A Practical Model to Achieve
Health Reform
2008 World Health Care Congress
George C. Halvorson
Chairman and Chief Executive Officer,
Kaiser Foundation Health Plan, Inc., Kaiser Foundation Hospitals
April 21, 2008
1

Dedicated to
Dr. Jerome H. Grossman
2

American health care could
be transformed fairly quickly if
a number of high leverage
buyers chose to strategically
use their market leverage
3

Health care reform needs to be
a “product” -- purchased and
paid for by high leverage buyers
in a well designed, sophisticated
and carefully targeted
purchasing strategy
4

Health care purchasers have
great leverage relative to
getting health plans to reform
key elements of care
5

Old Market Reality
-- Hundreds of “slices”
-- Commodity products
-- Financial conduits -- rather
than care managers
6

New Market Reality
-- Sumo wrestling
-- Total replacements
-- Shrinking total market
-- Growth needed to fuel
stock value
7

Health Care in America
is becoming unaffordable.
Financing Reform alone
can not fix affordability.
8

Ideally, care delivery and
care financing should be
closely synchronized --
even choreographed -- as
reform efforts
9

Most reformers focus on
one or the other -- with
“financing” getting the most
attention most of the time
10

That is a mistake
11

We definitely do need key
elements of financing reform
12

We definitely do need key
elements of financing reform
Several approaches make sense:
(Universal Coverage -- Individual
mandates -- Guaranteed issue --
Subsidized coverage for low
income people)
13

We need to learn how other
industrialized countries have
achieved universal coverage --
with a focus on the relevance of
key European systems to
American care and coverage
approaches
14

BUT --
Financing reform without
care delivery reform would
be a major operational and
economic error
15

Health care cost
increases are the
major reason we need
health care reform
16

Health care costs
come from health
care delivery
17

Care delivery in the U.S. is
uncoordinated, unfocused,
inconsistent, unmeasured,
extremely inefficient, perversely
incented, excessively expensive
and sometimes dangerous.
18

Health care delivery is,
however, the fastest
growing and most
profitable segment of the
whole U.S. economy
19

As an industry -- as a business
model -- health care is winning.
It is taking everyone’s money
with an amazingly low level of
accountability for the product it
sells.
20

We need to face the simple
reality that -- Health care
will never reform itself.
21

Health care is
full of smart people
22

Smart people do not kill the geese
who lay lots of golden eggs.
Health care is awash in both
golden eggs and very smart
people.
23

We need to remember that the
people who depend on a cash flow
of fees to stay in business and
serve patients will not, voluntarily,
take independent steps to reduce
the flow of those fees
24

In today’s world, more
efficient and effective
caregivers simply deprive
themselves of income
25

Asthma:
$200 to prevent
$10,000 to treat
26

Many Treat
Few Prevent
27

So what should we do?
28

Reform care
29

A few hard truths about
health care in America,
today:
30

Truth One
-- Current levels of increases in
health care costs are unsustainable
-- At current rates of increase,
Medicare and Medicaid will be the
size of today’s entire federal budget
by the year 2050
31

Truth Two
-- Health care quality is
inconsistent, often inadequate,
and too often dangerous
32

Rand Data
-- Barely 50% of American diabetics
receive appropriate care -- measured
by individual care protocols
-- Barely 10% of America’s diabetics
receive the full package of needed
care
33

Diabetes is the fastest growing
disease in America --
-- The number one cause of Kidney
failure, blindness and amputations
-- The number one co-morbidity causing
death from heart disease
-- Diabetics spend 32% of Medicare
expenses
34

Truth Three
Health Care costs are not evenly
distributed across the entire
population:
1% = 35% of costs
35

Cost Distribution of Care
Population Cost
35%
1%
$300 per month average cost
Break even cost insuring one percent: $12,000 per month
36

50% = 3% of costs
20% = 0% of costs
½% = 25% of costs
________________________________________________________________________________________________________________
Costs are not evenly distributed
37

U.S. Population U.S. Care Costs
10% 80%
38

Truth Four
-- Some diseases cost a
lot more than others
-- Acute care costs are not
the key cost driver
39

Total Cost of Care In America
Chronic Care
75% Acute
Care
25%
Chronic Care vs. Acute Care
40

Chronic care costs
can be impacted
(Rand data -- only 30% to 50% of
patients receive right care now)
41

Truth Five
Benefit design has been clumsy
and even inept. Current benefit
plans either insulate consumers
from the costs of care -- or
disincent patients from receiving
high leverage care.
42

So what are the realities we
need to face to achieve real
health care reform?
We need to understand the
basic cost drivers.
43

