McKinsey weighs in on healthcare reform

Charlie Baker is the president and CEO of Harvard Pilgrim Health Care, Inc., a nonprofit health plan that covers more than 1 million New Englanders. Baker blogs regularly at Let’s Talk Health Care.

Charlie_headshotBack in December, 2008, the folks at McKinsey – one of the world’s most well known consulting firms –  wrote an interesting article on health care reform in the U.S.  What’s striking about it now as we all watch the debate unfold in Washington, DC is how different McKinsey’s approach is to the one being taken in our nation’s capital.  McKinsey focused on three things – personal behavior, cost and quality transparency, and administrative simplification.  The Washington debate is focused mostly on whether or not to create a government run health insurance plan, individual and small group health insurance market reforms, Medicaid and/or Medicare expansions, how much deficit spending is too much, and administrative simplification.

People in DC would argue that doing anything about personal behavior is virtually impossible, so why bother, but McKinsey’s case on this one is pretty compelling.  In fact, McKinsey argues that the whole “40% of individual health care expenses occur in the last year of life” is no longer true – primarily due to the rise in costs associated with managing chronic conditions.  Quote – “…our findings suggest that the management of chronic disease outside of acute-care environments accounts for at least 20 percent of total U.S. health care spending, perhaps more.  That level of expenditure, compounded over decades in many cases, dwarfs the cost of end-of-life care…”  They indicate that end-of-life health care spending – on average – for people who pass away between the ages of 65 and 95 represents less than 10% of the total amount of money they spend on health care during their lifetimes.

McKinsey references obesity as a specific example.  The incidence of clinically defined obesity has doubled in the U.S. since 1980 – to roughly 34% of the adult population.  Clinically obese patients spend almost twice as much as someone with a normal body mass index on health care – every single year.  Put another way, if we were as obese today as we were in 1980, we’d spend $60 billion less on health care.  McKinsey says ignoring the impact personal behavior – and here, I’m mostly referencing diet and exercise – has on the rising cost of health care is a huge missed opportunity, and their data points make a compelling case.

Second, McKinsey points out that the same service provided by two different providers in the same geographic area with the same patient and the same outcome can vary in cost by as much as 40%, and no one knows it.  “In no other industry are service attributes and prices so opaque.”  No kidding.  Some of us having been banging this drum for years, and we are still in the crawl stage in terms of making this sort of information publicly available.  And while I’ve always thought of that as a way to rationalize provider prices, McKinsey thinks it could also rationalize insurance plan design and re-frame the health care conversation generally.  They note that without publicly available information on price and performance, the move from delivery and insurance models that are based on acute episodes of injury or illness to ones that are based on promoting healthy behaviors and managing chronic conditions will take forever to occur.

Third, McKinsey discusses the price of administrative complexity – and while Washington does seem interested in taking this one on, some of McKinsey’s observations about what drives complexity require a more nuanced approach than  the ones currently under discussion.  For example, McKinsey notes that regulation drives complexity, that providers and payors each own a piece of the complexity around claims processing and payment, and that the government as payor has contributed significantly to this conundrum as well.  Are there opportunities here?  Yup, but it’s not as obvious as it seems.  Remember, when someone talks about standardizing processes and rules, they usually standardizing everyone else to the way they do business.

I wonder if the whole diet/exercise question – or the transparency issue – will find their way into the health care reform discussion.  My guess is the answer will be “no.”  They are too beside the point for a discussion that’s primarily about financing and paying for services rendered.  That’s too bad.  McKinsey’s piece makes it pretty clear that reducing the rate of growth in health care spending and improving care quality is about a lot more than whether or not we have a government run plan for the non-Medicare/Medicaid population.

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Ariana CulmerPaul Blake MHMD as HELLPeterSteve S. Recent comment authors
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Ariana Culmer
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An fascinating dialogue is value comment. I feel that you must write extra on this topic, it may not be a taboo subject however typically people are not sufficient to speak on such topics. To the next. Cheers

Paul Blake MH
Guest

Hi, Assuming that obesity is a personal choice does not come close to explaining the epidemic. If it was really a personal choice then the problem would have been with us at the same percentages all along. I do not think the obesity problem can be solved by changing eating habits, such as lowering calorie intake when the American food supply is so poor; that is like pouring gasoline on a fire. The nutrition they need is not in the food they are eating due to poor farming methods, irradiation, pasteurization, over refining, GMF’s and poor food choices and handling… Read more »

Nate
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Nate

It most surely is in the best interest of the insurance company. Anything that increases premiums increases profits. It is a poor financial decision on part of the consumer to purchase such a plan though. Why pay 120% for routine exams? Cut them out of insurance and have people pay for them dorectly. Before the far left of this blog, about 99%, start screaming about the poor poor americans who can’t afford the exam, stuff it, the vast majority of Americans with private insurance make more then enough to afford an annual check up. If I was writing policies I… Read more »

Bill S
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Bill S

Nate, I think that you’re misinterpreting a key aspect of health benefits (and I use that term deliberately rather than health “insurance”). Many such plans today cover preventative and routine maintenance care for chronic disease at little or no out of pocket cost. These expenses would not fall under your definition of “insurable”, given that they are predictable. So why do health benefit plans cover them? I’ll borrow some concepts from the property and casualty insurance industry to help explain this phenomenon. When one experiences a covered occurence in insurance, one of your obligations is to take timely and prudent… Read more »

