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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  • buzzkillersmith

    So I guess your message is that HC costs a lot, people who pay are tired of that but providers are kinda OK with it, and at some indeterminate time in the future some undefined changes will take place. Oh, and people in location X do things differently from people in location Y. Well OK then.

    • http://www.thehappymd.com/ Dike Drummond MD

      you are such an excellent buzz killer. Mr. Smith
      Dike Drummond MD

      • buzzkillersmith

        I aim to please.

  • John Henry

    I’m not sure what to make about the comparison between LaCrosse and Madison health care costs. Madison is a large university city, with a population of students and younger employed people and younger families; I might expect the costs there to be less on average per person, certainly less per person than for a community without a large state research university.

    I’m not sure what alternatives this writer thinks are coming that are going to change the picture on the costs of health care. Health care services are highly regulated and labor intensive and require highly skilled and expensively trained people to deliver them, and in a much more direct way than say manufacturing. There are also many more health care goods and services available to consume in the past, significantly increasing the costs per consumer who uses those services.

    Do you think the ACO is the big change coming? All it is is a re-run of capitated care. It has been done before an was rejected by consumers who didn’t want to be limited in their choices of services by their doctors and insurers. If the nation wanted more Kaisers, don’t you think by now we would have them?

    Insurance companies already negotiate and fix payments for specific services. Many already limit testing to specific labs and imaging centers. The only means by which I see any significant savings coming is if patients are limited to less variety and quantity of services than they presently consume and are forced to pay more out of pocket for anything outside of those more circumscribed choices.

  • Rob Tilley

    30% unnecessary costs? After practicing for 30 years I have to say that isn’t true. Puts this article into the hidden agenda category.

    • http://www.thehappymd.com/ Dike Drummond MD

      I think you are talking about this from a personal perspective … as in “30% of what I order is not unnecessary”. That is probably true for you as an individual. AND from a systems point of view I am certain 30% is low. Here is one simple and politically unpopular example.

      Studies years ago showed that simply moving to a single payor system would cut US healthcare costs in half – there is 50% unnecessary right there. AND I realize that our political climate won’t allow the change to single payor. It does prompt this question though.

      What additional benefit does having legions of private insurance companies making profits on healthcare provide to the patient, the country or the businesses paying most of the insurance premiums?

      You will undoubtedly say that I have an agenda. However, what is your answer to that question?

      Dike Drummond MD

    • http://twitter.com/nhygv nhygv

      Any service industry that has not been rigorous in attending to value delivery will carry approx 40% excess cost. In healthcare this can be viewed as waste or nugatory effort. For example a med sec logged her time and found that 16 hrs per 40hr week were spent handling patient calls generated from a (rather long) paediatric ENT surgical waiting list. Her work was helpful but was caused by a waiting list that should not have existed in the first place. One of many examples.

  • http://twitter.com/Jillhs Jillhs

    As a Registered Nurse working at a large non-profit, urban hospital, my first impression is that you are very far removed from any actual healthcare. From my perspective, the true offenders are insurance companies, pharmaceutical companies and lawyers. I saw a recent breakdown of the salaries of top health insurance executives, of course multi-millions, breaking down to 40 – 50k/day – obscene. An uninsured person presents at my emergency department needing treatment, by law, we must treat them. Upon discharge, they may need several prescriptions to alleviate their malady. When the price for these much needed medications can easily go into the hundreds of dollars for someone without insurance, they are often not filled. The person does not get better, and frequently comes back to the ED. A far as the unnecessary procedures, we are often trying to rule out what it could be when attempting to make a diagnosis… So yes, when its determined that the problem is____, maybe ____ test or procedure want necessary. But try telling a patients family or family’s attorney that we didn’t do an ERCP or draw a Ca-19 lab because we didn’t think it was necessary – ”whoops, we missed your pancreatic cancer, but its so rare, we really didn’t it was necessary. It would just cost too much if we did those tests and procedures on everyone who presented with abdominal pain and loss of appetite.”

    • Paula Sims, MD

      Is it worth the high cost of health care to save that one person with pancreatic cancer when the price is that so many people will have no health care because they can’t afford it, and not be able to afford that ERCP or Ca-19 lab? It is the individual health care provider’s responsibility to care for that one patient, but the industry’s job to determine cost effectiveness. Abdominal pain and loss of appetite, to continue with your example, don’t usually mean pancreatic cancer. That’s where more in depth history and physical exam come into play, to use that ERCP only when indicated, not to CYA.

      • disqus_5DNk4kfN4w

        Dr. Sims, respectfully your laudable endeavors in med school and practice typically shape a certain mental discipline that is revealed in your post above. To isolate *one* relatively inexpensive test and compare it to *one* devastating diagnosis, as though that justified every healthcare expense, is unfortunately a very flawed debate technique that not only doesn’t get to the real issue, it helps to mask it. As a true model of the cost problem, you have to look at the cost of ALL the tests that could be performed per broad diagnosis area (considering the outliers, defensive medicine and the explosion in diagnostic technogies) multiple that by ALL the patients presenting, then do that for all diagnoses and finally evaluate that total cost against all the confirmed diagnoses for which medical intervention is actually *productive*. Of course, this is not the way one would expect any physician to run his/her practice, but it at least puts the issue in the proper light. I think it is pretty clear that this model reveals what has put us in such an unsolvable mess as almost everyone in HC conflates the utopian imperative of saving every life with what will sooner or later become the inescapable resource management issues.

