Blog

New Marketplace
New Risk, New Business Models

How to Make Our Crazy, Expensive, Amazing, and Uneven Health Care System Better Faster

Blog Post · October 24, 2016

I am often asked by health care entrepreneurs, policymakers, health system leaders, and clinicians to “explain” how health care in America works — and to offer ideas for how to improve it. Here, within a whirlwind synthesis, is a provocative thought starter for how to make U.S. health care better faster.

 

The State of U.S. Health Care

The U.S. health system is bigger than the entire economy of France.

The United States spends about $3.2 trillion on health care. This equates to $8,500 per capita, which is twice what other developed countries spend per capita. While health care spending growth has slowed since the 2008 recession, it still exceeds GDP growth. Unique to the U.S. economy, health care experiences negative labor productivity. It is also the largest source of new jobs since the recession, despite flat demand.

We waste the equivalent of the entire health care system of Spain annually.

Many economists believe that about 30% of spending, or about $900 billion per year, is wasted in the U.S. health system. The largest primary driver of excessive spending is high prices rather than high utilization. Prices in the United States are about 60% higher than in other OECD countries. High prices are a result of a fee-for-service reimbursement system based on paying “cost plus,” coupled with the market power of providers and suppliers to raise prices at a 5% CAGR over the past 20 years. Supplier market power is further augmented by a lack of transparency of prices and quality, complexity, insurance benefits with limited cost sharing, supply-induced demand, structural local provider market power, and consolidation. Commercial insurance prices vary by 50%–400% for all services, in all markets, and are seldom correlated with quality.

We compete with Cuba and Costa Rica on quality.

The United States comes in 37th on international comparisons of quality, just behind Cuba and ahead of Costa Rica. Our life expectancy lags behind other OECD countries and is improving less quickly than others.

We only perform better on cancers and preterm babies. We diagnose cancer earlier thanks to more widespread screening programs that are very profitable to providers. We do not do better on chronic diseases. The United States is “less sick” than other OECD countries only because we are younger and have lower prevalence of smoking. We are the only OECD country without national insurance; in 2013, 50 million Americans were uninsured. Moreover, 18% of Medicare patients are readmitted to hospitals for the same condition within 30 days. About half of these readmissions are believed to be avoidable.

Just 10% of patients account for 65% of U.S. health care spending.

A cohort of 35 million Americans who suffer from multiple chronic diseases and spend $90,000 per year, on average, drives most U.S. health care spending. Most of these people are unable to work, poor, and covered by Medicare and Medicaid (referred to as dual eligibles). End-of-life spending accounts for only about 10% of spending. So while people may spend large amounts in hospitals in their last year of life, it is a relatively small contributor to overall spending since only about 2.6 million people die annually. Expensive biologic drugs, cancer drugs, high-tech medical devices, and new technologies collectively account for only 15% of U.S. spending.

Our health care market is massively fragmented.

Health care in America is subscale. Care is organized around roughly 500 disease categories and delivered by loosely organized collections of local providers and hospital systems. The largest hospital system in the country, HCA, accounts for only 5% of the market. While a bit more than half of the roughly 850,000 doctors are employed by local hospitals, those in private practice are in groups of 4–8 physicians on average.

As a result, most doctors care for several types of patients within their specialty, and virtually all hospitals are general hospitals with low volumes of many types of patients. The typical Medicare patient under treatment has 16 doctors involved in his or her care. Nevertheless, scale appears to be one of the most important predictors of quality, with doctors and hospitals performing higher volumes of similar cases delivering better outcomes. Other countries have fewer, larger, and more specialized hospitals, and specialty providers with narrower practice areas.

The Affordable Care Act is a big step forward.

The ACA was designed to expand coverage largely by redistributing about 5% of current Medicare spending to subsidize coverage for up to 30 million uninsured. Newly insured people would be covered by private health plans sold on exchanges or Medicaid (in states that expanded their programs). Most of the uninsured are poor, young, male, and comparatively healthy. The ACA has improved insurance market competitiveness for individuals by standardizing policies (for example, gold, silver, or bronze) and eliminating underwriting, so that all people are able to purchase insurance at prices that vary only by age.

