Arsh Shah

Prof. Aqeel
09/25/2015
ECON 313

The Reduction of Medical Waste through Value Based Care Organizations: Solutions for
Unnecessary Spending in United States Healthcare

Healthcare spending continues to be a massive expense in our country, one that has
proven to be an economic toxin if our money is not spent carefully. The causes of medical waste
lie in high tech practices (specialists), fee for service issues (physicians charging per medical
service), and fraud. So, what effective strategies can we use to cut spending drastically? The
addition of value based care organizations and healthcare policy (such as the Affordable Care
Act) will aid in reducing our spending for the better. Research shows that alternative payer
models outside of fee-for service have the potential to save millions of dollars by preventing
over-utilization, whilst increasing transparency and patient outcomes, creating better spending
habits, and providing better patient care in the long run.
In 2014, the United States spent eighteen percent of its gross domestic product on health
care, compared to the Netherlands who had only spent twelve percent. In terms of scale, the
United States GDP amounted to around $17 trillion last year, leaving that six percent in gap
spending to be around an additional $1 trillion dollars out of the US government budget.
Household-wise, the estimated waste per household amounts to more than $8000 per family
(through insurance premiums, taxes, out of pocket care, and other costs.)1 The simple
explanation for a big proportion of this spending, is that the United States has a large number of
specialists that engage in high tech practices like imaging and other diagnostics. On an
international level, the Organization for Economic Co-operation and Development recognized
the following:

Compared with the average OECD country, the U.S. delivers (population adjusted)
almost three times as many mammograms, two-and-a-half times the number of MRI scans, and

1The Atlantic,.2014. 'Why Do Other Rich Nations Spend So Much Less On Healthcare?'. http://
www.theatlantic.com/business/archive/2014/07/why-do-other-rich-nations-spend-so-much-less-
on-healthcare/374576/.
31 percent more C-sections. Also, the U.S. has more stand-by equipment, for example, 1.66 MRI
machines per 6,000 annual scans vs. 1.06 machines. The extra machines provide easier access for
Americans, but add to cost..2

While seemingly more thorough and convenient, these high-tech practices can contribute to
waste and add to our expenses. In addition to spending twice as much, we also cannot control
administrative pressures as our government doesn't have strong tax supported healthcare with
more government intervention.
The specialists that engage in more high tech care make more money and also have a
more considerable influence on policy. Also, we can safely assume that quite often those on
public healthcare believe that more expensive care translates to better care.3 Drug costs in the US
are about twice as much as those in other countries. Specialist physician fees are also twice or
even worse, three times as high. Lower prices abroad are found by governments who pay for up
to seventy-five percent of medical care, whereas the US government pays about fifty percent.4
A loss of patient-doctor transparency, increased unnecessary care, and worse off patient
outcomes are all caused by a major flaw known as fee-for-service (FFS), present in modern day
primary care practices and hospitals. Furthermore, this idea denotes that patients are charged
separately for each service provided to them at their doctors office or hospital, instead of
otherwise bundling the procedures and increasing overall cost-effectiveness for these patients
and their families. Doctors and hospitals cross the line between care that is critical (true
preventative care), and care that should be done just to be safe. As a result, [we] spend more
than twice as much per person on healthcare as all other industrialized countries, despite being

