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The Economics of Quality in Healthcare

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We don’t have a functional competitive market in health care in the U.S. Consequently, many of the attributes of competitive markets that are beneficial in our lives are not present in health care. One significant negative externality of a dysfunctional market is an inability to discern quality. Consumerism is critical. Includes data and analysis from the 5TH ANNUAL HEALTHGRADES PATIENT SAFETY IN AMERICAN HOSPITALS STUDY – APRIL 2008

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The Economics of Quality in Healthcare

  1. 1. TTUHSC - EL PASO - 3RD ANNUAL OB/GYN SYMPOSIUM APRIL 18, 2008 DON MCDANIEL CAREY BUSINESS SCHOOL THE JOHNS HOPKINS UNIVERSITY THE ECONOMICS OF QUALITY IN HEALTH CARE
  2. 2. AGENDA <ul><li>Let’s get started! </li></ul><ul><li>Working premise </li></ul><ul><li>You call this a market? </li></ul><ul><li>Quality in health care </li></ul><ul><li>What needs to be done? </li></ul>
  3. 3. WORKING PREMISE <ul><li>We don’t have a functional market in health care in the U.S., </li></ul><ul><li>Consequently, many of the attributes of competitive markets that are beneficial in our lives are not present in health care, </li></ul><ul><li>One significant negative attribute of a dysfunctional market is an inability to discern quality, </li></ul><ul><li>Consumerism is critical. </li></ul>
  4. 4. YOU CALL THIS A MARKET? <ul><li>Government spending approaching 50% of total health care bill, </li></ul><ul><li>Competitive markets offer progressively lower unit prices, better quality, continuous innovation, but… </li></ul><ul><li>Healthcare offers increasingly higher costs, marginal quality, opportunistic innovation – the bad drives out the good, </li></ul><ul><li>Participants in the system are pitted against each other – no one is really winning. </li></ul>
  5. 5. CURRENT ISSUES AFFECTING QUALITY AND COST <ul><li>Lack of price transparency </li></ul><ul><li>Major information asymmetry </li></ul><ul><li>Presumption that quality costs more </li></ul><ul><li>Health financing not health insurance </li></ul><ul><li>Entrenched, status-quo-loving constituencies </li></ul><ul><li>Very little accountability short of malpractice </li></ul><ul><li>Very little consumer sovereignty </li></ul>
  6. 6. U.S. HEALTH CARE MARKET AND TRENDS <ul><li>Some sentinel events </li></ul><ul><ul><li>Advent of Blue Cross at Baylor University in 1929 </li></ul></ul><ul><ul><li>Post-WWII wage controls </li></ul></ul><ul><ul><li>Creation of Medicare and Medicaid </li></ul></ul><ul><ul><li>Federal HMO act passed </li></ul></ul>
  7. 7. TOTAL GDP 2007 <ul><li>United States $13.8 T </li></ul><ul><li>Japan $ 4.3 T </li></ul><ul><li>Germany $ 3.3 T </li></ul><ul><li>China $ 3.2 T </li></ul><ul><li>UK $ 2.7 T </li></ul><ul><li>France $ 2.5 T </li></ul><ul><li>US Health $ 2.2 T </li></ul>Sources: International Monetary Fund and Centers for Medicare and Medicaid. Note: Figures represent projections
  8. 8. TOTAL NATIONAL HEALTH EXPENDITURES Source: American Hospital Association via the Centers for Medicare & Medicaid Services, Office of the Actuary. Data Released January 8, 2007
  9. 9. PERCENT CHANGE IN TOTAL NATIONAL HEALTH EXPENDITURES Source: American Hospital Association via the Centers for Medicare & Medicaid Services, Office of the Actuary. Data Released January 8, 2007
  10. 10. NATIONAL HEALTH EXPENDITURES AS A PERCENTAGE OF GROSS DOMESTIC PRODUCT Source: American Hospital Association via the Centers for Medicare & Medicaid Services, Office of the Actuary. Data Released January 8, 2007
  11. 11. PROJECTED EXPENDITURES THROUGH 2016 Source: American Hospital Association via the Centers for Medicare & Medicaid Services, Office of the Actuary. Data Released January 8, 2007
  12. 12. GROWTH IN MEDICARE SPENDING VS. PRIVATE HEALTH INSURANCE SPENDING Source: American Hospital Association via the Centers for Medicare & Medicaid Services, Office of the Actuary. Data Released January 8, 2007
  13. 13. ANNUAL CHANGE IN PREMIUMS Source: The Kaiser Family Foundation and Health Research and Educational Trust.