The ACA has made minimal changes to employer-sponsored insurance plans; most Americans will continue to receive health insurance from their employers for the next decade. The ACA has also introduced new payment models containing incentives of varying strength for providers to improve quality and reduce costs. The transition from fee-for-service to alternative payment models is going to take at least a decade, as 90% of payments made in the United States today are still fee-for-service. The Congressional Budget Office expects the net effect of the ACA to be a small slowing of federal health care spending, about $300 billion of deficit reduction, and an expansion of health coverage from 85% of Americans to 95%.

Employers are best positioned to improve the health care market.

Nearly all of the margin for hospitals and doctors comes from patients with commercial insurance. For a hospital, a 1% decrease in commercial patient volume equates to a 10% reduction in EBITDA or surplus. This is a byproduct of commercially insured patients paying prices that are far higher (10%–400%) than Medicare (set payments that are plus or minus 3% net margin for providers) and Medicaid (money-losing for providers). If employers are willing to consolidate their purchasing, they can negotiate substantial discounts from hospital systems and, in some cases, warranties for quality. Tools like reference pricing, direct contracting with specific facilities, bundled payments, second opinions and referrals to higher value clinicians, and benefit designs that reward value-consciousness are promising approaches being used by some employers to reduce spending trends and improve quality.

Some care organizations are succeeding.

There are many examples of higher-quality and lower-cost care delivery models in the United States. Kaiser Permanente, HealthCare Partners, and CareMore, all in California, are held up as national models.

All tend to focus on caring for people with chronic disease to keep them out of the hospital. They are able to achieve 10%–40% lower rates of hospital utilization, fewer diagnostics tests, better medication adherence, and greater likelihood of following clinical guidelines, and much more use of information technology. They also attain high patient satisfaction and, in the case of Kaiser, lower churn than other health plans. All of these systems have in common two elements: capitated reimbursement models, and salaried doctors where margins are maximized by spending less money. In this way they have closed the payment and provision of care loop within one income statement. There is no evidence that these systems deny people needed care — rather, they coordinate care better to avert hospital use, duplicative tests, and unnecessary specialist visits.

 

What Needs to Be Done?

While the political climate makes additional legislative changes politically unlikely, there is broad agreement that the following changes would be smart:

  • Accelerate the rate at which the payment system shifts from fee-for-service to risk-based approaches, to incentivize lower-cost, more efficient approaches to care
  • Standardize care approaches to reduce unnecessary variation
  • Expand the scope of practice of non-doctor clinicians
  • Utilize technology to reduce duplicative care, increase the use of evidence-based care, exchange data, and coordinate care
  • Release data on drugs, devices, hospitals, and doctor performance at the patient and disease level to reduce information asymmetry
  • Reform the medical malpractice system to eliminate the incentive to perform unnecessary defensive care and reward adherence to evidence-based medicine
  • Reduce administrative cost and complexity of health care transactions
  • Incentivize patients to engage in their care and providers to engage in shared decision-making over treatment plans and goals

Fortunately, all of these changes can be initiated, tested, and proven by states or the private sector without new federal legislation. This is a call for hospitals, health systems, physician organizations, payers, self-insured employers, and state regulators to move ahead with changes to the health care system that will improve quality and reduce costs. There are mutual benefits to be captured, but only if all these parties work in tandem — and to the benefit of patients.

How can technology help?

Information technology is critical for improving the fidelity and specificity of care processes. It is also critical for catalyzing a much more competitive and efficient market.

To lower overall health care costs, payers, providers, and suppliers must employ technology to improve labor productivity similar to other manufacturing businesses. It should be possible to integrate all medical data to deliver patient-specific care plans optimized for simplicity, cost, and quality of life. Moreover, these same systems should be capable of generating services that instruct caregivers on how to achieve these goals. Finally, technology holds promise for engaging patients in the planning, purchasing, and the ongoing monitoring of their care to assure that treatments are working and course corrections are made seamlessly to avert complications. Done well, it may even be possible to make preventive and chronic disease care both safer and cost-efficient. I believe that IT remains the key to making U.S. health care better faster, just as it has most every other sector of our economy.

 

This blog post originally appeared in NEJM Catalyst on July 19, 2017.


Recent Blog Posts

Have an Article Idea ­for NEJM Catalyst?

Connect

A weekly email newsletter featuring the latest actionable ideas and practical innovations from NEJM Catalyst.

Learn More »

Insights Council

Have a voice. Join other health care leaders effecting change, shaping tomorrow.

Apply Now