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My perspectives as an investor and consumer

Use leverage to transform health care in the US

ailing_healthcare_by_frantzwahWe all understand to some extent that our health care system is in dire need of reform.  Do we know what its condition really is?  Allow me to paint a picture.

What is the current and projected state of health care in the US?

National Health Expenditure (NHE) is defined as the total health care spending in the United States.  According to Centers for Medicare & Medicaid Services (CMMS), which quantifies health spending on an annual basis, the NHE grew 6.1% to $2.2 trillion in 2007, or $7,421 per person.  In comparison, this cost was $75 billion or $356 per person in 1970.  Health care spending currently accounts for 16% of our Gross Domestic Product (GDP) and is projected to grow by an average of 6.2% per year between 2008 and 2018.  At that rate the NHE will have reached $4.5 trillion in ten years and account for 20% of our GDP.  Healthcare spending has exceeded overall economic growth (GDP) annually by an average of 2.5 percentage points since 1970.

80% of health care spending goes to hospital care (37%), physician and other professional services (29%), and drugs (14%).  Many doctors complain that the system is now turned on its head where more and more of each healthcare dollar goes to cover administrative costs associated with the first two categories than to pay professional fees.  The facilitator of the doctor-patient relationship has become the principal entity.  Meanwhile, the doctor-patient relationship is now there to support the facilitator.

Private health insurance and out-of-pocket payments accounted for the largest part of health spending (55%) in 2007.  Public programs like Medicare, Medicaid, etc., comprised 45% of NHE.  While worker’s earnings and overall inflation has increased ~30% since 1999, health insurance premiums have grown 119% during the same period.  This usually means that workers have to spend more of their income each year on health care to maintain coverage.  These effects may either be direct – through increased worker contributions for premiums or reduced benefits, or indirect – such as when employers forgo wage increases to offset increases in premiums.  I gather you’ll agree with me that neither of these options is ideal.

Due to the influence of the recession and the leading edge of the Baby Boom generation becoming eligible for Medicare, average annual spending growth by public payers is expected to outpace that of private payers.  As a result, CMMS projects that public programs will overtake private insurance and reach 51% of NHE by 2018.  Not only will it be necessary for us to allocate greater portions of our income to employer-covered insurance premiums and Medicare, there is no guarantee that it will be sufficient to bear the imminent burden on our health care system.

How can this problem be addressed?

Victor Fuchs, Professor of Economics and of Health Research and Policy at Stanford University, proposes tackling health care reform around four essential principles: coverage for the uninsured, cost control, coordinated care, and choice1.  According to him, any reform which does not cover these essentials is doomed to fail.  In addition, any reform plan that is not controversial is certain to be inconsequential.

Dr. Benjamin Carson has one such controversial and ambitious plan.  Dr. Carson, who has served in a medical advisory role for both President Clinton and President Bush, suggests the idea of a medical endowment where ten percent of the cost of health care be set aside annually in an endowment fund2.  The interest from the endowment would be used initially to cover health care expenses for the uninsured and underinsured, the first C of Prof. Fuchs principles.  He envisions growing the fund to such a size in 15-20 years that it can cover most of the country.  He has initiated a pilot program at Johns Hopkins Medicine.  The fund, called the Benevolent Endowment Network fund, will be started off in pediatric neurosurgery, expanded to all of neurosurgery with the hope of eventually covering the entire hospital.

On the corporate side, Wal-Mart is slowly positioning itself to be a force in health care through a controversial plan for tackling the second C – cost control.  I call it controversial because Wal-Mart tends to elicit a visceral reaction from many people, who view the company as “pure evil.”  I merely present the company as one of the potential forces necessary for true health care reform to be accomplished.  In September 2006, the company introduced $4 30-day prescription pricing for 291 generics in the Tampa Bay, FL area, which was available to the uninsured.  It has since expanded the program to 49 states covering 350 generics and 1000 over-the-counter medications.  Pricing now includes an option for a 90-day prescription for $10.  Several pharmacy chains, including Target and K-Mart, were forced to follow suit.  Anecdotal evidence from my pharmacist friends, who work for other chains, suggests anger at this move.  Meanwhile, many consumers applauded the move.

