Health care in the U.S. needs more than reform; it needs to be re-engineered.[IMGCAP(1)] The U.S. health care system wastes $700 billion annually on the kinds of systemic inefficiencies that would make a quality management guru cringe. According to our analysis of hospital data, government data, fraud claims and existing research, about one-third of the country’s total health care spending may be for unnecessary treatments, medical errors, redundant tests, administrative inefficiencies and fraud.Imagine for a moment what the balance sheets of S&P 500 companies would look like if they spent billions of dollars each year delivering unnecessary services or reproducing redundant paperwork. In the health care business, this has become the norm. Yet none of the health care reform bills being discussed in Washington, D.C., specifically addresses the most important types and causes of waste.Regardless of what happens in health care debates on Capitol Hill, one issue transcends the rhetoric: The amount of money wasted each year on systemic inefficiency is greater than the cost of providing premium health care to each of America’s 46 million uninsured.So, how do we begin to fix health care? As any six sigma management theorist will tell you, the first step to removing inefficiencies is to identify and quantify them. In our analysis, we began that process by defining the six major categories of waste: unnecessary care, fraud, administrative inefficiency, provider errors, preventable conditions and lack of care coordination.Unnecessary Care (40 Percent of Health Care Waste)Unwarranted treatment such as the overuse of prescription antibiotics and diagnostic lab tests performed to protect against malpractice exposure accounts for $250 billion to $325 billion in annual health care spending. For real-world evidence of this practice, consider the explosion of the diagnostic imaging industry. Commenting on published research, the New York Times reported in March 2009: “More than 95 million high-tech scans are done each year, and medical imaging, including CT, MRI and PET scans has ballooned into a $100 billion a year industry, with Medicare paying for $14 billion of that. But recent studies show that as many as 20 percent to 50 percent of the procedures should never have been done because their results did not help diagnose ailments or treat patients.”Fraud (19 Percent)Health care fraud accounts for about $125 billion to $175 billion in annual health care spending, manifesting itself in everything from fraudulent Medicare claims to kickbacks for referrals for unnecessary services. The scale of fraud in the U.S. health care system is staggering. In 2007, when the U.S. spent roughly $2.3 trillion on health care, fraud was estimated to account for as much as 10 percent of annual health care spending, according to a report published by the George Washington University School of Public Health and Health Services.Administrative Inefficiency (17 Percent)The large volume of paperwork in the U.S health care system accounts for $100 billion to $150 billion in annual health care spending. According to a 2003 New England Journal of Medicine report, the average U.S. hospital spends fully one-quarter of its budget on billing and administration.Provider Inefficiencies and Errors (12 Percent)Preventable treatment errors, ranging from complications because of procedure-related injuries to treatment of adverse drug reactions account for $75 billion to $100 billion in annual health care spending. Clearly, this category of waste has implications far beyond cost, with errors resulting in complications, readmissions, additional painful procedures, disability or even death. A February 2008 study from the New England Healthcare Institute estimates that 5 percent to 10 percent of all patients admitted to acute care hospitals acquire one or more infections.Preventable Conditions (6 Percent)About $25 billion to $50 billion is spent annually to treat preventable conditions like uncontrolled diabetes. In fact, a total of 7.2 hospital admissions per every 10,000 people ages 18 to 64 in the U.S. are for uncontrolled diabetes, according to a report published in 2008 by the industry consortium America’s Health Insurance Plans.Lack of Care Coordination (6 Percent)Inefficient communication between providers, such as duplication of tests and inappropriate treatments resulting from a lack of access to medical records between providers costs $25 billion to $50 billion annually. A classic example of this is when a patient visits an outpatient clinic or out-of-state emergency room that does not have ready access to the patient’s medical records. Another example is the use of the emergency room when primary care is not available. According to a study published in the American Journal of Managed Care, researchers found that eliminating avoidable emergency department use could save at least $21.4 billion per year.While the cold calculus of management theory cannot be the only factor to consider as we re-evaluate the American health care system, the exercise of assessing glaring business inefficiencies does provide a healthy starting point for a discussion of apolitical reform. The current health care debate could be the catalyst needed to get corporate America, hospital administrators, health plan leaders and government agencies to start focusing on these issues. It would be a shame for this opportunity to be wasted amidst the din of partisan politics.Robert Kelley is vice president of health care analytics at Thomson Reuters. He is author of the paper “Where Can $700 Billion in Waste Be Cut Annually From the U.S. Healthcare System?”