If Deborah Donovan had no health insurance, the surgery to replace her badly arthritic knee with an artificial one would have cost her more than $40,000.

Instead, she paid just over $3,000, in addition to the $2,600 that was her annual share of the cost of her health insurance.

"How do people do it without insurance?" asked Donovan, who is marketing director at the regional economic development agency SeCTer.

Her insurance, through her employer, paid substantially less than the $43,136 cost of the procedure because of the insurer's previously negotiated contracts with the doctors, hospital and visiting nurses. The total the insurance company paid was $36,265.

That includes all the pre-surgery physicals and lab work, the artificial knee and related equipment, surgeon and anesthesiologist charges, five days at Lawrence & Memorial Hospital, post-surgical physical therapy, nursing visits and other services as she recuperated at her Starr Street home.

But whether the bill in question is the one an uninsured person would have paid or the lower insurance bill, this increasingly common surgery - half a million annually in the United States, many among the growing Medicare population - comes with a high price tag. It's just one reason this country spends $2.5 trillion on health care annually.

Finding ways to put the brakes on the escalation of health care spending is considered by many to be critical to fixing the nation's health care system. Particularly, experts note, since the nation lags behind most of Europe and the developed world in key health measures such as life expectancy and chronic disease care.

"The United States spends more on health care than any other nation," said an Institute of Medicine report released last month. "Yet despite this spending, health outcomes in the U.S. are far worse than in other countries. Health care costs have contributed to slowing the growth in wages and jobs."

Battles over insuring the uninsured and a government-run plan have overshadowed other elements of the House and Senate versions of health care reform bills, now being negotiated into a final version for an upcoming vote. But the problem of health care costs, now at 17 percent of the GDP and considered a major threat to economic growth, is an equally important goal of health care reform, many experts believe.

"It's not like we're safe keeping what we have," said Stuart Guterman, one of the authors of a new analysis of the reform bills by The Commonwealth Fund, a nonpartisan health policy think tank. "The system now is unsustainable. What we're standing on is crumbling under us."

Three bills for one procedure

In the case of Donovan's bill, the biggest portion, $28,272, went to L&M to cover the five-day, four-night hospital stay including use of the operating room and monitoring equipment, sterile supplies, nursing care, meals, medications and the replacement knee, which cost $4,000 to $6,000, said Lugene Inzana, vice president and chief financial officer. The charges also factor in the unseen expenses of running the hospital - things like malpractice insurance, light bills, medical waste disposal, administrators' salaries and keeping the emergency room staffed around the clock.

What it didn't include was the charge from her primary care doctor for the pre-surgical checkup, or from the anesthesiologist who kept her sedated during surgery, or the surgeon who cut out the diseased knee and did the delicate work of aligning and affixing the new one, or the visiting nurses who led her through the at-home physical therapy after the surgery.

"In a typical surgery at L&M, you get a bill from the hospital, a bill from the surgeon, a bill from the anesthesiologist," Inzana said. "The doctors practice here at L&M, but they're separate and distinct from the hospital. One episode of care can involve multiple providers. It can be difficult for patients to navigate, because they come to L&M for one service."

The multiple bills are a manifestation of the fragmentation that Guterman and other experts argue is creating waste, inefficiency and higher-than-necessary costs. Cutting down on "administrative system inefficiencies," according to an October report by Thomson Reuters, could save $100 billion to $150 billion annually. The report's title asks, "Where Can $700 Billion in Waste Be Cut Annually from the U.S. Healthcare System?"

"The average U.S. hospital spends one-quarter of its budget on billing and administration, nearly twice the average in Canada," the report notes. "American physicians spend nearly eight hours per week on paperwork and employ 1.66 clerical workers per doctor, far more than Canada."

Both congressional measures would test new payment methods to streamline administrative costs and encourage better coordination of care - potentially reducing redundant testing and medication errors. The Senate bill creates an independent board that would find waste and other ways to reduce costs.

"We are tracking health care reform like you wouldn't believe," said Inzana of L&M, "because it will have a profound impact on this hospital and every other provider."

One of the fundamental problems with the current system, Guterman said, is that doctors and hospitals are essentially paid based on how many tests and procedures they order or provide, rather than on the quality of care or on giving the kind of services that keep patients healthy and keep chronic diseases under control. As an example, he noted that a doctor and a hospital would earn far more from having to amputate the badly infected foot of a patient with uncontrolled diabetes than from a diabetic who never needed the surgery because his blood sugar was kept under control.

"Moving toward different ways of paying and organizing health care is a crucial thing," he said.

In his analysis, Guterman and his colleagues estimate that the Senate bill would reduce federal spending on health care by $132 billion over the next decade, while the House measure would trim $138 billion. Those figures factor in the costs of expanding health insurance coverage, offset by new revenues and savings. But with the fate of the many elements of the bill - including expanding coverage - now in question since Scott Brown's election in Massachusetts, the final numbers could end up very different, if the bill passes at all. Regardless, the problem of health care waste will need to be addressed, experts say.

Preventive care needed

Dr. Hartmut Doerwaldt, a primary care doctor at the Community Health Center in New London, said he sees wasted health care spending on a daily basis, in patients with illnesses that could have been avoided.

He favors a system more oriented toward preventive care that would recognize the role of the patient as well as the doctor in making it work. Knee replacement surgery in Donovan's case and many others is unavoidable - Donovan had tried other, nonsurgical treatments first, without success - but not so with many of the most prominent chronic conditions.

"I don't see the waste in knee replacement surgery or in treating leukemia," Doerwaldt said. "But probably half the heart attacks and diabetes-related hospitalizations and emphysema could be avoided. A lot of it starts with the patients, with obesity and smoking and IV drug use."

Both bills would provide coverage for preventive medical services and invest in employer prevention and wellness programs. Both would increase payments to primary care doctors and take other steps to elevate their role in the health care system, and de-emphasize that of the higher-priced specialists.

The reform bill also aims to lower the costs of drugs and medical devices, already higher in this country than in most of the rest of the world. Compounding the higher prices is the fact that Americans on average take more medications than others.

Other ways proposed to reduce overall health care spending include slowing the growth of Medicare reimbursement rates and reducing payments to hospitals when patients get an infection in the hospital. According to Guterman, one-fifth of Medicare patients readmitted to the hospital within a month after discharge are there because of an avoidable problem - lack of good follow-up care.

Also needing to be addressed, according to the Thompson Reuters report, is the practice of defensive medicine, which causes doctors to order up to 25 percent more tests than necessary out of malpractice fears; fraud and abuse; medical errors; and general overuse of expensive surgical procedures, diagnostic tests and medications when cheaper, equally effective alternatives exist.

End-of-life care that provides "neither comfort nor cure" is another huge consumer of wasted health care dollars, according to the Dartmouth Atlas of Health Care.

Overall, said Guterman, the system needs to become one that rewards cost-effective medical decisions and also high-quality treatments given when warranted. No one, he said, knows yet exactly what that new system should look like, but he believes that passage of a health reform bill would be a first step toward that end.

"The key," he said, "is to have a consistent set of expectations about what the health care system is supposed to do for patients. We don't have the answers right now, but we need to be willing to try new things, because what we have isn't going to be here in 10 years."

For her part, Donovan is grateful that the health care system worked when she needed it to, and that she can now walk, drive, climb stairs and work without constant pain.

Though knee replacement surgery is sometimes termed "elective," for her there was no choice, she said.

"I needed it. Otherwise, I'd be basically crippled," she said.