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Three Steps That Will Control Health Care Costs

We have the tools to effectively control excessive health care costs and improve the quality of health care. In order to address the damaging impact of these costs it is necessary that we understand the underlying cause of the problem and implement three fundamental changes. The goal is to have health care services of acceptable quality, reasonably priced and available to our citizens.

Where We Are...

Health care costs are one of the largest expenses of many families. In the past few years they have risen to represent the largest source of personal bankruptcy.

For corporations the cost of health benefit plans typically represent the second or third largest expense after payroll and raw materials. Today GM, Ford and Chrysler would not be facing potential bankruptcy if they did not have to sustain health benefits for employees and retirees.

For local, state and federal governments these expenses are forcing the increase in taxes and limitation of other services.

In all cases these expenses represent the most inflationary expense typically increasing from 8% to 15% or more. They are several times the increased cost of other goods and services.

Why The Problem...

Volumes have been written in an attempt to identify the reasons for health care cost increases. Technology, malpractice insurance expenses, defensive medicine, aging population, administrative inefficiencies, the uninsured, insurance company greed and a medical arms race among integrated health systems have all be advanced as the culprits. These are all symptoms of a deeper and more pervasive underlying situation.

At the core of our health care cost dilemma is an economically dysfunctional system. This system has evolved as a byproduct of employer based health benefit plans and government social programs. These two systems today represent about 95% of health care purchases in the United States. They have resulted in a system where those who need the service are different from those who order the service and both of these groups are different from those who pay the majority of the bill. Each of these groups has different needs and incentives which results in a dysfunctional system.

Let me present an example. Discretionary cosmetic surgery is typically not covered by benefit plans. The doctor presents the services, the risks and the cost, "That nose job will be $5,000." All services, surgeon, assistant surgeon, anesthesiologist, pathologist, lab work, facility cost, pre-surgery care and post-surgery care are included in one "Global" fee. The patient makes the final decision to have the surgery and pays the bill.

This is a normal customer – provider relationship. The patient can compare costs and through references obtain quality information.

If a health benefit plan is involved, a dramatically different presentation occurs. The patient may elect to have the surgery and select the surgeon but the other components are independent and are factored in as the system requires. Each will result in a separate charge which may be aggregated or submitted separately. The patient and the patient’s insurance will not know the cost of the service until the end of the day when all the bills have been submitted. This system has been driven by the nature of the health insurance contract where each component of health care is treated separately.

This is similar to the difference between buying a dinner and purchasing each component of the dinner separately. With the latter the steak is one charge, the potato another, the peas are a third and determined by how many peas you want, if you want a plate… that is additional, as are the knife and fork. The napkin is considered unnecessary and will not be covered by insurance.

Add to this confusing system two other elements. First, each service is subject to a discount which will most likely vary between insurance company, PPO, HMO and government contracts. A service may have a 60% discount from billed charges for Medicare, a 50% discount for one HMO and a 40% discount for a PPO. Even patients without insurance get a discount. No one pays billed charges anymore.

Second, the price of a single service will vary widely from provider to provider. In 1984 prior to the Medicare program moving from cost plus 5% to Diagnostic Related Groups (DRG), the price variance was about 10% in a given metropolitan area. Today, of the top 38 hospital procedures the variance is at least 100% and can reach 400%. A $2,000 service at one hospital will cost $8,000 at another.

What Can Be Done...

There is no other industry in the world where a dysfunctional system of this magnitude occurs. No individual, corporation, industry group, consumer group or government can effectively address this problem. Changing the underlying economic model, however, will result in a thousand responses by the market that will effectively address the problem.

For this to occur, three steps must be taken.

1. Health care costs must be made transparent. In order to not violate private confidential contracts between the health care provider and the payer, an initial report of the average revenue received by a hospital for the top 20 procedures will identify those hospitals that are doing a good job of controlling costs and those that are abusing the system.

2. Where possible, services should be offered on a "dinner" basis. These "Global" fees can be developed for about 85% of the services American’s purchase annually. Their development will encourage the medical community to improve efficiencies and develop mechanisms to report on quality.

3. Insurance plans (both through insurance companies and self-insured) and government plans like Medicare can then be modified to embrace the Global fees. This will result in greater cost control and more efficient payment systems (pay one Global fee instead of 12 smaller bills).

These three actions will change the economic foundation on which we as a society provide and purchase health care services. Costs will be contained and reduced and quality will be emphasized. If quality care is more affordable it will also be easier for various programs to provide care in more challenging inner city and rural areas.

The first step is for state and federal governments or corporations through existing contractual relationships to require average price disclosure (net of all discounts) by each hospital.

This article was contributed by Richard L. Blomquist, Esteemed Member of the HRS Client Advisory Team
Mr. Blomquist's Bio and Contact Info 


The Team At HRS - Friday, May 01, 2009