Our biggest problem in healthcare is efficiency (quality of care per dollar spent) and Obamacare doesn't solve it. Our spending is off the charts by any measure (growth over time, % of GDP, per capita) Consumerism as a force of change in Healthcare is just getting started, but there are many barriers in place that serve to protect existing stakeholders in the industry. Knocking down these barriers to competition is what the GOP should be focusing on, but it's not. "Repeal and replace" seems to be a slogan, not a plan. Do Republican lawmakers have the will to make changes that might upset entrenched players?
14 Ways to Cut Healthcare Costs and Improve Quality
1. Market-based
Healthcare Reform
14 ways to increase competition,
improve quality and reduce cost
January 2014
A billion dollars here, a billion
dollars there, and pretty soon
you're talking real money.
-Everett Dirksen
U.S. Senator 1951-69
2. Introduction
Healthcare was a mess long before Obamacare came along. It’s a complicated problem,
but reform really is possible. It’s just hard politically.
The next steps in reform need to clearly separate the two objectives of driving access to
care and driving efficiency of care (quality of healthcare per dollar spent). Both are noble
objectives, but they are not the same. The Patient Protection and Affordable Care Act
(aka Obamacare) focused almost entirely on expanding access to care, but it was sold
as equal parts access and efficiency improvement.
The GOP will never be able to toss out all of PPACA, nor should it try. Rightly or wrongly,
some of the access improvements (e.g. elimination of pre-existing conditions exclusions)
are far too popular to toss. The huge opportunity is in reforms to drive efficiency.
The most efficient industries are the ones with the most competition for customers – cars,
electronics, transportation, energy. Healthcare is inefficient because it lacks true
competition for our business. Lack of supplier and customer incentives are largely to
blame. These incentives have begun to change, but the change has only just begun.
Increasing incentives and eliminating the many barriers to true competition in healthcare
are the secrets to improving efficiency. What follows are some new and old ideas for
accelerating the changes that will bring better health outcomes per dollar.
4. Ugly Facts
Comparisons2
Norway #2-- $5,400/person, 9.6% of GDP (Norway is wealthier per capita than the U.S.)
Germany #7-- $4,200/person, 11.6% of GDP
OECD Median-- $3,200/person, 9.5% of GDP
• Annual U.S. healthcare spending is $2.9 trillion, $9,216/person
• This is about 18% (over a sixth) of our economy6
• No other nation comes close to these levels, even adjusting for
wealth differences1
5. American “Exceptionalism”
U.S. healthcare spending vs. OECD countries2
OECD is the Organization for Economic Co-operation and Development, consisting of 30 countries
considered high-income, and developed. It was established in 1948.
6. We pay a big premium for our healthcare
Are we getting our money’s worth?
• Life Expectancy
– U.S. ranked 23rd out of 30 within the 30 OECD nations1
• Cancer survival (5-year survival rate vs. OECD Median2)
– Breast - 5% better
– Cervical - 2% worse
– Colorectal - 3% better
• Ischemic stroke survival2 – Better
• Hemorrhagic Stroke survival2 – Worse
• Acute Myocardial Infarction survival2 – Better
• Asthma mortality (Ages 5-39)2 – Worse
• Diabetes, Lower extremity amputations2 – Worse
7. The Myth of Employer Health Plans
“My company provides my health benefits, so the
increases don’t affect me.”
