April 17 2012
by Todd Hixon

Health Care Costs: The Art Of The Practical

My last post argued that the escalation of health care cost is the root of the long term U.S. fiscal problem, and health care reform following the Massachusetts/ACA* model makes the problem worse. Recent analysis of health care spending in Mass in the five years since health care reform shows an acceleration of both spending and insurance rates relative to both the national trend and the previous trend in Mass (Source).

And, MIT professor Jonathon Gruber, the economist who was an architect of both Mass health reform and the ACA, recently announced that the economic analysis underpinning the ACA is wrong. He now expects that private insurance premiums under the ACA will be much higher than previously predicted (more).

Chart via Mary Meeker of KPCB


Even before the ACA, the U.S. had a huge health care cost problem. The chart above is shows health care spending per capita versus income for the U.S. and peer countries. This chart has been around for a while, but the problem does not go away. Health care cost per capita in the U.S. is about 100% higher than other advanced countries. And, I have seen no data that says the quality of care justifies this.

Forbes contributor Dan Munro in a recent post took a stab at quantifying the cost savings likely to result from the major cost saving elements of the ACA (link). He concludes that the savings potential from these programs is incremental: a few percent. They miss by an order of magnitude the savings needed: reduction by ~40% would bring U.S. health care costs in range of other rich countries.

Politicians usually focus on the art of the possible: what the players will agree to do. Business people think in terms of the art of the practical: what does it take to win? I’m a business person, and I asked myself the question, what could produce the kind of savings that is needed? The good news: there are some potential answers.

1.         Make primary care more intensive and use it to drive down utilization of hospitals and expensive treatments and diagnostic tools. This is not speculation. There are several organizations in the U.S. that employ the “medical home” model: they provide people with access to all the primary care medicine they need for a fixed fee per month. These primary care doctors have no financial interest in the treatments they recommend. They spend more time with each patient, and hence have time to focus on wellness, early intervention, and solving less complex problems in-office, versus referring everything to specialists. Experience with medical homes shows that intensive primary care can reduce the cost of downstream treatment by 30%-50%.

Potential Impact of Medical Home on U.S. Health Care Cost. Data via Congressional testimony of Dr. Erika Bliss of Qliance Medical Group (a NAV portfolio company).


This is a great trade-off because primary care is a very small part of the cost of medicine. U.S. health care spending in 2010 broke-down into $350 billion for primary care, $1,000 billion for trauma and end-of-life, and $1,250 billion for “advanced care”, which is specialists, hospitals, advanced radiology, etc., other than trauma and end-of-life. That’s the left bar in the chart above. And, about 40% of the cost of primary care is overhead added by funding primary care through the insurance system. If you take primary care out of the insurance system, double the actual primary care resource, and use that to drive down the cost of Advanced Care by 40%, you get the right bar, an overall savings over 15%. That’s the kind of savings we need. This won’t be simple, of course, and probably does not apply to all health care, but there is a big idea here that can make a big difference.

2.         Take a Serious Run At Life Style Diseases. We can no longer afford to fund the cost of care for elective diseases from the public purse. Smoking causes chronic disease and premature death. It adds about $160,000 to the lifetime health care costs of the average smoker (source), which adds $140 billion to the annual cost of U. S. health care. That’s over 5% of our health care bill. Everyone pays for it through taxes, insurance rates, and the need to care for the people in our lives who are smokers. It’s tough to eradicate a drug addiction, which is what this is, and the tobacco establishment has political clout. But, we can no longer afford to ignore the chain-smoking rhinoceros in the living room. My suggestion: we buy out the tobacco farmers, put tobacco in a class with heroin and crack cocaine (expensive, hard to get, criminal to deal), and provide help to those who want to wean themselves.

Diabetes is another life style disease that is epidemic in the U.S.; it costs $220 billion per year (source). Not all diabetes is life style related, and it is a more subtle problem than smoking, but we can attack it too: with leadership and public education (as Michelle Obama is doing), earlier and more intensive counseling of people who are at-risk, investment in things that are healthy and steps to raise the cost of things that cause health problems, and by holding individuals more responsible for health costs related to life style choices (i.e., higher insurance premiums for obese people, just like for smokers). Substantial progress against diabetes would drive a several percent reduction in the national health care bill. And then there is alcoholism …

The point is, there are things we can do to take a big bite out of health care costs. They are hard to take on, but they have big potential. We we can no longer afford to kick this can down the road. We have to take the steps that have a practical chance to beat the fiscal cancer that health care has become.

*ACA refers to the 2010 federal Patient Protection and Affordable Care Act, also known as “ObamaCare”.

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