The company is now looking to shake up Pharmacy Benefits Management (PBM).  It announced a pilot with Caterpillar to provide 2500 prescription drugs to 70,000 of its employees, spouses, and retirees.  If successful, it is sure to try expanding the deal with other employers.  This, in turn, could help employers cut their costs related to prescription drug coverage.

The third leg in Wal-Mart’s stool is electronic medical records (EMR).  According to an article in the New York Times, Wal-Mart has decided to team its Sam’s Club division with Dell and eClinicalWorks to market hardware, software, installation,maintenance, and training to physicians’ offices.  They will be mainly targeting small physician groups where 75% of the nation’s physicians practice.  Another initiative in the works for Wal-Mart is telemedicine in collaboration with NuPhysicia, LLC.

Michael Porter, University Professor at Harvard Business School and Director of the Institute for Strategy and Competitiveness, has a plan for tackling the third and fourth C’s – coordinated care and choice.  He proposes a value-based health care delivery system where players strive to create value for patients rather than capturing more revenue, shifting costs, and restricting services.  The centerpiece of this strategy involves bundled reimbursement for an entire care cycle instead of individual services like doctor visits, MRI scan, radiologist consultation, biopsies, etc.  He provides examples of institutions such as The Cleveland Clinic and MD Anderson Cancer Center where disease-based integrated practice is bearing fruit.

Despite the various forces working to address the four C’s, one important issue that I see missing is that of preventive medicine.  I proffer this as the most important piece for the long term viability of any health care reform that’s implemented.  Most reform ideas center around the reduction of current health care burden which are all remedial in nature.  In fact, our entire nation’s health care focus seems to be on treating the disease.  Even the preventive measures mainly target regular screenings.  The assumption here is that some type of disease is inevitable; so let’s try to nip it in the bud through screenings.  What about the notion that many diseases may be prevented if we actively engage in a lifestyle that’s healthier this year than it was the last?  A friend of mine (hat tip CJC) made a statement recently which I believe to be true:

No health care reform or plan in the world can bear the burden of overweight and obesity and the complications that arise from it.”

According to the National Institutes of Health, two-thirds of us are overweight and one-third are obese.  Overweight and obesity are known risk factors for several diseases.  Certain diseases can trigger other complications and multiply the cost associated with treating them all.  For example, people with diabetes spent $190 billion for health care in 2004, nearly seven times the $28 billion they spent specifically to treat diabetes.  A sizeable portion of the total spending for these people went to the treatment of conditions that are common complications of diabetes3.  So leverage, in this case, works against us and multiplies the burden on the health care system.

However, leverage may be employed to our advantage, as well.  What if we take personal responsibility for our long term health through healthier eating and more physical activity?  We may be able to reduce conditions of overweight, and obesity and diseases like diabetes, heart attack, stroke and other related disorders.  As a result, we will find ourselves making fewer doctor visits outside our regular check-ups.  Fewer complimentary services are ordered by our primary physician.  All of this reduces the burden on our health care system.  Health care providers can, in turn, focus on patients with diseases that are out of their control and provide better value.  Meanwhile, consumers may be willing to apply some of the savings from their reduced insurance premiums to cover the uninsured and underinsured.  The four C’s have a better chance of success in providing coverage for all of us because less strain is put on by each of us.  And the best part: this leverage monetarily costs us next to nothing.

All it requires is one question and small steps to answer it: How can I live healthier this year than I did last year?

—————————————————————————————

1 Health Reform: Getting the Essentials Right by Victor R. Fuchs

2 The vision of the Benevolent Endowment Network fund by Dr. Ben Carson

3 Roehrig C., et al. National Health Spending by Medical Condition, 1995-2005.  Health Affairs.  Volume 28, Number 2 (2009): pp 358-367.

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One Response

  1. Helene says:

    Thanks for contributing this well written and informative blog post on the healthcare situation in this country to Take Charge of Your Health Care Carnival.

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