By BILL KRAMER

President Obama described it as a “watershed” in the journey toward comprehensive health reform – and it might very well be.  But many people are suspicious of the health industry leaders who promised to slow the trend in health care costs and save $2 trillion over the next ten years.  Should we be hopeful or skeptical?  The answer is both.

The joint statement by health insurers, hospitals, physicians, drug and medical device manufacturers on May 11 was very encouraging.  At no time in recent history has this group agreed on a savings target and specific steps to achieve it.  In the 1990’s, most of these industry groups made the cold, rational decision that they were better off with the status quo than under a Clinton-style reform plan.  Now, all of them know that the current path is unsustainable, and they believe that the mainstream reform proposals by President Obama and Sen. Baucus are much better for them than the other options (do nothing or single payer).  They also know that these savings are achievable; for the last 15+ years, academic experts and consultants have been pointing out opportunities for improvements in affordability and quality.  There is plenty of “low hanging fruit”.

But there are plenty of reasons to be skeptical.  In the past, no one ever lost a bet that health care costs would continue to increase rapidly.   The title of Altman & Levitt’s 2002 article in Health Affair says it all: The Sad History of Health Care Cost Containment as Told in One Chart. 

The most basic problem is that there is little incentive for anyone in the health care industry to be efficient.  From the consumers’ perspective, price competition is great, but no business leader likes to compete on price; that’s the recipe for low profits and low growth.  As a business strategy, it’s much better to compete by “differentiating” your product or service (Apple), targeting a high-income, price-insensitive segment (Neiman Marcus), or building brand image and loyalty that allows you to charge a premium price (Nike).  Every MBA program is filled with case studies about this, and it’s not surprising that health care industry leaders follow suit.  And the health care market has some additional characteristics that make price competition even more elusive: the lack of transparency and information to allow us to easily compare price and quality, the large tax subsidy for employer-paid health benefits that reduces our incentive to buy less expensive health plans, and the fact that we are dependent on physicians (the “suppliers”) to help us make decisions for the most expensive forms of medical care.  A senior physician executive at a large, well-respected, not-for-profit health care system once said to me in a moment of candor, “Improve efficiency and lower our prices? Why bother?”

It’s all well and good for the health care industry to make a pledge to improve efficiency and slow the cost trends, but someone else will have to hold them accountable.  Who?  The people and organizations that pay the bills: employers, government purchasers (Medicaid, Medicare, and public employee plans), and individuals like you and me.  Unless we want Congress to establish formal cost controls (which are likely to be ineffective, for political as well as economic reasons), we have to rely on the purchasers to inject some cost consciousness to the health care system.  There are many ways to do this – some of them easy, some hard.  Here are a few ideas:

* Large employers – both private and public sector — could stop treating health benefits as an uncontrollable “cost of doing business” and start applying good purchasing practices, like they do for materials and other inputs to their products and services.  To do this, they need to “create a market” by

o Offering real choices among competing health planso Setting rigorous standards for health plans offered to employees, including quality thresholds and incentives to improve efficiency and qualityo Providing transparent information on providers’ quality and costo Establishing employer contributions to monthly premiums that allow employees to keep the savings if they choose a more efficient health plano Establishing benefit structures that encourage employees to seek out the most effective and efficient medical care

* Small employers and individuals could purchase their health benefits through an insurance exchange or connector.  This would allow them to offer choice to employees (and encourage competition among health plans), reduce insurers’ administrative and selling costs, and get the same level of purchasing power that large employers have.

* Congress could modify the federal tax treatment of employer-paid health benefits to reduce the subsidy for expensive and inefficient health plans.

* Congress could introduce reforms to the insurance market to eliminate medical screening and risk-based pricing.  One of the effects of these tactics is to reduce healthy price competition.  From an insurer’s perspective, “managing risk” – avoiding the enrollment of high-cost patients – has always been an easier path to profitability than improving efficiency.  At the same time, insurers would need to be protected from adverse selection through risk adjustment mechanisms.

* Government could provide support for basic information and infrastructure development that would benefit everyone: o Transparency and public reporting on the cost and quality of insurers and providerso Comparative effectiveness research that would encourage the use of evidence-based best practiceso Information technology standards for electronic health record systems and secure information exchange

The bottom line: we should embrace the health industry’s commitment to reduce costs, but we must take steps to hold them accountable.

Bill Kramer is an independent health care consultant, focusing on health care management, finance and public policy. Bill served as a senior executive
with Kaiser Permanente for over 20 years. Most recently, he served as
Chief Financial Officer for Kaiser Permanente's Northwest Region. More information about Bill may be found at www.kramerhealthcareconsulting.com.

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