Cost Drivers
Normal inflation
2008 2010 2020
Cost Mitigators (Inflation)
44

Basic Inflation -- heat, light,
salaries, benefits
Additional Pressure --
health care worker shortages
(lab techs, nurses, etc.)
45

Office Visit Fee --
Canada and U.S.
$73
$23
Canada United States
46

Obstetrician Income
$290,000
$270,000
$250,000
$230,000
$210,000
$190,000
$170,000
$150,000
Canada United United
Kingdom States
47

Medical Specialist Income
$260,000
$240,000
$220,000
$200,000
$180,000
$160,000
$140,000
$120,000
$100,000
Canada France United
States
48

Cost Differences –
U.S. versus Canada
Care
Costs Administrative
Costs
20%
80%
49

Basic Inflation
We start with a higher base
and then add both normal
costs of inflation (and inflation
results from worker shortages)
50

Cost Drivers
s, genetics,
ts, new drugnew science
en
y, new treatm
New technolog
Normal inflation
2008 2010 2020
Cost Mitigators (Technology)
51

Number of MRI Machines
30.0
Per Million People
25.0
20.0
15.0
10.0
5.0
0.0
Canada Germany United States
Source: OECD
52

Number of CT Machines
35
Per Million People
30
25
20
15
10
5
0
Canada Germany United States
Source: OECD
53

Total Transplants
30,000
25,000
20,000
15,000
10,000
5,000
0
Canada France United States
Source: OECD, BMJ
54

Liver Transplants
Per Million People
24
22
20
18
16
14
12
10
Canada France United States
Source: OECD
55

Solid Organ Transplants Per Million
People – California and Canada
100
90
90
80
70
59
60
50
40
30
20
10
California Canada
56

One-Third of California Transplants Would
Not Have Happened Using Canadian Ratios
3,510 3,242
3,010
2,510
1905
2,010
1,510
1,117
1,010
510
10
California Canada Non-
transplants
57

-- New drugs and new technologies
do not go through a value screen
of any kind in the U.S.
-- Manufacturers’ profitability and
provider profitability are the twin
driving technology business
models -- not value
58

Cost Drivers
nked care
coordinated, unli s, genetics,
Inefficient, un en ts, new drugnew science
y, new treatm
N ew technolog
Normal inflation
2008 2010 2020
Cost Mitigators (Inefficiency)
59

-- Co-morbidities drive most costs
-- Care linkage deficiencies abound
-- 10,000 fees for units of care
-- No reward for outcomes or
results
60

We need to make care
linkages a core
competency of American
health care
61

Cost Drivers
e data
f ormanc
ero per
egivers/z
ted car
ly incen nked care
P erverse coordin ated, unli s, genetics,
Inefficient, un en ts, new drugnew science
y, new treatm
N ew technolog
Normal inflation
2008 2010 2020
Cost Mitigators (Perverse Incentives)
62

Cost Drivers
e data
f ormanc
tion ero per
p opula are givers/z
Aging ely incented c nked care
P ervers coordin ated, unli s, genetics,
Inefficient, un en ts, new drugnew science
y, new treatm
N ew technolog
Normal inflation
2008 2010 2020
Cost Mitigators (Aging)
63

Per Capita Annualized Health Care Costs
By Age Group
$12,000
$10,000
$8,000
$6,000
$4,000
$2,000
$0
0-18 19-44 45-54 55-64 65+
Source: CMS
64

Population Over 65
(in millions)
20
15
10
5
0
2010 2020 2030
Source: U.S. Census Bureau
65

Cost Drivers
e data
f ormanc
tion ero per
p opula are givers/z
Aging ely incented c nked care
P ervers coordin ated, unli s, genetics,
Inefficient, un en ts, new drugnew science
y, new treatm
N ew technolog
Normal inflation
2008 2010 2020
Cost Mitigators: So what can we do?
We can’t stop aging, inflation, new technology, and provider
financial motivations
66

So what can be done to
mitigate the increasing
cost of care?
67

Opportunities exist that are
sufficient to offset the health
care cost drivers.
We have to make some smart
choices and wise decisions
about available cost mitigators.
68

Cost Drivers
e data
f ormanc
tion ero per
p opula are givers/z
Aging ely incented c nked care
P ervers coordin ated, unli s, genetics,
Inefficient, un en ts, new drugnew science
y, new treatm
N ew technolog
Normal inflation
2008 2010 2020
Focus on chronic co
nditions
Cost Mitigators (Chronic Focus)
69

We need to focus first
on the low hanging fruit
70

Five conditions drive over
50% of all costs
(CHF, Asthma, Diabetes,
Coronary Artery Disease,
Depression)
71

We need to start with focus --
we can’t fix everything at
once. We can fix some things
that costs a lot of money.
72

Medicare Diabetes Expense
68%
Cost of care
32% for Diabetic
patients
As a Portion of Total
Medicare Costs
73

