The 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.
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.