Reality
Rising Benefit costs put downward pressure on Salaries
– Cost of an Employee = Salary + Benefits
Ballooning healthcare costs disadvantage U.S. companies
– GM’s healthcare costs add $1.5-$2.0K to the cost of each vehicle3
– GM’s global competitors do not have this problem
8. Healthcare Costs vs. Wages
Cumulative active employee health care cost increases vs. wage
increases
Source: Towers Watson Health Care Cost Survey 2010 (active employee data) and Bureau of Labor Statistics,
seasonally adjusted data from the Current Employment Statistics Survey August to August, 2000 – 2009
9. Where does the money go?9
2013 Total $2.9 Trillion
$899 Billion
$580 Billion
$290 Billion
$203 Billion
$203 Billion
$174 Billion
$551 Billion
Hospital Services
Other
Physician Services
Prescription Drugs
Dental, Other
Professional
Admin
Long term
Care
14. Excessive Costs for Diagnostic Imaging
Higher utilization and higher pricing of CT & MRI exams2
15. The Self-Referral Problem
When referring Physicians own an MRI machine their patients get
more MRI exams. 12
Press Release, November 30, 2011
CHICAGO – Physicians who have a financial interest in imaging equipment are more
likely to refer their patients for potentially unnecessary imaging exams, according to a
study presented today at the annual meeting of the Radiological Society of North
America (RSNA)…
During [2000-2006 study period], private office imaging utilization rates by non-
radiologists who control patient referral grew by 71 percent…
There were 86 percent more negative scans in the FI* group than the NFI** group,
indicating a significantly higher number of potentially unnecessary exams…
* FI Group – patients whose physicians had a financial interest in the MRI
**NFI Group – patients whose physicians did not have a financial interest in the MRI
16. How bad will it get?
Projections for family of four with employer-sponsored healthcare
8
17. • Growth of 3.9% since 2009 (Inflation = 1%, GDP growth = 2%)
• If ACA works as advertised, it won’t solve the cost problem.
• Healthcare spending growth is expected to accelerate as baby
boomers retire and ACA is implemented
But the cost curve is bending… isn’t it?
• Growth slowed since 2009 (fewer people employed, higher deductibles)
It’s getting worse less quickly, but the
“good news” won’t last.
18. We are in hot water!
If you put a frog into a pot of boiling water, it
will leap out right away to escape the danger.
But, if you put a frog in a kettle of cool water
and gradually heat the kettle until it starts
boiling, the frog will not become aware of the
threat until it is too late.
The frog's survival instincts are geared
toward detecting sudden changes.
Excessive healthcare cost growth has been the norm
for decades. The water is getting hot. Let’s not be frogs!
20. Healthcare Lacks Competition
In other markets
• We shop around; we get competitive bids; we go to Costco.
• We compare prices and customer ratings
• We love getting a great deal and we’re good at it.
In the healthcare market
• We make $10,000 purchase decisions without pricing or quality data
• We often pay no more when the price is higher.
– The “payer” does!
• We lack the incentive and the info to shop around, so we don’t.
Buyer incentives and provider transparency are the keys
21. Could greater competition reduce healthcare
costs and improve quality?
Is healthcare “special”, not governed by normal market
forces? NO!
• What would allow market forces to work in healthcare?
– Customer Incentives
• Everyone needs a reason to care about the true cost of their care
• Catastrophic care coverage with high deductibles
– Transparency
• Quality - Reliable data on outcomes, complication rates, patient
satisfaction
• Price - Up front information on the total price of care
– Fewer Barriers
• Eliminate unnecessary rules that restrict new competitors
22. The Payoff
Of a $1 trillion reduction in health spending….
•Puts more money in consumers’ pockets
•Improves competitiveness of U.S. companies
– Levels the playing field vs. global competitors
•Reduces deficits and debt
•Enables investments
– Healthcare for the poor
– Upgrading the energy grid
– Building roads and bridges
But how?
24. If U.S. healthcare spending per person
was equal to Germany’s, we would save
over $1 trillion/year*
* Difference between the U.S. and Germany’s health spending per capita(2) X U.S. population (311 million)
Reform does not mean sacrificing.
It means cutting waste.
If we matched the OECD Median, savings would be $1.5 trillion/year.
25. YES, EASILY!
Can we afford to reduce healthcare
spending by $1 trillion/year?
•$1 trillion reduction is $3,200/person
•Spending would go to $6,000/person
– This is the 2002 level (inflation adjusted)
27. Change Incentives to Unleash the Consumer
• When people have no reason to save resources, they waste them.
• Reward patients for cost effective health choices
– People who make financially irresponsible choices in managing their health
should pay more than people who don’t.
