Imagining the Possible

Bruce PyensonThe emperor we call American healthcare is wearing no clothes—or perhaps too many clothes. The  United States spends too much on healthcare. More than 25% of our healthcare dollars are wasted on unnecessary utilization. With this in mind, we recently completed research that identifies where that waste resides. Our analysis offers a target for how far the country might go in weeding out waste. We used the top-performing health systems as a basis, employing actuarial models to extrapolate results for the entire country. Our “16 to 12” model is a standard you can use to measure healthcare reform proposals. It can help you quickly identify defenders of different pieces of the status quo—and defenders of the absurd. In the few weeks since “16 to 12” came out, we’ve heard an almost universal reaction: “Of course you’re right, but [fill in special interests] won’t let it happen.” That’s amazingly positive—maybe we can actually reach consensus on fixing the system.

Framing the vision

In 2006, approximately 16% of the gross domestic product was spent on healthcare. Even if the United States were to reduce its healthcare expenditures to 12% of GDP, we would still spend far more than any other country. Is this possible? Our reduction is less than many estimates of healthcare waste. It’s also more than the annual spending on motor vehicles—4% of GDP could power a new American century.

Numbers for a growing consensus

Opposition to waste seems universal, from President Obama to Senator Max Baucus. They join a chorus of other voices, from CEOs and medical trade organizations to employer groups. Let’s take them all up on this point by quantifying opportunities for reductions in waste.

The table below offers a detailed inventory of efficiencies by service category, for one year’s costs. For example, inpatient services in 2008 cost an estimated $500 billion. Our working efficiency model reduced that by 38% to $311 billion.

Picture 4

These reductions are based on evidence-based best practices, including reducing unnecessary imaging and surgeries, better managing inpatient admissions, increased reliance on generic drugs, embracing primary care and certain electronic transactions, and other 20th-century (not even 21st-century!) management practices.

We’re proposing that healthcare payers (governments, employers, and individuals) could reallocate more than half a trillion dollars each year to other priorities.

The saved money could be used in other sectors, such as increased wages and infrastructure investment initiatives, and possibly even toward deficit reduction, reduced taxes, funding Medicare, etc.

The money saved could also stimulate the economy. And even though we’re working with 12% as the target model, we think it can get even lower than that.

Economic stimulus programs will likely increase healthcare spending, especially by federal and state governments. The 12% target may have to fight that surge, but we’re not talking about speculative long-terms gains, such as getting all Americans to exercise and reach a healthy weight.

What will the new system look like?

Although the healthcare system is typically divided into three categories—physicians/healthcare professionals, hospitals, and prescription drugs—our vision directly benefits patients.

We point to patients consistently receiving attention and care, according to treatment plans based on evidence-based medicine.  All patients’ interactions will be streamlined through administrative systems, along with expanded hours via e-mail and phone access. We also suggest that the average patient will be more informed about choosing the appropriate care due to the reduction in costs; in turn, fewer medical errors should occur.

Another big change in the desired model is the re-engineering of hospital care.

Hospitals would operate on a 12/7 (12 hours a day, seven days a week) or 24/7 basis. While many hospitals currently don’t provide diagnostic treatment services on weekends or after standard business hours, that would change under this vision.

We believe hospitals can do a much better job lowering their readmissions. A separate report estimates that 18% of Medicare hospitalizations result in readmission within 30 days. A majority of those are potentially avoidable.

Our report didn’t delve deep into prescription drugs, but we suggest that there are efficiencies to be found in improvements to the FDA approval process and in a more widespread embrace of generic drugs.

It’s important to point out that we can become even more efficient than this vision. For example, we can dramatically improve end-of-life care, fix medical malpractice, and reduce administrative costs on better than a pro-rata-with-claims basis—all things that could push healthcare spending below 12% and improve the patient experience.

Winners and losers

Given this demanding vision, hospitals and other providers who don’t adapt to an efficiency- and quality-driven system will lose out.

For the nation, this vision offers more winners than losers. Patients and consumers would be the biggest winner and the U.S. economy overall would benefit. Employers would minimize the yoke of expensive benefits that has made it difficult to compete with leaner companies in other countries.

Proposals for healthcare reform now have the glamour of springtime fashions. Our 16% to 12% vision measures what’s under these emperors’ new clothes.

Pyenson, Fitch, Goldberg, Imagining 16% to 12%. 2009. Available online at http://www.milliman.com/expertise/healthcare/publications/rr/pdfs/imagining-16-12-RR02-01-09.pdf

Lead author Bruce Pyenson, FSA MAAA, is a Principal and Consulting Actuary with Milliman, an actuarial and consulting firm with offices worldwide. Kate Finch RN serves as a Principal and Management Consultant with Milliman. Sara Goldberg, FSA, MAAA serves as Consulting Actuary with the firm.

18 replies »

  1. As co-author of “16 to 12,” I wanted to thank all the posters — both supporters and especially the critics, who have raised some great points and issues. Best of luck to you all.