  14. 14. HOSPITAL PAYMENTS AND COSTS - MEDICARE, MEDICAID, AND OTHER GOVERNMENT Source: American Hospital Association Annual Survey data, 2005, for community hospitals.
  15. 15. NATIONAL SUPPLY AND DEMAND PROJECTIONS FOR FTE RNS Source: National Center For Health Workforce Analysis, Bureau of Health Professions, Health Resources and Services Administration, 2004. Shortage of over 1,000,000 nurses in 2020
  16. 16. ATTRIBUTES OF QUALITY <ul><li>Errors and rework </li></ul><ul><li>Customer experience and choice </li></ul><ul><li>Costs </li></ul><ul><li>Durability </li></ul><ul><li>Serviceability </li></ul><ul><li>Technology </li></ul>
  17. 17. Leading Causes of Death <ul><li>Heart Disease 652,000 </li></ul><ul><li>Malignant Neoplasms 559,000 </li></ul><ul><li>Potentially Preventable 238,337 </li></ul><ul><li>Medical Errors </li></ul><ul><li>Cerebrovascular 143,579 </li></ul><ul><li>Chronic Low Respiratory 130,933 </li></ul><ul><li>Disease </li></ul><ul><li>Unintentional Injury 117,809 </li></ul><ul><li>Source: Centers for Disease Control and The Fifth Annual Healthgrades Patient Safety in American Hospitals Study </li></ul>
  18. 18. <ul><li>5 TH ANNUAL HEALTHGRADES PATIENT SAFETY IN AMERICAN HOSPITALS STUDY – APRIL 2008 </li></ul>
  19. 19. PATIENT SAFETY STUDY <ul><ul><li>Patient safety: “freedom from accidental injury due to medical care, or medical errors” </li></ul></ul><ul><ul><li>Agency for Healthcare Research and Quality developed 20 Patient Safety Indicators – HealthGrades used 16 (excluded 4 related to obstetrics) to analyze care provided to Medicare population from 2004 – 2006 </li></ul></ul><ul><ul><li>Results of review </li></ul></ul><ul><ul><ul><li>Found 1.12 million total PSIs </li></ul></ul></ul><ul><ul><ul><li>Resulted in 41 million hospitalizations – 2.76 % incident rate </li></ul></ul></ul><ul><ul><li>source: Institute of Medicine </li></ul></ul>
  20. 20. PATIENT SAFETY STUDY CONT. <ul><li>Some of the most common PSIs (63% of total: </li></ul><ul><ul><li>Failure to rescue </li></ul></ul><ul><ul><li>Decubitus ulcer </li></ul></ul><ul><ul><li>Post-operative respiratory failure </li></ul></ul><ul><li>Over 20% of Medicare patients with PSI die – over 238,000 deaths from 2004 - 2006 </li></ul><ul><li>Economic impact - $8.78 billion across 16 PSIs </li></ul>
  21. 21. SOME GOOD NEWS <ul><li>10 of the 16 rates associated with the PSIs studied showed improvement during the study period, </li></ul><ul><li>There are some good performers – so-called “Distinguished Hospitals for Patient Safety” </li></ul><ul><ul><li>If all were DHPS – over 220,000 incidents and 37,000 deaths among the sample could have been prevented </li></ul></ul>
  22. 22. April 10, 2008 EDITORIAL Quality Care at Bargain Prices “ This year’s (Dartmouth) atlas focuses on Medicare spending for patients in the last two years of life at the top five teaching hospitals, as ranked by U.S. News & World Report. The medical center at the University of California, Los Angeles, was the most extravagant, averaging some $93,000 per patient. Johns Hopkins, at $85,000, and Massachusetts General, at $78,000, came next. The Cleveland Clinic, at $55,000, and the Mayo Clinic, at $53,000, were far more cost-effective.”