• e.g. Medication non-compliance, smoking, a sedentary lifestyle
1. Reduce the role of third party payers by reducing regulations
– Reduce the individual mandate to catastrophic events only
– Less mandated coverage means more consumerism, more competition
– Take the third party payer out of routine, predicable healthcare spending
2. Eliminate the tax distortion of employer health coverage
– It hides the true costs from employees
– Shift the money to employees & let them decide what insurance to buy
28. Reform the Third Party Payment System
3. Allow Insurance companies to compete across state lines
– Consumer choices are unnecessarily limited
– Current regulations prevent this, benefiting no one except large insurers
4. Increase Medicare copayments for those who can afford it.
– Medicare Part B average copayment rate has fallen by nearly half
during the past 35 years.
5. Provide beneficiaries with a defined level of support and
allow them to purchase insurance. Beneficiaries may
choose health plans with lower premiums but higher
deductibles and/or coinsurance than those in traditional
Medicare.
– Similar model to the Medicare prescription drug coverage
– Similar to proposal by Rep. Paul Ryan (R., Wis.) and Sen. Ron Wyden
(D., Ore.)
29. Increase Transparency of Information on
Healthcare Value
6. Prices of healthcare services must be communicated to
patients and/or family
– Require providers to give patients a “Good Faith Estimate” of all charges
to enable comparison shopping
– Life-threatening emergencies must be an exception
7. Quality and Outcomes data must be standardized, reported,
and made accessible to patients via web
– Imperfect data is better than no data
– Data integrity and granularity will improve over time
30. • AMA controls the supply of U.S. physician labor4,5
– Beyond defining education standards, AMA controls med school enrollment
– AMA has a financial interest in keeping physician supply low
• Shortages reduce competition, raising the cost of medical education,
driving up physician salaries
– If U.S. physician pay aligned with the UK, it would save $118 billion/yr
– If pay aligned with Germany, it would save $239 billion/yr
8. AMA should draft education standards, but should not be allowed to influence
the number of students enrolled or the # of medical schools
9. We must ease restrictions that make it difficult for internationally trained
physicians to practice medicine in the U.S.
The powerful American Medical Association restricts the supply of physicians
which bids up their compensation.
Eliminate Competitive Barriers due to Special
Interests: Physician Supply
31. Eliminate Competitive Barriers due to Special
Interests: Pricing
Create Transparency in Setting Medicare Prices13
• AMA’s Relative Value Update Committee (RUC) controls the Medicare price
list (Physician Fee Schedule)
• RUC holds secret, closed door meetings three times a year to adjust prices
paid by Medicare and followed by many private payers
• Meetings are invitation only, among AMA members
• Once prices are set, there is no transactional price competition for Medicare’s
business
10. The price-setting process should be externally audited with results
published
11. RUC Meetings should be open to the public with attendee lists and
meeting minutes published
32. Reducing U.S. Prescription Drug Prices
• Unlike oil, prescription drugs do not have global market-driven prices
• U.S. prices are almost double international prices2
– (Median of countries from following slide)
– Many countries (e.g. Canada) cap prescription drug prices
– High R&D spending by pharma companies is funded by higher U.S. drug
prices
• “Re-importing” U.S.-made drugs from low price countries is illegal
12. There are three reform options, each with risks
A. Medicare as price leader, negotiates prices that align with OECD markets
B. Legalize re-importation of U.S. drugs from low cost markets back to the U.S.
C. Shorten the duration of drug patents to speed availability of low cost
generics
33. Medical Malpractice and Defensive Medicine
“Overall annual medical liability system costs, including
defensive medicine, are estimated to be $55.6 billion* in
2008 dollars, or 2.4 percent of total health care spending.” 7
* Estimated total cost, not incremental vs. other nations
13. Cap jury awards to reduce the direct and indirect costs
of malpractice litigation.
34. Diagnostic Imaging
More frequent tests and higher pricing costs up to $67 billion/year
• U.S. doctors order CT & MRI scans at double the rate of
physicians in other nations2
• U.S. Prices for CT and MRI exams are nearly double
international prices2
• Stark Law was created to eliminate the self-referral problem
– Stark has huge exceptions11 that make it ineffective
– Eliminating self-referral would save tens of billions of dollars
14. “Self-Referral” and its overutilization of resources must be
reduced by adding teeth to the Stark Law
– More specificity in its application, greater penalties for violations
35. Waking up the Lions
Tackling a trillion dollars of entrenched spending will be a tough fight.