2 Ibid.
3The Atlantic,. 2014. 'Why Do Other Rich Nations Spend So Much Less On Healthcare?'. http://
www.theatlantic.com/business/archive/2014/07/why-do-other-rich-nations-spend-so-much-less-
on-healthcare/374576/.
4 Ibid.
the only country that doesn't provide basic health insurance for its citizens.5, says Dr. Timothy
Johnson, a senior medical contributor for ABC News.
In terms of national spending, the FFS concept was responsible for an estimated $750
billion dollars in unnecessary spending in the year 2009.6 This roughly translates to thirty cents
of every American dollar contributing to medical waste and unnecessary care, albeit of low
quality. The overall breakdown of waste is as follows: $210 billion for unnecessary care, $190
billion for excessive administrative costs, $130 billion for inefficient delivery of care, $105
billion for inflated prices, $75 billion for fraud (from insurance companies, clinicians and
patients), and $55 billion from missed prevention opportunities.7 Mark Smith, the chairman of
the Institute Of Medicine said that our current state of healthcare is driven by a maddening
paradox, in which patients are over-treated (creating medical waste) or under-treated (creating
lower life expectancies).8 This proves a strong point in the healthcare debate today: we are
unable to determine, as patients, which care is necessary and which is not. FFS practices create
incentives for physicians to focus on quantity of care (as they bring in more profit with a higher
number of tests and visits), rather than the quality of care. This may lead to medical fraud as the
best doctors exist in the lowest socioeconomic areas, in which patients are often uneducated
about the services that they may receive. Therefore, some doctors may become corrupt and
exploit this loophole with such patients.
Local information compared to the national average from the Center of Medicare and
Medicaid Services shows that inpatient costs (hospital admit/procedural costs) for various
procedures can range from a fraction of the national average to more than twice the cost,

5Wong, Julielynn. 2012. 'US Health System 'Wasted' $750B In '09'. ABC News. http://
abcnews.go.com/blogs/health/2012/09/06/us-health-care-system-wasted-750-billion-in-2009/.

6Quinn, Audrey. 2012. 'The Top Causes Of U.S. Health Care Waste | Zdnet'. Zdnet. http://
www.zdnet.com/article/the-top-causes-of-us-health-care-waste/.
7 Ibid.
8 Smith, Mark. 2012. Best Care At Lower Cost: The Path To Continuously Learning Healthcare
In America. Ebook. 1st ed. California: Institute of Medicine of the National Academies. http://
iom.nationalacademies.org/~/media/Files/Activity%20Files/Quality/LearningHealthCare/Release
%20Slides.pdf.
depending on the severity of the procedure. The most recent data set outlines notable statistics
for Lake Forest Hospital when compared to Northwestern Memorial in Chicago. For example, in
19 cases of surgery of intracranial hemorrhage or cerebral infarctions, Lake Forest Hospital
billed Medicare an average of $38,318, which is 1.3 times the national average for this
procedure. In return, Medicare paid $7,335, which is 0.9 times the national average paid to
hospitals. When looking at the same procedure for Northwestern Memorial, we see an average
amount for 56 cases of $110,418, which is 2.2 times the national average. In return, $23,337, a
staggering 1.7 times the national average, is paid back by Medicare. 9 The cost of such FFS
practices is is extremely variable and dependent on quality metrics for medical care (risk
adjusted by age, disability, socioeconomic status, geography, and chronicity). Therefore, in
different socioeconomic areas, FFS costs may drastically vary, with those in poorer areas (such
as the South side of Chicago) billing Medicare more for procedures. When compared to a
financially sound area (Lake Forest), its easy to see how costs can skyrocket with such
complicated procedures (leading to low quality care).
The solutions to the medical waste problem and unnecessary spending in US healthcare
are minimal as of now, but leave untapped ideas and potential for large savings nationwide.
Perhaps the most widely accepted concepts are the ACA and the value based care organization.
The Affordable Care Act is a law that was put into place on March 23rd, 2010, by President
Obama, set on creating new mechanisms for reform over time. These new changes include a
Patient Bill of Rights to protect from insurance abuse, cost-free preventative care, the creation of
accountable care organizations, open enrollment in the health insurance marketplace, and
affordable care for those in low or middle class families.10 It will provide billions of previously
uninsured people insurance coverage and tax credits towards their healthcare cost, and will