  2. wonder if someone came on THCB spamming conservative propoganda if their links would stay up. It’s the exact same post cut and paste every couple days.

  3. A little perspective for jackson s
    The above CEOs aggregate salaries are about $200M (of which they probably pay about $60M to Uncle Sam). Healthcare spending in the US for 2007 was about $2.4T. So .0083% of health care dollars are spent on CEO salaries, or $1 of every $12,000 spent on healthcare.
    Where is the mention of Hospital CEOs salaries? I know this is a stratch, but what about food companies salaries — millions in the US go hungry, and how come its not a “right” to have food, the US spends more on food than any other country, yet we have millions of “unfed”.

  4. In my years of health plan experience, I’ve seen a number of actuarial consulting studies with findings similar to those presented here (regards to Ron Harris, one of your Milliman colleagues). There is tremendous potential to reduce what the US spends on health care.
    The issue has always been and continues to be what specific action steps need to take place, and how much cost will need to be incurred, to realize the potential savings.
    The lack of a unified payer approach is one of these obstacles. Only on a collective basis can the patients and dollars involved reach critical mass with health care providers and help to drive provider behavior change. Employers, health plans and the government need to be on the same page here.
    Just as important is the need to educate the public about why more care using the latest new technology is often not the highest quality or best care for them. We need to replace the dollar-driven push to roll out new technology with a recognition that FDA approval is only the starting point to determine comparative effectiveness. Again here, employers, health plans and the government need to be on the same page in how they make coverage determinations and in requiring that providers participate in registries and post-implementation research studies as a condition of having the new technology covered.
    The current model of a combination of government and employer-based private health insurance is not going away anytime soon. Rather than spewing ideology about the virtues of a single payer model and the dollars wasted on administrative spending, it would be much more productive to work with these different entities and help to gain their support to achieve the potential medical cost savings identified here.

    ** 2.6 Million New Jobs,
    ** $317 Billion in Business Revenue,
    ** $100 Billion in Wages, and
    ** $44 Billion New Tax Revenues
    You can find out more about this study here: http://www.CalNurses.org/
    The press release is here: http://www.calnurses.org/media-center/press-releases/2009/january/nurses-to-congress-expanding-medicare-could-reverse-job-losses-and-repair-our-broken-healthcare-system-and-safety-net.html

  6. The huge insurance company profits—BILLIONS EACH YEAR—could provide quality healthcare for millions of people.
    We need to get the insurance companies OUT of healthcare . The only solution is a NON-PROFIT SINGLE-PAYER HEALTHCARE SYSTEM – and the single payer should not be an insurance company or a group of insurance companies.
    • UnitedHealth Group — $ 4.654 BILLION. UnitedHealth Group owns Oxford, PacifiCare, IBA, AmeriChoice, Evercare, Ovations, MAMSI and Ingenix, a healthcare data company
    • WellPoint — $ 3.345 BILLION. Wellpoint owns BLUES across the US, including Anthem Blue Cross Blue Shield, Blue Cross Blue Shield of Georgia, Blue Cross Blue Shield of Wisconsin, Empire HealthChoice Assurance, Healthy Alliance, and many others
    • Aetna Inc. — $ 1.831 BILLION
    • CIGNA Corp — $ 1.115 BILLION
    • Humana Inc. — $ 834 million
    • Coventry Health Care — $626 million. Coventry owns Altius, Carelink, Group Health Plan, HealthAmerica, OmniCare, WellPath, others
    • Health Net — $ 194 million
    Health insurance companies make billions of dollars each year, while the rest of us face skyrocketing healthcare costs, impossible bureaucracy, and life-threatening insurance denials.
    The solution? Both the House of Representatives and the Senate have NON-profit, single-payer healthcare plans.
    In the House of Representatives: HR 676 — The United States National Health Insurance Act. You can read about it here: http://www.healthcare-now.org/hr-676/
    In the Senate: The American Health Security Act of 2009

  7. Using these numbers, the Admin. cost for all but government is 9.3% of premium, assuming Medicare/Medicaid is at 3% (up front admin., which leads to add’l waste & fraud).

