A new organizational structure is coming in health care

At our first meeting years ago, Tom Emerick, Walmart’s then VP of Global Benefits, told me, “No industry can grow continuously at a multiple of general inflation. It will eventually become so expensive that purchasers will simply abandon it.”

He said it casually, as though it was obvious and indisputable.

Health care is playing out this way. From 1999 to 2011, health care premium inflation grew steadily at 4 times the general inflation rate. During that same period, the percentage of non-elderly Americans with employer-sponsored health coverage fell from 69.2 to 58.6 percent, a 15.3 percent erosion rate.

Health care’s boosters like to argue that it has buttressed the economy, and that it means more jobs and economic prosperity within a community. A February 2011 Altarum Institute report estimated that private sector health care jobs now account for nearly 11 percent of total employment. Since the recession began in December 2007, health care employment has risen by 6.3 percent while employment in other industry sectors fell by 6.8 percent.

But there’s a darker side. Health care’s ever-increasing revenue growth has come at the expense of individuals and firms that pay its bills, directly, through health plan premiums and through taxes, often instead of buying other goods and services. It transfers wealth to health care from everyone else. Like the finance services industry, health care has become a disproportionate “taker” industry, sapping economic vitality of America’s communities.

And it is also clear that a sizable part of health care cost is inappropriate and unjustified. It is related to procedures that are done unnecessarily, markups that are hidden, and a thousand ruses to make it cost more. The prestigious National Academy of Sciences Institute of Medicine recently estimated this waste at 30 percent of total health care expenditures, or about $765 billion/year. But any number of health care professionals I’ve spoken with agree that, based on their experience, the number must be significantly higher. Other estimates have suggested this. In 2008, the consulting firm PwC issued The Price of Excess, which calculated that about 54.5 percent of health care cost, or nearly $1.5 trillion annually, focused in every sector – supply chain, health information technology, care delivery and finance – provides no value.

Institutional excess has made America’s health care costs double or more those in other industrialized nations’, with middling quality, meaning that we have the lowest value health care among our peer countries. The out-of-control practices that are taken for granted throughout the US have become the most significant threat to our national economic security.

I recently visited a Wisconsin community that, with four health systems for 75,000 people and virtually no price competition, is a clearly understandable microcosm of this problem. Employers I met with told me, “We have great health care here. But the costs are crushing us.”

Wisconsin average health care costs are higher – 6.1 percent – than the national average, but that’s not the real story. Someone has to be above the mean, and the costs in many states – Alaska, Connecticut, Maine, Massachusetts, and others – are higher than Wisconsin’s.

The real culprit is Wisconsin’s regional health care cost variation, which makes clear that health care organizations in some markets have pressed their advantages more successfully than others. A local group, Citizen Action, led by Robert Kraig PhD – Dr. Kraig was named “Consumer Health Advocate of the Year” in 2009 by Families USA – writes a superb annual report ranking health insurance cost in different Wisconsin communities. The 2012 report shows that Wisconsin’s highest cost market, La Crosse, is 16.8 percent higher than the national average.

Interestingly, Madison, Wisconsin’s 2nd largest community with more than a half-million people, has relatively low health care costs. There is a 32 percent difference – $2,177 per person per year – between the health care costs in Madison and La Crosse.

These health care cost differences are so large that they influence other economic market realities. Communities with higher health care costs are likely to have more uninsureds, and regional businesses are at a competitive disadvantage relative to those in communities with lower health care costs. Higher cost communities are less desirable for firms seeking to establish a presence in new locations.

In other words, despite what they might say at local Chamber meetings about being community-focused, health care organizations that pursue excessive health care cost practices that have become the norm undermine their communities’ welfare, opportunities and futures.

As I’ve described elsewhere, the tide is turning. Market forces are beginning to emerge in health care, and employers are beginning to stir. There’s more evidence than ever of non-health care businesses collaborating on health care, which could evolve into mobilization on both policy- and market-based efforts that seek to improve quality while driving down cost.

Meanwhile, people knowledgeable about the mechanisms that undergird health care’s excesses will increasingly exploit these as market opportunities to win for purchasers. A few of America’s health care organizations are actively engaged in developing more market-capable business practices. They seek to trade lower per patient revenues and margins for greater market share that will be drawn from their competitors.

Most, though, will remain resistant, and will hold onto the conventional, more lucrative (if less appropriate) ways as long as they can.

Which is why I believe a new organizational structure is coming in health care. Getting there won’t be pretty, though.

Brian Klepper is Chief Development Officer of WeCare TLC and blogs at Care and Cost.

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