IOM Confronts America About Wasteful Health Care Spending

The first step to recovery is admitting that you have a problem. That is exactly what happened earlier this month when the Institute of Medicine (IOM) released a consensus report concluding that in 2009, roughly 30% ($765 billion) of health care spending was wasted on unnecessary treatments and various other useless costs. Overspending of this magnitude is clearly not caused by just one kink in the system. The problem is pervasive and the reasons are complex.

The report, The Healthcare Imperative – Lowering Costs and Improving Outcomes, does a fine job of presenting the facts in ways consumers can relate. The IOM points out that the average U.S. salary has increased by only 38% in the last decade, while health care premiums have increased by 131%.

So, where is all of this waste coming from? The IOM breaks it down into categories by the billions:

Unnecessary Services – $210 Billion

One of the main problems with this type of waste is that it is impossible in some cases to know if a medical service is “unnecessary” until after it has already been performed. For instance, a doctor may order a series of tests to rule out the existence of a certain condition or illness. This can rack up quite a hefty medical bill. Is it worth it? Well, if someone’s life is saved in the process, we tend to say “yes.”

Excessive Administrative Costs – $190 Billion

This one boils down to unproductive documentation and duplicative costs to administer insurance. In other words, human error is rampant in the health care industry. Can this be completely eliminated? No way. But measures can certainly be taken to cut this number down to a more reasonable size.

Health care providers all over the country have recently begun implementing Electronic Health Records (EHRs) as part of their daily routines. These digital forms of the traditional patient chart have the potential to cut down on paperwork errors by generating a complete record of each patient visit and securely recording information about vitals, lab results, and medical histories.

Health care reform enacted a Medical Loss Ratio (MLR) that requires health insurance companies to pay between 80 to 85 percent of premiums on actual medical care. This means that only 15 to 20 percent of premiums can be allocated for administrative costs.

Inefficiently Delivered Services – $130 Billion

Medical errors, uncoordinated care, and inefficient operations are reported to be the major causes of the billions wasted in this category. The current health care system is fragmented between health care providers and many consumers use more than one health care provider at a different time. If care is coordinated between providers, there will be a reduction in the number of errors, unnecessary services and tests.

Prices That Are Too High – $105 Billion

The rate at which health care costs have grown since 1945 seem pretty absurd when compared to other household items:

  • A gallon of milk would cost $48
  • A carton of eggs would cost $55
  • A dozen oranges would cost $134

Fraud – $75 Billion

Fraud is a pretty big issue in the current Medicare and Medicaid system which pays for a service before it is approved. Insufficient investment in detection from public and private payers is also driving the problem but the government started confronting this issue after health care reform was passed.

Missed Prevention Opportunities – $55 Billion

All too often, we wait to seek medical attention until a severe illness or injury is well underway. For those without health insurance, paying out-of-pocket for preventive care may not seem like a realistic option. Under the Affordable Care Act (ACA), patients with health insurance can receive free preventive care services with no additional co-pays or fees. As of 2014, when the full law takes effect, roughly 26 million more Americans will have the free preventive care benefit.


Explaining Health Reform: Medical Loss Ratio (MLR) – Kaiser Family Foundation.” The Henry J. Kaiser Family Foundation – Health Policy, Media Resources, Public Health Education & South Africa – Kaiser Family Foundation. 2012.

Preventive Care. 2012.

Image via Bruce Rolff / Shutterstock.

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  • Access to preventative services at no out-of-pocket cost to the policyholder is certainly one of the strong features of the ACA. Hope such benefits will far outweigh all those tax increases and penalties.

  • What’s wrong with medical care in the US?

    It’s a business!

    The purpose of a business is to maximize income for the business entity. The purpose of medical care should be to maximize the health and wellbeing of the patient.

    Private and governmental tinkering with the system has produced an entity, which does neither but has created a boon to the insurance industry.

    Consider an earlier time in America when doctors were dedicated to the patient’s health and made accommodations for those who had difficulty paying.

    Hospitals, for the most part were owned and operated by the county and were subsidized by the taxpayers.

    Today most doctors try to maximize their income. That’s the business mentality. They selected the field of study because of the potential income. Hospitals are corporate organizations dedicated to maximizing profits. They were organized because of the potential income. Government assistance comes from the Medicare and Medicaid programs and protection of hospital territories via the “Certificate of Need” processes.

    As a consequence of the current system, medi-business prospers, medi-insurance prospers medical providers prosper but the patients and other taxpayers suffer. The system fosters unnecessary and expensive tests, prescriptions and procedures.

    So, one solution is to eliminate the profit motive, which would take the medical care system out of the capitalistic system. That would be socializing medicine in the US. But, consider the opposition to that concept:

    During the Vietnam War years, a bill was introduced in the House of Representatives to create a Military Medical College. It would be similar to the military academies with strict entrance requirements and its purpose was to provide enough doctors to fill the needs of the Armed Forces in combat without drafting more practicing doctors. That was HR #1 in the House for ten years and because of lobbying opposition by the AMA and their allies, the bill never passed the House. The rationale espoused to defeat this resolution was that the government could not provide sufficient education and training of doctors. Of course they have provided Army, Navy and Marine officers to defend the US for a couple of centuries. The real reason for the opposition seems to have been to prevent the creation of too many doctors who would engage in price competition for their business when they returned to civilian life. Severe quotas for Medical schools have always limited the number of doctors, thus preventing any price competition. The Certificate of Need Process eliminates the price competition among hospitals.

    Now, in addition to the AMA we have the powerful lobbies for Insurance companies, Pharmaceutical companies, corporate hospitals and other corporate entities engaging in medical care. No reasonable solution to socialize medicine will ever pass in congress as long as it is controlled by those whose election or re-election depends on their support for the status quo.

    So, wake up America! Don’t vote for incumbents or new office seekers who won’t commit to a single payer health care system. Eliminate the middleman (insurance) and control costs in a manner similar to the current Medicare safeguards.

    This would be the first step in taking business out of medical care.

    We might also like to require a routine second opinion for the need for certain tests and procedures. But let’s take one step at a time.

Sean O'Connor, MS

Sean O’Connor, MS, is a blogger and public relations/media professional at GoHealth. He holds a Bachelor of Arts from DePaul University and a Masters of Science from Roosevelt University.

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