Health care reform : What we can learn from Costco

CostcoThe most telling point about health reform in President Obama's budget is that, "Some researchers 
believe that healthcare costs could be reduced by a stunning 30 percent — or about $700 billion a year — without harming quality if we moved as a nation toward the proven and successful practices adopted by the lower-cost areas and hospitals."

That sentence gives us some grist for forecasting some of the elements of health reform — in particular, the last phrase which talks about moving from higher-cost, unproven health practices to lower-cost proven approaches.

In a post earlier this week, I talked about the importance of understanding practice variations, especially those behaviors that lead to increasing costs without improving health outcomes. Under the New England Journal of Medicine paper's scenario, all practitioners would be incentivized to behave as if they practiced in Salem, Oregon and not Miami, Florida.

What will it take to "move" medical practices? We can take a page out of Costco's playbook to answer this one. Three Costco tactics which keep the business resilient will be relevant to this scenario: standardization, deployment of information technology, and tough negotiations with suppliers.

Standardization. Costco long-term success and profitability has been driven on setting consistently high standards. Whether you enter a warehouse in southern California or in the Mid-Atlantic states, the Costco consumer experience is singular. Variability is not a good thing in the Costco playbook. In December 2008, the Dartmouth Atlas team offered an Agenda for Change which laid out some practical tactics for reducing practice variation to lead to more standardized care patterns and rational spending. Written by John Wennberg (the godfather of medical practice variation research) and Shannon Brownlee (author of the seminal book Overtreated) and colleagues, the Agenda includes financial incentives for Medicare providers that would share savings resulting from better organizing patient care and improving outcomes and efficiencies especially for people managing chronic conditions. Efficiency here means the best outcomes and quality for patients at the lowest cost and resource utilization.

Information technology deployment. Costco's success has been built on a strong IT backbone for both back office and front-of-store functions. Information which quantifies what therapies, procedures and workflows work versus which do not is the underpinning for this approach. Thus, the deployment of information systems among provider organizations becomes a strategic imperative. Indeed, the Obama Administration has anticipated this through the inclusion of HIT adoption incentives beginning with the Medicare and Medicaid programs in 2011.

Tough negotiations with suppliers. Costco never accepts a price increase from a supplier without examining every alternative possible to hold the line on price. At Costco, nothing is ever marked up 14% above costs. In the health care setting, this approach will rely on comparative effectiveness studies which analyze existing therapeutic interventions and compare new competitors in the market, whether they be drugs, biologics, surgical techniques, devices, or other medical inputs. If the new-new input is shown to be more beneficial for outcomes and overall savings to the system, then it will be adopted into the system. If not, the existing treatment will prevail.

Jane's Hot Points: While Costco's fortunes may be down in the current economy, they are an important case study for how to provide value-for-money in a consumer-facing milieu. The vision of the Obama health budget is that the U.S. sickness system will morph from a sickness system to a citizen-centric wellness system. The tenets of standardization, appropriately-scaled and deployed information technology, and tough negotiations on price for supplies and services will be helpful building blocks to move the dysfunctional environment toward a healthier delivery system that covers all citizens.

Vendors to the health care industry, be forewarned. Interestingly, the medical device industry has come out to support comparative effectiveness research, so long as it doesn't, "put an arbitrary dollar amount on an extra year of life or force patients toward a single treatment based on cost," in the words of AdvaMed, the industry lobby group.

By the way, the health segment is a big focus at Costco. Furthermore, Costco provides health insurance to employees, something Wall Street hasn't liked very much over the years.

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11 replies »

  1. I am not saying that I fully understand the healthcare reform bill, but what I do know is that forcing a person to purchase something that you possess control over is wrong. The government can control much of the insurance business and now is mandating the American people to buy into a broken system. Spending more money to fix the problem isn’t a solution. Actuall fixing the problem would be nice. Give us lower premiums, actual coverage that will cover things, and a chance to get sick and have peace of mind to know that things are going to be taken care of.

  2. As long as private insurance companies are in the game, all that IT will do is enable them to deny people care more efficiently.
    Technocracy is not the answer here! The Obama administration should not be experimenting with people’s lives as it structures with health care reform. Rather, it should look to proven models of success — prominent among them single payer. Because single payer’s philosophy of “everybody in, nobody out” minimizes administrative costs — 3% vs 30% for the insurance companies — it can save $350 billion.
    And if the Dartmouth study’s experimental approach proves out, and we save even more money, well and good.
    However, the first concern should be the health of our citizens, and then “rationalization.” Fortunately, single payer enablles both.

  3. I did just post a comment on my blog about healthcare I.T. What I’ve known is that the super-expensive systems are not flexible, not interoperable and are closed. It seems they are designed to require expensive maintenance and deliverable contracts, and to depricate shortly after installation.
    I.T. in just about every other business sector has to be be efficient, flexible, user-friendly and compatible.
    Lastly, remember Costco is a members-only system, it is not accessible by the population at large.

