Wasteful Healthcare Spending: A Significant Cost Driver for Employers

We all know that healthcare coverage is expensive, but did you know that it can be wasteful too? According to the Institute of Medicine, about $750 billion is wasted spending which includes:

  • Unnecessary services
  • Excessive administrative costs
  • Fraud
  • Other problems.

Employers who foot the bill can grit their teeth and tell you exactly how many thousands of dollars they spend on healthcare each year. With costs so high, there’s bound to be wasteful dollars going down the drain. How can employers know where to look to improve the quality of the healthcare they receive, while also ensuring that wasteful healthcare spending is prevented?

In a recent survey by the National Alliance of Healthcare Purchaser Coalitions (NAHPC), 126 U.S. employers were asked to identify and estimate where wasteful spending may exist in their benefits programs. In this survey, waste is defined as “procedures and treatments that are overused or have limited effectiveness.”

Employer Perceptions


Figure 1


When asked what percentage of their healthcare treatments are wasteful, 57% of employers estimate that up to 25% of their populations’ healthcare treatments is unnecessary (Figure 1). Although most employers believe that a substantial amount of their healthcare spending is wasteful, most also revealed that they are not equipped to analyze their spending.


Figure 2


When asked how their organization collects and analyzes its medical and pharmacy data to track healthcare spending and find sources of waste, 59% of employers responded that they do neither collecting nor analyzing (Figure 2). In fact, only 7% of the respondents answered “Yes,” while 34% responded that they have a vendor track waste on their behalf.

According to the NAHPC, the leading contributors to wasteful spending are:

  • Medical imaging
  • Specialty drugs
  • Prescription medications
  • Clinical tests.

As you may expect, employers that manage waste did not report high levels of success in their benefits programs. Fortunately, there are steps they can take to begin addressing the issue of reducing wasteful healthcare costs.

Although most employers believe that a substantial amount of their healthcare spending is wasteful, most also revealed that they are not equipped to analyze their spending.

Clearing the Waste

To get a general idea of their situation, employers can ask their vendors to share information on healthcare spending and waste. Any data based on health plans, pharmacy benefit management, providers, etc. can provide important context for employers to adjust their programs accordingly.

Employers may also want to consider value-based benefit design strategies to discourage the utilization of low-value, low-quality services. You can read more about value-based design in one of my previous blogs.

Employers can also empower their employees through the Choosing Wisely initiative. This initiative provides resources to “advance a national dialogue on avoiding unnecessary medical tests, treatments, and procedures.”

Ultimately, understanding what is driving your waste is the first step in managing your overall healthcare costs. Finding and using a healthcare data analytics vendor can deliver the insights you need to make impactful benefit design changes that influence your costs, improve population health, and make healthcare more affordable for your members.

Sashi Segu

Sashi Segu

Sashi Segu, Counsel, has participated in cases and provided legal expertise on HIPAA, ERISA, privacy, compliance, and other healthcare-related fields. Sashi left Innovu in March 2019 to pursue other interests.

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