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092617 State Health Inefficiencies 1

State Health Inefficiencies

Sep 26, 2017

By Ken Sagynbekov, Marlon Graf, and Perry Wong with Ross Devol


Despite spending more than any other country on health, the U.S. has a mediocre ranking across most indicators.2 According to a report published in 2012 by the Institute of Medicine, the U.S. wastes roughly one-third of health expenditures ($750 billion annually) on unnecessary medical services, costly paperwork, fraud, and poor quality services.3 The expensive nature of the U.S. health care system has been acknowledged widely. However, our understanding of sources of inefficiencies and policies capable of addressing these areas, and ultimately providing Americans with affordable, high-quality health care, remain limited.

There are numerous studies that compare the U.S. health care system to other countries, but such comparisons are inappropriate. In effect, comparing countries like Denmark to the U.S. is no different than comparing apples to oranges. In other words, differences in estimated health care system efficiencies across countries are heavily driven by country-specific unobserved factors, which undermine the validity of lessons learned from such a comparison. In this study, we therefore choose U.S. states as our primary unit of analysis. Comparing states minimizes the effect of strong confounding factors observed in cross-country studies and allows us to draw meaningful policy conclusions. Specifically, our analysis contributes to the understanding of health care inefficiencies in the U.S. in three important ways:

  1. We rank states according to their health care system efficiency scores, which we estimate using a Bayesian Stochastic Frontier Model. Although there already are numerous reports that rank health care quality, delivery, and population health in states, these rankings reflect a system’s effectiveness and evaluate states’ performances along a predefined health dimension without accounting for differences in available resources. Our ranks, on the other hand, reflect a system’s efficiency and assess states’ abilities to convert their health care resources into reductions in deaths amenable to health care interventions. For example, states such as Wyoming and Montana that are often ranked below Massachusetts or Vermont in effectiveness are at the top of our efficiency ranking, suggesting that these states are getting the most out of their resources.
  2. We carry out a quasi-counterfactual exercise, where we estimate what the health care cost savings would be if each state were to operate at the efficiency level of Wyoming, our top-ranked state. The results of this exercise indicate that, on average, states can reduce the cost of health care by 38% with their existing resources, which is equivalent to $1.2 trillion annually at a national scale or a reduction in health spending from 18.2 percent to 11.3 percent of the U.S. GDP.
  3. We compare the ten most efficient states to the ten least efficient states across eleven key health policy indicators commonly associated with health system inefficiency and waste both in policy debates and academic literature. We find that the overall quality score of health care systems in the most efficient states is 25% higher than that of the bottom states. In addition, per capita Medicare standardized risk-adjusted costs are 50% lower for the top states compared to the bottom, per capita community social workers are 51% higher for the top states compared to the bottom states, and the rate of uninsured is 22% lower for the top states compared to the bottom states. In other words, we find that more efficient states have fewer uninsured individuals, less wasteful spending, better quality services, and greater reliance on community social workers to bridge the gap between clinicians and patients.