  8. Jeff’s link reminds me of those ads with the very pretty girls that want to meet me now, click with hope but always end with disappointment.
    Jeff, no study has ever claimed administration cost more then unnecessary care. Administration runs 5-10% of claims, unnecessary care around 20-30% depending on who you believe.
    I would suggest you look up the term HMO as you apparently have no clue what one is. At their peak they had around 25% of the market, considerably lower today. Further the nature of HMOs put them at the forefront of administrative innovation, HMOs like Kaiser and many others are paperless or close to it. The pre authorization craze ended like 5 years ago.
    As to your blog entry, this gets even worse.
    “A whopping $210 Billion is spent on claims processing alone”
    What the article actually says is;
    “claims processing, ($21-$210 billion)”
    Any smart person would look at that range and laugh. Claims processing is very easy to estimate as all the major carriers publish their financials, we know what Medicare pays, and the self funded market files 5500s and is pretty transparent. If this is their best effort at an estimate they are idiots.
    You would have to over look a number of very creditable studies placing total administrative overhead in the 5-10% range. There is no way claims processing cost anything close to $210 billion.
    You also fail to acknowledge the perfect example of Medicare when you skimp on claims processing, for every dollar Medicare saved with cheap claims processing they loss 3-5 dollars in fraud and waste.
    I don’t know if your post on Pharm sales are any better but you might want to stick to something your more familiar with.
    “4% of GDP could power a new American century.”
    If only it modeled this easy. Elasticity of money is the term I beleive. Although we do spend a fortune on HC it is better spent there then exports. If you where to save 4% on HC and spend it all on exports you would actually do more damage to our GDP then if you just left HC spending alone. More oil and China imports don’t help, depending on the exact expense they reduce GDP by a factor of 7 to 20.
    Instead of a magic bullet that cuts HC spending 25% we need to hold it flat and allow GDP to grow over it lowering it’s % that way.

  9. That’s what i say all the time here – we are spending billions on stuff with no or little benefit.
    Dr. Lippin, I am a physician and I have never treated “joblessness” or “poverty”. What I work up, treat and see treated by others all the time are:
    anxiety symptoms/overobservation of normal physiology, nonsensical, commercially promoted self diagnoses (patients reporting “restless legs”, their actual description not even remote to the actual (mostly benign) disorder, patients reporting “GERD” as a symptom), and patients pushing for imaging studies that are nonsensical.
    It is true, the US is medicalized – and if we want to save health care coverage for a majority (or even talking about general coverage), we need a cultural shift. And tort reform.

  10. This is a good scenerio anaysis. In principle the cost can be reduced even further. The question is how to implement.
    The key to reduction of healthcare cost is ethics and value. How would you control the over diagnostic and over treatment, how would you reduce the administrative waste? I recall – and hope I read it write – that there are 1 exec mgr for every 7 doctor. That is quite a waste – is it not. Note that these are only execs which of course would then far more underlings. Focus on just that would reduce huge cost.

  11. By using the “top performing health systems as a basis”, is the notion that you wrap the benefits of reduced practice pattern variation (by using the “best practice”), lean/quality initiatives, effective use of HIT, all into one? How have you defined “top performing”? By medical outcomes vs. dollars spent on care? The approach seems novel, but the level of detail provided here is too high level for it to be a meaningful discussion piece.

  12. Sid,
    The issue isn’t that our costs are too high. Virtually everyone agrees they are. The question is what to do about it – and this seemingly arbitrary analysis could lead to wrong, and even stupid, actions!

  13. Maybe they are pulling numbers out of thin air but at least they are in line with the rest of the world. I hear the US System spends 16%+ on health. That is a lot! More than everyone else, unless my sense of numbers is off. What a waste, what a waste. The US system is a bit bundle of not-good use from what I hear.

  14. Perhaps others understand your analysis but it is not at all clear to me. It appears that you are pulling numbers out of the air!
    Are you arbitrarily picking 12% of GDP as a target and then spreading it over your categories or are you starting with the categories, applying some magical formula to them that represents waste and then arriving at 12%

  15. I don’t quite understand how we have cuts all over the board. If we cut inpatient admissions and unnecessary imaging procedures and surgery AND increase access, how is it that office visits spending is also reduced?
    I may be misunderstanding, but I think that regular office visits, particularly primary care visits will increase in frequency, particularly since currently uninsured people are supposed to use primary care docs instead of ED for routine care.
    So is the cost decrease due to decrease in reimbursements to physicians? Or to shifting care to less skilled resources and/or e-care?

  16. If you are covering everyone, then do not create a huge bureaucracy just to enroll anyone. Everyone is covered. Just assume they are enrolled. What you need to figure out is how anyone accesses the system in the first place. Everyone needs to know how to make the system work for them. It must be easy. It must be easier than getting on Medicaid. It must be easier than reading the back of an insurance card. You must redefine emergencies and what to do. You must give EMS a preliminary destination that is not the ER. The ER will be crushed without access management. The finance will be the easy part. The delivery will need new engineering. It will take more than a computer and an EHR to deliver care. And please define what it is you are providing. The critics say we have a lousy system. Surely it cannot be desirable to inflict it on the unsuspecting uninsured. Give me meaningful tort reform and I can take you down to 8% of GDP.

  17. Thanks for your courage of your vision.
    The biggest inefficiency of all is the “medicalization” of America’s social problems like joblessness and poverty. These are NOT medical diagnoses that need medical interventions.
    But “Big Medicine” and all who profit from it has too much to lose if we dare to recognize and act on that reality.
    The data has been well established but generally ignored by “Big Medicine” for decades.
    Dr. Rick Lippin

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