• These changes would threaten powerful special
interests
– American Medical Association (AMA)
– Pharmaceutical Research and Manufacturers of
America (PhRMA)
– Many, many others
• Reforms would be spun as “Healthcare Armageddon”
– Special interests will turn both parties against market-
based reforms– Remember “Death Panels”?
• There are risks and challenges in each of these
changes
– These are implementation issues, not justifications for
inaction!
– None are as big as the risk of not changing
36. American consumers are lions too!
If we want cost reform, we should start now.
• Runaway healthcare costs must become a
big voter issue
– Where’s the GOP Plan and sense of urgency?
• Demand a plan
– Obamacare adds to the cost problem
– Which type of cost reform do you want?
• Value-enhancing competition
• Single payer government system
– The current path is the worst possible option
• Start asking for prices before you make decisions
– Huge differences in prices exist
• e.g. MRI’s can vary by 400%
– It’s OK to shop around!
– We can can save money right now
37. Imagine…
Consumers with the information and the incentive to choose
healthcare services based on price, quality, outcomes, and patient
satisfaction data.
Doctors and hospitals competing with each other to earn our
business.
Those providing excellent care at reasonable prices thrive and
prosper. Others improve or go out of business.
A trillion dollars of hard dollar cost savings to fund expanded patient
access, invest and reduce debt.
An innovative, efficient healthcare market costing 12% of GDP.
This is not radical change! Many markets work this way
and 12% of GDP is plenty (almost $2 trillion).
38. Sources
1. McKinsey Global Institute publication, “Accounting for the Cost of U.S. Healthcare: A New Look at Why
Americans Spend More”, December 2008
2. Commonwealth Fund publication, “Issues in International Health Policy”, May 2012
3. “Healthcare Costs and U.S. Competitiveness”, Council on Foreign Relations, March 26, 2012
4. Forbes Magazine, “The Evil-Mongering Of The American Medical Association” August 26, 2009, Shikha Dalmia
5. “The Medical Cartel: Why are MD Salaries So High?”, Mark J. Perry
6. Assoc. Press, July 28, 2011. “U.S. health care spending to reach $13,710 per person by 2020, government
says”
7. “National Costs Of The Medical Liability System”, 2010, Health Affairs.
http://content.healthaffairs.org/content/29/9/1569.abstract
8. Center for American Progress, September 15, 2009.
http://www.americanprogress.org/issues/2009/09/family_health_spending.html
9. Centers for Medicare & Medicaid Services, Office of the Actuary, National Health Statistics Group, 2009
10. “Diagnostic Imaging Regulations’ Possible Benefit to Hospitals”, Hospitals & Health Networks, Scott Clay and
Gregory Milton, February 9, 2009.
http://www.hhnmag.com/hhnmag_app/jsp/articledisplay.jsp?dcrpath=HHNMAG/Article/data/02FEB2009/0
90203HHN_Online_Clay&domain=HHNMAG
11. Exceptions to the Stark Act. http://starklaws.uslegal.com/exceptions-to-the-stark-act/
12. Press Release: “Self-referral leads to more negative exams for patients” November 30, 2011. Matthew
Lungren, M.D., Sin-Ho Jung, Ph.D., and Peter Kranz, M.D. http://www.eurekalert.org/pub_releases/2011-
11/rson-slt111711.php
13. “The Secret World of Healthcare Pricing”, Marketplace, NPR, June 11, 2012.
http://www.marketplace.org/topics/life/health-care/secret-world-health-care-pricing
14. “The Wrong Remedy for Healthcare”, June 28, 2012. John F. Cogan, R. Glenn Hubbard, Daniel P. Kessler
15. Reuters, “No matter who wins, there’s still a healthcare cost crisis”, Reihan Salam, October 1, 2012
39. Market-based
Healthcare Reform
14 ways to increase competition,
improve quality and reduce cost
January 2014
A billion dollars here, a billion
dollars there, and pretty soon
you're talking real money.
-Everett Dirksen
U.S. Senator 1951-69