Is 25% of health care spending really waste?

That is a claim by a recent JAMA article by Shrank et al. (2020). The Incidental Economist has a nice video explaining their findings.

Of the $760 billion in total waste, the largest component is administration and billing, costing $266 billion. There is an easy way to eliminate most of this waste: eliminate insurance. If everyone paid for health care themselves, billing costs would decline dramatically. While this would reduce waste, clearly it is not a good option. Since individuals are risk averse, health insurance provides a high value good which allows individuals to protect themselves against the risk of getting a high cost disease. Clearly administrative costs could be streamlined; in countries like in Switzerland and the Netherlands who have large private sector health insurance, administrative costs are much lower than in the U.S. At the same time, those who believe that administrative costs should be $0 are unrealistic.

Consider another source of waste, fraud and abuse. The costs of this are $60 to $80 billion. One could cut down administrative costs to verify services were provided, but doing so likely would increase fraud.

High prices cost the U.S. $230 to $240 billion per year according to the article. In particular, high drug prices are cited. As The New York Times reports:

“High drug prices do motivate investment and innovation,” said Rachel Sachs, an associate professor of law at Washington University in St. Louis.

…Likewise, studies show that when hospitals are paid less, quality can degrade, even leading to higher mortality rates.

In short, pointing out areas where the health care system can be improved is a useful endeavor. However, don’t be fooled by the attention-grabbing headlines. While the U.S. health care system could certainly be made more efficient, there are tradeoffs that would need to be made. As any economist will tell you, “there’s no free lunch.”


  1. The section on health insurance fraud is very important, but we need to acknowledge that the $60 to $80 billion range is a highly uncertain estimate. Fraudulent claims are designed to avoid detection. We don’t know what we don’t know. Fraudulent Medicare and Medicaid claims could be be much higher than we suspect. The relatively low administrative costs of these government programs might allow far more fraud than we can see. For all we know, the greater waste could be in these government programs and not in the private insurance industry.

  2. Yes, Health care systems should be improved because the system is not proper and contains a huge number of fraud people. The main fraud comes generally from the government itself. So government so take care of this before bringing out new programs.

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