Eliminating Waste and Inefficiency Can Do Little to Contain Costs

Prologue: Americans often identify waste and inefficiency as the major culprits leading to the spiral of medical care costs. In-deed, when the Clinton administration unveiled its proposed reform of the health care system, its stewards argued that by removing inefficiencies, considerable savings would be generated to finance reform. In this paper William Schwartz, a physician-economist at the University of Southern California and the Pacific Center for Health Policy and Ethics, and Daniel Mendelson, a policy analyst at Lewin-VHI, Inc., take exception to this view. Their estimated potential savings from the reduction of inefficiencies in the acute care sector fall far short of the administration s cost containment goals. Schwartz and Mendelson were quick to point out in conversation that the basis of their study does not stem from ideology or opposition to reform, but rather from a belief that policymakers should have a frank discussion with the American people about the cost of reform. Schwartz is a rare figure in American medicine, combining the knowledge of a clinician with policy analysis skills. From 1950 to 1971 he headed the division of nephrology at Tufts-New England Medical Center and later served as physician-in-chief there. But in the mid-1970s, as the problem of rising medical costs grew worse, Schwartz became fascinated with its implications, and has pursued them ever since. (For details, see John Iglehart's interview with Schwartz, Health Affairs, Fall 1989.) Mendelson, who is a principal at Lewin-VHI, a nationally recognized health care consulting firm, has worked with states and the federal government to help structure and evaluate regulatory programs such as those recently proposed to reform the health system. Mendelson also has expertise in issues related to technology, such as cost-effectiveness analysis, practice guidelines, and quality measurement. He holds a master's degree in public policy from Harvard University. Abstract: This study estimates potential savings from eliminating waste and inefficiency in the acute care sector (hospital, physician, and pharmaceutical). Our analysis indicates that in the unlikely event that all potential savings are achieved between 1994 and 2000, the rise in costs would be reduced by about 1.5 percentage points annually. This would slow the real rise in costs from a projected rate of 6.5 percent to 5 percent annually. Covering the uninsured would partially offset these savings and bring the rise in costs to more than 5.5 percent annually. If our estimate of potential efficiency savings is in error by plus or minus 50 percent, the projected rise in costs would be altered by about one percentage point. We conclude that savings from eliminating inefficiency are likely to fall far short of the Clinton administration's cost containment goals.