9 Center of Medicare and Medicaid Services,. 2015. 'Medicare Provider Utilization And Payment
Data: Inpatient - Centers For Medicare & Medicaid Services'. https://www.cms.gov/Research-
Statistics-Data-and-Systems/Statistics-Trends-and-Reports/Medicare-Provider-Charge-Data/
Inpatient.html.
10
Health and Human Services,. 2015. 'Key Features Of The Affordable Care Act By Year |
HHS.Gov/Healthcare'. http://www.hhs.gov/healthcare/facts/timeline/timeline-text.html#2012.
definitely aid those in lower income communities. The most notable and perhaps useful addition
to recent healthcare policy is the idea of a value-based care organization.
Oak Street Health is a value-based care organization that has a network of insurance
providers (Blue Cross Blue Shield, Humana, etc), that furthermore contains managed care
models (preferred provider organizations, also known as PPOs, and health maintenance
organizations, or HMOs). Seventy five percent of Medicare relies on the FFS model, and the
remaining twenty five percent on these alternative models(PPO/HMO). Furthermore, research
suggests that HMOs are more able to cut unnecessary care by 20 or 30 percent when compared
to typical FFS models. [These] findings demonstrate that the more managed plans do not
compromise quality. [They do] just the opposite: they deliver higher-quality care than fee-for-
service medicine and thus do a better job of improving health care value.11
The Oak Street Health clinical model is focused on those primarily with Part B Medicare,
accepts traditional Medicare (FFS) and Medicare Advantage as well (Part C), and privately
contracts with varied insurance providers. After finding that complex, chronic older patients
drive the cost of Medicare (20% of 65+ patients create 75% of the cost - an estimated $350
billion)12, a tier system was created for the sickest patients based on need and acuity. The tiers
are assessed during the first two visits and are assigned as good (0-30% sickness), fair (31-70%
sickness), serious (71-95%), or critical (96-100% sickness), which dictate how frequently
patients are seen (anywhere from every 3-4 months or up to twice a month). Those in serious or
critical condition are given priority with 24/7 MDs as well as transportation and home visits,
etc.13 Another advantage is smaller scale care.
Instead of the typical Medicare approach (where a patient would see 7 physicians, 2
primary care physicians, across 4 different practices), a patient is surrounded by a small managed
care team (an MD and 4 other members) with Oak Street acting their primary care doctor. This

11Kaplan, Jon, Jan Kuenen, Mike Pykosz, and Stefan Larsson. 2013. 'Alternative Payer Models
Show Improved Health-Care Value'. Boston Consulting Group. https://
www.bcgperspectives.com/content/articles/
health_care_payers_providers_alternative_payer_models_show_improved_health_care_value/.
12 Oak Street Health Internal Analysis
13 Ibid.
clinical model leads to improved health, for patients using emergency response (41% FFS
compared to just 20% for Oak Street), undergoing diabetic amputations (1.2% FFS compared to
just 0.03% for Oak Street), and open heart surgery (3.7% FFS, compared to just 1.9% for Oak
Street).14 The core preventative care model tries to reduce emergency response need with home
visits, 24/7 consultation, connecting emergency response with Oak Street MDs, and working
with hospital staff to facilitate discharge in the event that patients need to go to the hospital. As
Oak Street has such a groundbreaking alternative payer model, tiered patient systems, and a
small scale managed care ideology, they are left to focus on patient satisfaction and outcome,
which is perfect for the effective creation and expansion of their business.
To end, we see that the medical waste issue in healthcare today can be attributed to a
multitude of factors, sheer profiteering, high technology, lack of transparency, over-utilization,
and disregard for patient well being. Given updated alternative payer models, patient tiering, and
value-based preventative care, we see an effective solution to minimizing the waste in healthcare
costs. So, can value-based organizations like Oak Street Health become a long term solution to
the healthcare cost crisis in the United States? They definitely reduce the amount of medical
waste and increase overall patient health, reducing hospital readmissions, and providing stronger
care to patients. If the future of American healthcare models adopts updated administrative
technologies, more emphasis on acute care for patients and focuses on preventative care, our
country will definitely cut back on spending and be taking steps in the right direction to resolve
the healthcare crisis.

14 Ibid, 2013.