model, let’s look at why the current model just isn’t working.
A MODEL IN NEED OF REPAIR
There is a plethora of ways that the current model is broken, tracing back to World War II, when employers added health care benefits as a way around wage controls. The evidence for the current breakdown includes:
■ Costs have roughly doubled every eight years for the last four decades. At this rate, health benefits could equal base pay for many jobs within a decade. Some manufacturers report that the cost of insuring their workers exceeds that of production materials.
■ Costs per employee for family coverage average $16,351 in the United States, according to the Kaiser Family Foundation, and exceed $20,000 in many organizations. Those are painfully high numbers for any employer.
■ The Milliman Medical Index put 2013 costs at $22,030 per family of four, split 58 percent to the employer and 42 percent to employee in the combination of premiums, deductibles, and copays. The employee share of $9,144 exceeds the cost of food for most families.
■ Prices for procedures vary wildly—as much as 300 to 400 percent within regions, even from hospital to hospital and clinic to clinic within the same health system. It is pricing chaos.
■ More than 40 percent of U.S. companies don’t offer health care insurance. The prime reason is escalating costs.
■ Medical bills are now the leading cause of personal bankruptcy in the country.
■ The U.S. government has been running trillion-dollar annual deficits, with health care entitlements a leading cause of the red ink. Major national priorities like education and environmental advances are being crowded out. A recent defense secretary said the Pentagon spends more on health care than on weapons.
■ Many state budgets hemorrhage red ink or incur greater debt because of undermanaged health costs, especially in Medicaid.
■ Some municipalities have gone bankrupt, with public employee health costs as a major contributor to their insolvency.
A recent defense secretary said the Pentagon spends more on health care than on weapons.
This catalog of negative consequences adds up to a complete indictment of the existing business model for medicine, even as doctors and their teams deliver minor miracles on a daily basis on the treatment side. U.S. physicians and nurses are on the cutting edge when people get sick. Almost all practitioners deliver empathetic, professional, caring service.
But fixing sick people isn’t good enough if it bankrupts or financially stresses them, their companies, and governments in the process. The economic side of medicine has to be as effective as the medical side.
The Hippocratic Oath for physicians—“First, Do No Harm”—has to extend beyond medical outcomes to the economics of care.
WHO’S GOING TO FIX IT?
Unrelenting health care inflation has generated extreme frustration at private companies. Unlike public sector business managers, they cannot pass along cost escalation. Their customers won’t allow them to pass along excess costs. With nowhere to turn for relief, private sector payers are revolting. They have learned that management has been the missing link in U.S. health care, that management disciplines have to be brought to bear.
Put on another hat. Think about what a turnaround manager would do if confronted with a totally busted business model, one that has been going the wrong way for decades? The turnaround guru would look at the existing players—insurance companies, provider organizations, policy wonks, health care academics, and political experts in health care—and that manager would be highly skeptical of their ability to turn things around. That manager would conclude that the major players in health care have been talking reform for decades but have demonstrated little success.
Major players in health care have been talking reform for decades but have demonstrated little success.
Our expert would be looking for a clean sheet of paper. Our turnaround tough guy would look for a new business model.
Some hospital initiatives have slowed the cost escalation, especially among providers that have employed the lean disciplines that were introduced into manufacturing with great success 40 years ago. But only about 1 percent of providers, like the Cleveland Clinic and Gundersen Health and ThedaCare in Wisconsin, have adopted transformational lean methods.
Provider corporations that own hospitals and clinics, whether for-profit or not-for-profit, have had little incentive to fix the old system heretofore. These huge organizations have profited handsomely in the current dysfunctional environment. While they face government price controls, they face neither market disciplines nor regulatory price controls on their private sector book of business. They see limited competition. This means there is little incentive to cut costs. They are almost immovable objects. Why should they move? Life, for them, is good.
Provider corporations...have profited handsomely in the current dysfunctional environment.
It is also good for health insurers.
Since the main assets of health insurance companies are their networks of providers and the volume discounts they bargain for, it’s unrealistic to expect them to be agents for reform. Why would they push their de facto partners hard when they need them and when they get a cut of the rising costs? Indeed, they have a huge disincentive to drive down overall costs and premium prices, since doing so would reduce their revenue increases.
The Affordable Care Act may expand health care coverage to 94 percent of Americans, but it makes the cost outlook worse. Under “medical loss ratio” rules, health insurers may keep for themselves no more than 15 percent of large company plan premiums and no more than 20 percent of small company premiums. This gives them every reason to want the other 85 percent or 80 percent—the amount they’re obliged to spend on medical care and quality improvement—to be as high as possible so their 15 percent to 20 percent cut in dollars is protected.
It’s not that health insurance companies aren’t seeking some efficiencies, but their intrinsic motivations for reform are not compelling. Cost reduction is just not where they live day in and day out.
Would-be reformers who assume that competition among insurance companies will rectify the economic ills of medicine in America are simply misguided. Competition among third-party payers has existed for decades, with little resulting reform. Why would that change going forward?
The real horse to ride for reform has to be the payers—employers and their employees as consumers. Because of the economic pain surrounding
