution.

My sources and more: Thanks to Timothy Taylor’s always excellent Conversable Economist, here and here, for alerting me to recent research on healthcare spending. From there, you can find the details in three JAMA articles, here, here, and here. And finally, at econlife, we did write about a solution. Please note that for accuracy I’ve used some of the same terms and phrases from JAMA articles without quotation marks.