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Curing the Health Care Crisis

Over the past decade, health care spending in the U.S. rose 44 percent per capita in real terms-far outpacing GDP …

Over the past decade, health care spending in the U.S. rose 44 percent per capita in real terms-far outpacing GDP growth, wage increases and inflation-according to the Executive Office of the President and the Council of Economic Advisors. Already, costs of care and insurance premiums represent 15 percent of GDP, a number economists say will hit 22 percent by 2025 if the current trend continues.

For Corporate America, these numbers represent a major crisis-and a dicey dilemma. Continuing to foot the bill for this level of spending drives up labor costs, making American businesses less competitive than their foreign peers. But how to reduce the costs while continuing to provide affordable, quality care to employees?

Many of the CEOs gathered for a Chief Executive roundtable held in partnership with Blue Cross and Blue Shield Association, feel that one answer lies in addressing a fundamental flaw in the current system; the invisibility of costs to the end consumer. Several participants charged that the prevalence of health maintenance organizations (HMOs) has misled employees to equate the cost of a doctor visit to the $20 copay printed on their plastic ID cards. “We have to change the paradigm of accountability,” noted Scott Serota, CEO of Blue Cross and Blue Shield Association of Chicago. “Until the person receiving the product is responsible in some fashion for the costs, there will be no incentive to spend responsibly.”

Under the current system, for example, a patient bears no additional cost for entering the hospital the evening before surgery rather than early the next morning-so why not do what’s most convenient? “But if it’s my money,” added Serota, “chances are I’ll be willing to show up in the morning.”

Consumer Ed

Consumer directed health plans (CDHP) are one widely touted way of encouraging consumers to approach health care with a concern for price and value. Typically coupling a low-premium, highdeductible insurance policy with a medical savings account allowing employees to pay for medical expenses with pretax dollars, these plans give consumers a financial incentive to spend their health care dollars responsibly. Also, because unused funds in a medical savings account roll over from year to year, enrollees build tax-sheltered savings that can be used to fund health care in retirement.

But despite the enthusiasm for enhanced accountability and savings opportunity, few companies have transitioned to CDHP. A report by GAO put the number of CDHP enrollees as of January 2006 at less than 6 million, a relatively small share of the 177 million enrollees and dependents with private health insurance coverage. What’s more, a survey of 2,100 companies by the Kaiser Family Foundation found that relatively few companies plan to switch to CDHP or add it as an option for employees.

Why the disconnect? “Employers and consumers are looking at these consumer-directed models with some well-deserved skepticism,” suggested Tom Bowser, CEO of Blue Cross and Blue Shield of Kansas City. “Despite the temptation of premium savings, employers are reluctant to expose their employees to a $1,500 front-end deductible. And there is also the question of how well the industry-doctors, hospitals, health insurance companies-can direct an uninformed consumer through the maze of the health care system to make cost effective decisions about medical care.”

“We’re asking people to make decisions in areas where experts have significant disagreements,” agreed Larry Goodman, CEO of Rush University Medical Center. “Accountability is fine, but we have to do a better job of getting information out to consumers about quality.”

“There is an assumption of literacy in this equation,” agreed Serota. “We have a general literacy problem in the U.S., so it seems a big leap to assume that individuals will understand how to make these decisions.” In short, offering financial incentives without the information crucial to making good decisions is both ineffective and irresponsible.

Consumers, for example, must routinely choose between branded pharmaceuticals and their less expensive generic versions with no information on the difference between the two-or, worse yet, only the consumer ads of the branded drug to go by. “Direct to consumer advertising drives up the cost of health care,” noted William Brody, a physician and president of The Johns Hopkins University. “Seventy-five percent of the time when a patient goes to a doctor and requests a particular drug, they get it.”

Unfortunately, there is a dearth of helpful information in the health care industry today. The fees of doctors and medical facilities for various treatments are not typically made available to patients, and information on the quality of care provided by a given doctor tends to be based on reputation or patient recommendations rather than objective data about his or her treatment outcomes. Nor is such information likely to become available in the near future.