All five conditions lend
themselves to major
improvements in care
levels and costs
74

Percent of American Diabetics
Receiving “Right” Care
92%
8%
Not Right Care \"Right Care\"
75

We should determine as a
matter of national public
policy that we should and will
focus our efforts on improving
care for a specific and
defined set of conditions
76

-- Then --
We should do what needs to
be done and can be done to
significantly improve care
delivery for patients with
those conditions
77

Cost Drivers
e data
f ormanc
tion ero per
p opula are givers/z
Aging ely incented c nked care
P ervers coordin ated, unli s, genetics,
Inefficient, un en ts, new drugnew science
y, new treatm
N ew technolog
Normal inflation
2008 2010 2020
Focus on chronic co
nditions
High-leverage
targeted care
re-engineering
Cost Mitigators (Care re-engineering)
78

We need to put the
tools in place needed
to do that work
79

Tools:
• Benefit redesign
• Public messaging
• Care tracking (PHRs/EMRs)
• “Mandatory” care registries and
care linkages
80

Care Support Registries
For 5 percent of the population this
tool could functionally synchronize
and coordinate care, massively
improve care, and relatively quickly
reduce the cost of care
81

This will be a major change
Process engineering is almost
completely unused in health
care today. There is a lot of
very low hanging fruit.
82

Nurses spend 26 percent of their
time on direct patient care
Nurses spend much more time
on paperwork than they do on
patients
83

The delivery system will
redesign important parts of
itself when those goals are
set and someone is paid to
achieve them
84

Process engineering and
re-engineering are relevant
only when processes have
goals
85

Random re-engineering
does not create progress
86

Care coordination will be a tool
that gets used very effectively
when there is a specific
outcome that can best be
achieved by using that tool
87

We will not get to reform or
care coordination on the
current path by doing a million,
tiny, local, uncoordinated
quality improvement projects --
all “one off,” none transferable
88

Care re-engineering
-- hospital process protocols (shift
changes, electronic prescriptions)
-- e-care, mini-clinic care, patient-
focused care
-- Two tracks -- support for the areas
of focus and basic things that just
plain need to be fixed (never events)
89

Hospital Safety Results
Hospital Composite of Surgery Infection Control: 2005 - 2007
100%
A
Fresno
B
Hayw ard
90% Manteca
C
Northern Calif ornia
D
Oakland
E
80% Redw ood City
F
Sacramento
G
San Francisco
70% H
San Raf ael
I
Santa Clara
J
60% Santa Rosa
K
Santa Teresa
L
South Sacramento
50% M
South San Francisco
N
V allejo
O
Walnut Creek
40%
Q3-05 Q4-05 Q1-06 Q2-06 Q3-06 Q4-06 Q1-07 Q2-07 Q3-07
90

We need to make care
linkages a core
competency of
American health care
91

Chronic Care is a team sport.
Acute Care can be an
individual effort and market
model.
92

Need to use the full tool kit for
chronic care:
1) Focus
2) Public commitment/support
3) Buyer commitment/Mandates/Specifications
4) Health plan commitment/competition
5) Consumer commitment
6) Electronic care data (PHR’s/EMR’s)
7) Benefit changes
8) Computerized care support registries
93

Teams need captains
and care coordination
94

Someone or some thing has
to be at the center of the
care experience for optimal
chronic care
95

That central point can be
1. A caregiver
2. A team of caregivers
3. A care coordinator
4. A virtual care coordinator
96

Pick one -- and set the cash
flow up to make it happen
97

That is our opportunity.
We should be able to cut
kidney failures in half with
best care.
98

Start with the goal --
work backward to the
tool(s)
99

Cost Drivers
e data
f ormanc
tion ero per
p opula are givers/z
Aging ely incented c nked care
P ervers coordin ated, unli s, genetics,
Inefficient, un en ts, new drugnew science
y, new treatm
N ew technolog
Normal inflation
2008 2010 2020
Focus on chronic co
nditions
High-leverage
targeted care
Benefit re re-engineering
design
Cost Mitigators (Benefit Redesign)
100

Rule One
Benefit design should
support the care
improvement plan
101

Rule Two
Benefit design should support
real consumer choices and
caregiver competition
102

Cost Drivers
e data
f ormanc
tion ero per
p opula are givers/z
Aging ely incented c nked care
P ervers coordin ated, unli s, genetics,
Inefficient, un en ts, new drugnew science
y, new treatm
N ew technolog
Normal inflation
2008 2010 2020
Focus on chronic co
nditions
High-leverage
targeted care
Benefit re re-engineering
design
Value b
ased pr
ovider c
ompetit
ion
Cost Mitigators (Provider Competition)
103