  23. 23. QUALITY SHOULDN’T COST MORE… <ul><li>Better technology, </li></ul><ul><li>More accurate diagnoses, </li></ul><ul><li>Fewer treatment errors, </li></ul><ul><li>Lower complication rates, </li></ul><ul><li>Less invasive treatment and faster recovery, </li></ul><ul><li>The diminution of the need for treatment. </li></ul>
  24. 24. HOW ARE HOSPITALS THWARTING COMPETITION?* <ul><li>Certificate of Need Laws, </li></ul><ul><li>Lobbying for legislative to block specialty hospitals – in 2006 the AHA donated $1.8 million to federal candidates, </li></ul><ul><li>Acute consolidation </li></ul><ul><ul><li>From a base of over 6100 hospitals, 900 mergers occurred, and 2700 hospitals joined megasystems </li></ul></ul><ul><ul><li>Total number of hospitals decreased by 20% between 1970 and 2005 </li></ul></ul><ul><ul><li>Despite promised economies of scale, “consolidation has led to price increases of 40 % and reduced quality” </li></ul></ul><ul><ul><li>2/3 hospital systems dominate many markets </li></ul></ul><ul><ul><li>* Regina Herzlinger, Who Killed Health Care? </li></ul></ul>
  25. 25. WHAT DO WE EXPECT? <ul><li>Latest innovations – we want to facilitate them! </li></ul><ul><ul><li>Leads to greater choice, higher quality and lower costs </li></ul></ul><ul><li>High Quality/Hassle ratio </li></ul><ul><li>Stable prices – downward trends </li></ul><ul><li>We may pay more for a better experience but we don’t expect to! </li></ul>
  26. 26. WHAT COMPETITION HAS STARTED TO FOSTER <ul><li>A new emphasis on quality of care – we’re talking about PSIs! </li></ul><ul><li>Growing purchaser pressure on HMOs </li></ul><ul><ul><li>Cost </li></ul></ul><ul><ul><li>Reporting on outcomes </li></ul></ul><ul><ul><li>Preventive measures pursued </li></ul></ul><ul><ul><li>Health status indicators </li></ul></ul><ul><ul><li>Development of report cards </li></ul></ul><ul><li>Use of Internet </li></ul>
  27. 27. WHAT STILL HAS TO HAPPEN <ul><li>Mandatory measurement and reporting of results, </li></ul><ul><li>Much broader and deeper information markets, </li></ul><ul><li>Broader clinical technology deployment – especially in the physician group practice world (current adoption ≈ 20%), </li></ul><ul><li>Get patients to access excellent providers, </li></ul><ul><ul><li>Deeper experience and shorting learning curve </li></ul></ul><ul><ul><li>Better efficiency </li></ul></ul><ul><ul><li>Greater scale </li></ul></ul><ul><li>Get away from one-size fits all medicine, </li></ul><ul><li>Michael Porter – “Competition on results is dynamic and never-ending.”*– Greater Consumer Sovereignty! *Michael Porter, Redefining Health Care, 104. </li></ul>
  28. 28. Health Care is Global Comparison of Spending on Health, 1980–2004 Data: OECD Health Data 2005 and 2006. Average spending on health per capita ($US PPP) Total expenditures on health as percent of GDP Source: Commonwealth Fund National Scorecard on U.S. Health System Performance, 2006.
  29. 29. The World IS Flat!
  30. 30. THANKS <ul><li>Contact information: </li></ul><ul><li>Don McDaniel </li></ul><ul><li>[email_address] </li></ul><ul><li>(o) 410.534.1161 </li></ul><ul><li>(m) 443.904.2882 </li></ul>

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