  4. It’s been 36 years since Wennberg wrote his classic paper on small area variation. Hundreds of peer-reviewed papers based on the Dartmouth Atlas Project have followed. These papers focus on Medicare patients and differences in care and costs in high and high cost environments and low growth and low cost environments and often mention overspecialization, over-use of resources in doctor-rich cities, doctor generated-demand, and practitioners striving to meet “target-incomes.”
    Dasrtmouth studies conclude intensive use of resources does not produce better care, and indeed the opposite is usually true. The differences, saith Dartmouth. , are due to discretionary decisions by physicians unduly influenced by availability of hospital beds, imaging centers, and a fee-for-service system that rewards fast growth and high utilization. For his work and that of the Dartmouth Group, admirers have suggested Wennberg as a candidate for the Nobel Prize, either in economics or medicine.
    Yet regional variation persist. Health costs still vary widely between cities, the countryside, academic centers, hospitals, physicians, North and South, East and West. Why? Many factors share the blame – self-serving doctors, too many specialists, too few primary practitioners, too little standardization, excess fragmentation, neglect of prevention, negative fee-for-service incentives, lack of integrated groups run by salaried doctors with no incentives to do more. All contribute. If only we could somehow use data to”homogenize “ care, stamp out “unwarranted variation,” have salaried doctors compete in integrated groups, we could save 30% in costs.
    But it hasn’t happened. What are Wennberg and his followers missing? Richard “Buz” Cooper, MD, professor of medicine at Penn and senior fellow of the Leonard Davis Institute of Health Economics Institute at Penn, has suggested, sometimes indelicately, that these variations are inevitable.
    Dartmouth may be missing fundamental realities of human nature – that doctors gravitate to big cities to make a better living and to access better educations for their children,, that populations of these cities have profound socioeconomic circumstances, that it costs more to care for the neglected, the newly arrived, the poor, and the uninsured, that specialists on the whole enhance rather decrease quality, and that there is rampant and growing shortage of doctors, primary care and specialists alike, and that we ought build more medical schools and create more residency programs.
    This kind of talk is anathema to the Dartmouth folk, who insist more care, more doctors, emore “intensive” use of resources, has not and will not eventuate in better care.
    And so the debate about variation rages. Impersonal data from on high supports the Dartmouth position that profound variations exist. But human nature at ground zero ignores the data. It is a classic top-down bottom-up reality test. By minimizing variation by trying to bring about uniform prices by bringing down costs in high cost areas to those of low cost areas, one is trying to repeal certain fundamental forces of human nature – that doctors will migrate where they can make better use of their skills and can make a good living, that the cost of delivering care varies by the socioeconomic status of those being cared for, and that doctors and hospitals will do what is needed to satisfy the demands their organizations to be community leaders and to satisfy cultural expectations of their region.
    There is nothing mysterious about this – practices and costs vary by region, and bottom-up economic forces are more powerful than top-down calls for compliance to meet arbitrary standards. To paraphrase former House Speaker;s maxim about politics, “all health care is local.”

  5. HIT is just a tool- and an immature one at that.If not properly designed and implemented according to variable hospital and medical practice cultures,like any tool, it can range from being effective,to being useless,to causing harm.
    Dr. Rick Lippin

  6. As a fan of costco and walmart both, I think it takes an overwhelming amount of faith to speak of American health system and standardization within the same sentence — or even paragraph. Wennberg’s been documenting practice disparities for better than a quarter century with no appreciable result — tho he may be nudging new docs into the high cost areas. As that great health philosopher Ronald Reagan said, “its simple, but it isn’t easy.”

  7. IT won’t save healthcare any more than it’s saved banking, or credit-card defaults, or anything else that’s craving the automation of a bad idea.
    Cutting costs in an dysfunctional system will result in a really bad, dangerous dysfunctional system with no reporting so no one knows how broken it is. This is what automation brings to us – an impoverished outlook.
    No, we must return to basic principals, and that includes expectations on the part of stakeholders, such as physicians, boards of directors, nurses, fiscal departments, quality and compliance departments, physical plant departments and so on. In other words, people have to THINK about what will work, instead of asking for their particular pony, then blowing off steam when a computer can’t jump a fence.
    Computer implementations don’t work when the vendor wants the sale and will assure the customer it will do the impossible thing the customer asks for, but doesn’t know he/she/it doesn’t want. There’s not enough serious analysis because no one wants to think of the icky bits, like “does reimbursement represent a sustainable model for employing physicians?”
    Let’s be grownups. Let’s ask the hard questions, and let’s try crazy answers knowing they might fail.

  8. WTF?
    Trying to compare Costco to U.S. healthcare is like comparing Edward R. Murrow to Michael “schlock-umentary” Moore. Hard to imagine two, more different scenarios.
    And ditto to Ravi: people who think I.T. will save health care have never installed a major I.T. system at an affordable price. You’d have better luck with your money at Bernie Madoff’s firm than with most I.T. providers.

  9. Jane,
    That is Walmart not Costco. I do take exception that somehow people believe that IT isthe solution. IT is just going to enable…The impact of information technlogy will be very small unless we look into the basic design of our healthcare system.
    To make a point, one of the hospital told me few months back that they did implement a system with multimillion dollar budget and in the end….nothing came out and they were very pained with expenditure and not benefit…
    Different people will find different reason for the above outcome…but the end result is what it is. The key to good business is about good business practice and utilization of IT to enable it.
    Let us not fool ourselves that IT is a solution to our healthcare problems….I is just an enabler or tool.

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