Example One
Maternity Care
Package Price
Hospital One $5,000
Hospital Two $9,000
104

Competitive Impact of a
$2,000 deductible
Caregivers Package Deductible Consumer
Price Pays
Hospital One $5,000 $2,000 $2,000
Hospital Two $9,000 $2,000 $2,000
105

Competitive impact of a
“Base Pay/Fixed Price” benefit
design ($4,000 basic benefit)
Caregivers Package Basic Consumer
Price Payment Pays
Hospital One $5,000 $4,000 $1,000
Hospital Two $9,000 $4,000 $5,000
(Lower prices are rewarded)
106

A “base-pay/fixed price” benefit
model creates real provider
competition on price that does not
exist with a full pay, flat co-pay, or
a low deductible benefit package
107

What happens when
providers compete on price?
LASIK Eye Surgery
$2,500 $2,000 $1,500 $1,000 $500
$250
108

The eye surgery process was
reengineered, from top to bottom--
New Staffing
New Chairs
New Laser
New Pain Killer
New Process
109

Cost Drivers and Mitigators For American Health Care
e data
f ormanc
tion ero per
p opula are givers/z
Aging ely incented c nked care
P ervers coordin ated, unli s, genetics,
Inefficient, un en ts, new drugnew science
y, new treatm
N ew technolog
Normal inflation
2008 2010 2020
Focus on chronic co
nditions
High-leverage
targeted care
Benefit re re-engineering
design
Value b
Health ased provide
reform r comp
as a v etition
iable b
usines
s mod
el
Cost Mitigators (Health Reform as a Business Model)
110

Someone needs to be
paid to reform health care
or reform will not happen
111

Only buyers control the
cash flow that fuels the
care system
112

We need vendors who
survive and thrive by
reforming care delivery
113

“IV” Specifications -- What Should
Buyers Insist on from the Vendors?
1)PHR’s
2)Disease management
3)Targeted conditions
4)Computerized care registries
5)Targeted outcomes data
114

Buyer Goals
-- Virtual second opinions
-- Provider price competition
115

Cost Drivers and Mitigators
For American Health Care
data
rmance
on ro perfo
po pulati areg ivers/ze
Aging ely incented c nked care
Pe rvers ordin ated, unli s genetics,
Ineffic ient, unco nts, new drugn, w science
, new treatme e
Ne w technology
Normal inflation
2008 2010 2020
Focus on chronic co
nditions
High leverage
targeted care
Benefit re re-engineering
Value b design
Health ased provide
Bette reform as r comp
r hea etition
a viab
lth le bus
iness
mode
l
Cost Mitigators (Better Health)
116

Prevention needs to be part
of the total package, even
though prevention is not
“low hanging fruit.”
117

Diabetics spend 32%
of the cost of Medicare
118

Walking half an hour a
day, five days a week
cuts the incidence of
diabetes by 40%
119

Public Health Basic Steps
1) Walking
2) No transfats
3) Limited/labeled saturated fats
4) Huge smoking tax
120

Buyers need to specify
health improvement as
a vendor agenda and
performance goal
121

If we are going to save
Medicare, effective
levels of prevention are
absolutely essential
122

We need to stop hoping for
magic solutions and silver bullets
and we need to stop thinking that
the current cost drivers are
inevitable, invincible,
insurmountable, and inherent to
the economics of American care
123

Affordable health care costs:
The “mitigators” have the
power to offset the “drivers.”
124

Cost Impact?
Re-engineering 10-30%
Chronic conditions 10-30%
Unit price competition 5-20%
Health impact 10-30%
Informed care choices 5-20%
125

Cost Drivers and Mitigators
For American Health Care
a
nce dat
erforma
popul
ation s/zero p
a regiver
Aging ely incented c ked care
Pe rver s
ordina ted, unlin s genetics,
ient, unco , new drugn, w science
Ineffic ew treatments e
New technology, n
Normal inflation
2008 2010 2020
Focus on chronic co
nditions
High leverage
targeted care
Benefit re re-engineering
design
Value b
Health ased provide
Bette reform as r comp
r hea etition
a viab
lth le bus
iness
mode
l
126

We need enlightened health
care policy -- starting with our
major employers -- who need
to become high leverage,
high power, highly focused,
purchasers of care reform
127

At Kaiser Permanente --
We are on a pathway to
model best care:
128

Our Pathway
-- Consistent best care
-- Computer supported care
-- Linked caregivers
-- Focused on high cost, high
need, high opportunity patients
-- Targeted toward improved
health
129

We have spent nearly
four billion dollars
putting major portions of
that tool kit in place
130

America needs to build a
health care policy agenda
based on real care reform
131

We need to use an
approach that builds on
natural market incentives or
the solution will fail
132

Be Well
133