Nate
Guest
Nate

“Nate, you think insurance is the perfect vehicle to solve healthcare, but isn’t insurance like a tax in that it costs more for bad habits/actions/inactions so as to change/modify behavior, or at least have the bad apples pay more?” Um…what? And no not at all. Not even sure what solve healthcare means. I think insurance is an ideal tool to protect oneself from unknown events/needs. I think it is a terrible way to finance known medical expenses. True insurance is nothing like a tax. In the few places it is praticed insurance is just math and probability. Depending on ones… Read more »

Peter
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Peter

MD, maybe you’d be interested in a little fact chack – buy I doubt it.
http://www.factcheck.org/askfactcheck/does_the_stimulus_bill_include_a_52.html

MD as HELL
Guest
MD as HELL

Margalit,
Is that not how we got stuck with our President? Maybe you are on to something afterall. Now ACORN has billions from the stimulus bill just for Obama 2012. Watch out for the advertising. You might just buy it again.

Margalit Gur-Arie
Guest

rbar, I’m not sure that financial penalties are quite the same as incentives. For example, providing incentives to employers to set up gyms on premise is a good thing. Educating children on good nutrition and exercise is also something worth spending money on. I have a problem with allowing insurers to decide which lifestyle they condone and which one is to be penalized. For example obesity can have various sources and various reasons. I really don’t think that we will resolve this particular issue by making healthcare more expensive, or unaffordable for fat people. I agree with Peter about the… Read more »

Peter
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Peter

“I am against taxing alcohol and unhealthy food, since these things are OK in moderation.” rbar, then you will only be taxed in moderation. We are getting the diet (and habits) our tax dollars subsidize. Subsidized corn is the chief food stuff found in almost every processed food. It is nothing more than calories through starch and sugar. Changing tax policy may not change habits but it will pay for the poor health it creates. The tax dollars can be used to fund healthcare and subsidize good food and exercise – even for the poor. For all those “personal responsibility”… Read more »

Michael Millenson
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Michael Millenson

The link between health status and socio-economic status has been extensively documented globally. Interestingly, some of the pioneering work was done in England, where everyone has health insurance (access) but class distinctions are fairly clear. (Not that WE have that problem, right?) An article I wrote on Mike Huckabee’s health care reform proposal for the blog of the policy journal Health Affairs criticized the simplistic notions of personal and financial accountability put forth by the GOP. (To be clear, I’ve also been vilified by the Left for criticizing the simplistic notion that single payer would solve all financial difficulties arising… Read more »

rbar
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rbar

Margalit, I don’t think that’s a valid argument. There is always a lot of gray in life, and not much pure black and white. Almost all legislative or administrative intervention has to draw the line somewhere, and compromises need to be made (for instance, most states have a legal alcohol limit even though DUI is such a terrible thing – why is that?). Different insurance (tax) premiums should not be considered punitive, but taken as an incentive, an incentive converting long term benefits that are rather in the future (improved health) into actual financial advantage right in the present. I… Read more »

Steve S.
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Steve S.

{Didn’t have time to read all posts but Nate and Margalit seem to be ‘spot on!’} Here is my response to ‘Mike’ Is that ‘25 percent asthma rate on Chicago’s West Side’ a credible statistic? So how was, Mike, it you come to know that “profiteering by businesses (slumlords, corporations dumping environmental hazards) end up causing chronic disease in large swaths of the population?” To me…that’s sorta funny because asthma, obesity and all those other Chronic Ailments impact EVERYONE! Regardless of where they live. Mike quotes/says: “There are a host of studies linking obesity, etc. to socio-economic status?!” So what’s… Read more »

Margalit Gur-Arie
Guest

So maybe insurance premiums should be assessed by pound of body weight, or by BMI for accuracy. We could also use treadmill tests to gauge fitness and have higher premiums for those who choose an inactive lifestyle. We can also charge higher premiums for those with HIV or other STD, since that’s a lifestyle choice. There should be something about alcohol consumption in there too. If you have back problems from old football injuries, the premiums should go up as well, after all football is really a lifestyle choice. If you fall off a horse and end up in a… Read more »

Deron S.
Guest

Overeating is not about diets and willpower. It’s about people getting their rewards from something other than food. We are wired to go for the most salient stimuli. Why do you think Chili’s, TGI Fridays, etc. create the carnival atmosphere that they do? I believe in personal responsibility as much as anyone, but we have become hijacked by the food industry. Unfortunately, Dr. Kessler and the FDA had it easier when they took on big tobacco. It’s not a necessity like food. However, we still need to make it socially unacceptable to market, sell, and consume foods laced with huge… Read more »

MG
Guest
MG

So looking into a weekly Pathmark circular on three arbitrary items is proof to debunk that the link between subsidies and food costs? Junk science indeed.
As for largely relying upon on education to improve lifestyle, that path is hopeless. Gov’t agencies like the Dept. of Agriculture and others already have huge deficiencies in dollars and personnel devoted to the issue but they also don’t have the savvy, understanding, and ability to reach the American public either as effective as food conglomerates and their Madison Ave. counterparties.