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Waste Avoidance: The New Mantra in Healthcare Spending


With all the talk of trimming healthcare spending, perhaps it is time to look at indirect costs - administrative and regulatory procedures with no proven benefit.

My first car was an old Studebaker. The building that housed the Studebaker dealer is still standing a few blocks from where I live. I remember being amazed at how small the establishment was. The showroom had space for two to three cars. There was (and still is) a small lot where they could display about 10 used cars.

In the '50s and early '60s, it was unusual for dealers to carry much inventory. The typical customer planned their purchase, placed an order and took delivery about 4 weeks to 8 weeks later. Things were in balance. Dealers kept little inventory and the factory production lines only ran at the pace needed to fill orders.

If business took a downturn, as it did in 1954, neither the factory nor the dealers were stuck with unsold inventory, huge financing costs, and a large payroll. The recession was hard on the auto industry, but Studebaker failed not because they built a business that depended on eternal high demand but because of one kind of waste avoidance. They made ugly cars and the customers avoided them. This story is relevant to the "fix" in which healthcare finds itself today.

The healthcare industry has been selling medical services in part because it could, not because every service was demonstrably necessary or beneficial. In the process, the healthcare industry has become dependent on a continued high volume of sales, as did the auto industry.

Suddenly the country is short of funds and there is a growing realization that something must be done to lower the total cost of healthcare. It is becoming obvious that "waste avoidance" can reduce costs more, and faster, than merely by trying to do unnecessary things less expensively. [1]

What a novel idea! "It has become common wisdom that 30 percent of healthcare spending, or $800 billion a year, is wasted on ineffective measures... Useless care, critics note, is easy to spot after the fact; it's much more difficult to recognize at the moment of clinical decision.” [2]

These editorials refer to direct costs, the actual costs of the unnecessary treatments and of any complications that result from them.

They make no mention of what I call "indirect costs" - administrative and regulatory procedures that also have no proven benefit and may actually be harmful. Nevertheless they consume valuable resources and increase the cost of healthcare. There is no estimate of the percentage of healthcare spending that is wasted in this way because there is no nationwide estimate of regulatory overhead. Individual organizations may know their internal costs, but I suspect that many are reluctant to ask the question even if they are about to be bankrupted by those costs.

I have been a vocal proponent of waste avoidance for years. That is why I devote so much attention in these pages to explaining the technical underpinnings of EHR. It is in the hope that you will begin to appreciate that clear understanding leads to simplicity and recognition that many of the products being offered cannot provide benefits that are commensurate with their cost. Simple systems cost less to acquire and maintain.

When looking for ways to avoid waste, remember Pareto's Law. Eighty percent of what you do every day is relatively simple and doesn't call for complicated systems. The other 20 percent are the exceptions - what you get paid the big bucks to manage. No EHR, no matter how expensive, is ever going to do a great job managing exceptions because they are - well - exceptions.

The notion that EHRs improve patient care is mostly hypothetical. To put it in the terms of evidence-based medicine, most reports of EHR efficacy would barely qualify as Level D: Expert opinion without explicit critical appraisal. A recommendation to adopt EHR would be considered to be a Level I: Scientific evidence is lacking, of poor quality, or conflicting, such that the risk versus benefit balance cannot be assessed. An EHR that is not effective, especially an expensive one, is part of the problem, not part of the solution.

This is not a great time to be making a large, long-term financial commitment to an EHR that has not proven its effectiveness. It will be one of the first things on the chopping block when you have to get serious about waste avoidance. Instead, choose something simple and inexpensive that does 60 percent to 80 percent of what you think you need and wait for the dust to settle. Your accountant will thank you and the experience you gain will be invaluable.

One final cautionary note: Don Berwick [3] has recently warned that as waste avoidance takes hold, it will lead to significant economic dislocations as unnecessary treatments and the facilities and jobs that provide them are eliminated. It would be prudent to assume that there are big changes coming. Those who have the lowest fixed costs and are the most agile will be the survivors. Caveat emptor.

Find out more about Daniel Essin and our other Practice Notes bloggers.

[1] Howard Brody, MD, PhD, From an Ethics of Rationing to an Ethics of Waste Avoidance, NEJM, 5/24/2012

[2] M. Gregg Bloche, MD, JD, Beyond the “R Word”? Medicine's New Frugality, NEJM, 5/24/2012

[3] Donald M. Berwick, MD, MPP, Andrew D. Hackbarth, MPhil, Eliminating Waste in US Health Care, JAMA. 2012; 307(14):1513-1516


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