  • http://www.facebook.com/barbara.alexander.14 Barbara Alexander

    I am truly offended by the assertion that health care is a “taker” of resources. On its’ face, this statement is LUDICROUS!! Name ONE industry which does NOT “take.” I am an RN who, over the years, has observed overt greed on the part of executives create the need to use INFERIOR supplies in delivering care to my patients. I realize the depth of a multifaceted problem here, including overseas manufacturing, a sense of “entitlement” by the upper echelon, and the very NECESSITY of offering and providing health care.

    In addition, I would like to balance this entire discussion with this reality:
    Class action law suits today are a HUGE BUSINESS for which many legal professionals compete mightily. Medical malpractice suits fall into the same category, especially those which promise a substantial award. How much of an impact does this practice have on the health care costs? This may be my new mission in life…an attempt to define the financial impact this particular business has on health care costs. Anyone else interested?

    • Ventjock

      Defensive medicine by many sources accounts for less than 5% of total healthcare costs. There are bigger pieces of the “healthcare cost” pie which should first be addressed.

  • http://twitter.com/nhygv nhygv

    This reworks material that has been known but rarely actively acknowledged for many years despite this equally-familiar slightly-outraged sytle of presentation. And the conclusion is that something new but unspecified is coming to solve the problem.Feels a bit like cargo culture has reached USA. It might advance the debate if a solution could be specified beyond the bland “new organizational structure” mentioned with no evidence to underpin that conclusion.

    The implication is that we do not yet know the solution – comforting perhaps if it was true. Is it? Or is that just an excuse for inactivity and failure to confront suppliers?

    A 1956 study concluded that there was no defined “enough spent” limit in healthcare – there was always scope for more. One solution option is a parental controlling approach but that is unlikely to be accepted in a US free economy. What other forms will create a limit on consumption. Can it include theose unable tp pay personally?

  • Paula Sims, MD

    If those in power realize there is at least a 30% waste, why can’t something be done? I think we do need more oversight, and the money to pay salary would come from the money saved. I am an MD now working, among other places, at an MRI facility. I am amazed at how many doctors don’t know how or why to order an MRI, and don’t like to be corrected, so $1500 is wasted on a wrong diagnostic procedure. It seems everyone with vertigo or hearing loss gets a brain MRI with contrast ($2000), even if the indications are wrong. Yes, Barbara Alexander, I think it is done more for legal reasons.
    Another reason for waste- doctors don’t know how to do history and physical exams anymore. In med school I was taught that 85% of diagnosis comes from history, 10% from physical exam, and only 5% from further testing. Nowadays, doctors (and NP’s, etc.) go right for the diagnostic procedure. Heart exam notes now consist of “S1, S2″ with no description of whether they are normal or not, or anything else. Go right for the echo and stress test for heart exams!

    And then there are the outright cheaters and fraud.

    • GS61

      Dr. Sims, I agree with your assessment that an intensive taking of history and physical is needed to root in or out what needs to follow in a visit with the physician or NPP. But, I want to point out that working from an office or hospital setting really does not tell you alot about your client. Working from a home setting does. You’ll be amazed what you find out about your clients in the comfort of their home. Thus, my desire to see increased home visitations by health care clinicians.

      My hope is that any changes in organzational structure take the home setting as well as prevention and wellness into account. Prevention and wellness is about the only thing in my mind that will aid in lowering health care costs.

      • DixieAngel_76

        And the repeal of “0bamacare”.

        • Ventjock

          While Obamacare isn’t a fix, it is helping the industry move in the right direction from “Fee for Service” to “Fee for Quality/Outcomes”

  • DixieAngel_76

    Getting there won’t happen at all, now that the Feds have totally taken over health care. In my opinion it is government meddling that is 95% responsible for the high cost of medical care. Like anything else they touch, they will ruin it. Don’t believe me? Stroll into your local post office (while you still have one) and see how you like the “service”.

    • Ventjock

      The market doesn’t work in healthcare. Government intervention or not, the system requires new incentives. Less payors would mean less paperwork/administrative burden to lower the cost of HC.

  • http://www.facebook.com/Jeanemaki Jean E Maki

    Hard message to receive, especially when in the work place the message is to cut costs and increase production alongside providing the highest quality of patient care ever. Aren’t we doing enough? There are so many good souls doing the best and most they can for the sake of others, which is the fundamental foundation of health care. Unfortunately, the data shows we are headed towards a brick wall where affordable access and cost of providing those costs will collide. I fear geniune access to healthcare services will be reduced to only a segment of the population with the means (will that be me?) while the rest of the population will receive a generic version of healthcare services. What is stopping America from providing the best to all? Is it greed at the top of the chain? Or is it the massive healthcare machine that we can’t stop. Well, maybe the brick wall will stop it.

  • DeejayAustin

    Dr. Pho, my first take on your post (with several great points, thank you) is that everyone needs to distinguish in the discourse the cost of *healthcare* from the cost of healthcare *insurance* (which you were mostly talking about), and you might strongly suggest that commenters do the same. We really miss the *worst* causes for rising insurance premiums (mostly public and private policy and administration) when distracted by impassioned comments about soaring prices of meds, medical devices and diagnostics and the horrible inefficiencies of HC IT – which deserve their own focused discussions.

    Many of the things being done in the realm of healthcare reform fundamentally work AGAINST the true nature and drivers of “insurance” and the discourse is, IMO, being manipulated to maximize confusion among the populace and provide a smokescreen for various parties to further their own agendas.

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