“It’s very hard for consumers to make shopping-cart decisions on who is best at hip replacement or an appendectomy, or another procedure, because there are different versions of each procedure,” noted Bowser. “The quality measures do not lend themselves to consumer shopping.” That factor is a major contributor to the relatively low adoption rate of CDHP programs by employers and employees.

Efforts are under way to improve the availability and usefulness of data on quality of care. “We put together a process called Healthcare Facts to provide consumers with quality of care information in a way as approachable as the nutrition label on the back of a cereal box,” explained Mark Banks, CEO of Blue Cross and Blue Shield of Minnesota. “What we found is that you can’t assume you know what information consumers want. Some people want to know the ratio of nurses to patient, others are interested in the number of procedures performed, because volume can be indicative of quality.”

But even confined to the information currently available, policies that promote awareness of price differentials can encourage consumers to weigh their options more carefully. Employees at Alcan make a higher copayment for specialists than for general practitioners and for name-brand drugs vs. generics. “That drives the behavior toward using the primary provider as a consultant rather than going straight to specialists,” explained Ilene Gordon, president of Alcan’s food packaging division. “Prescription reimbursement at retail outlets is limited to three months. After that prescriptions must be filled by mail order or there’s no reimbursement.”

But incenting employees to spend responsibly raises other concerns-among them that companies risk inadvertently discouraging workers from seeking necessary care or to opt out of coverage altogether. “Already, we have 46 million Americans without insurance,” said Serota, who notes that Corporate America effectively subsidizes the health care needs of the uncovered. “The important point to realize there is that while they don’t have coverage they still get health care-so we are all paying for that.”

And, finally, while CDHP may be effective in encouraging smart spending, few expect that even widespread use will impact rising health care costs-let alone reduce them. “At best we are trying to bend the curve down slightly, because what drives health costs is utilization,” noted William Milnes, CEO of Blue Cross and Blue Shield of Vermont. “And the bottom line is that there is better technology and better medication available than ever before. Which of us would say, ��No, I don’t want the latest treatment-the beta blockers or ACE inhibitors-developed a few years ago’?”

Driving Out Disease

Lowering utilization, however, may well be the next frontier in addressing the health care crisis. More and more companies are adopting “wellness programs” that educate workers about health awareness and even financially reward them for taking proactive steps toward healthier lifestyles-or penalize them for failing to change. Taking care of one’s own health might seem a personal responsibility-as well as an obvious necessity, particularly for people with conditions that require care. Yet, many diabetics, for example, neglect to have their blood sugar regularly checked. Similarly, those with cardiovascular conditions often fail to have their blood pressure monitored regularly. Wellness programs try to encourage and facilitate proactive management of health conditions and general health care by employees. More than 25 companies, for example, participate in a wellness program offered by Blue Cross and Blue Shield of Kansas City’s wellness program, which CEO Bowser describes as a “direct intervention program.”

“First, we work with the employer to make sure individual employees are aware of their health status,” explained Bowser. “Second, we hook them up with resources we have in disease management programs for diabetes, obesity, smoking cessation and offer payroll deduction levers to get them to do what’s right.” For example, employees of participating companies undergo a health risk assessment program; those who refuse incur an extra payroll deduction per month.

This type of carrot-and-stick is controversial-many argue that it’s invasive-but may well deliver on the elusive goal of cutting the cost of care. “There are five to 10 chronic diseases that consume the bulk of the health care dollar,” asserted Brody. “If we just focus on getting effective control of these-of diabetes, for example-we can save lots of dollars. So rather than looking at the entire field, why not carve out a few areas where a lot of money is spent, where we can make a dent, and where everybody-providers, payers, and patients-can be incented to change behavior?”

Some charge that such programs are intrusive and, ultimately, ineffective. “We are getting nothing but negative feedback on disease management,” said John Lettmann, CEO of the Malt-O-Meal Company, who feels realizing behavioral changes is an unlikely outcome. “Most people are going to follow their doctor’s advice without getting a phone call once a week asking if they’re doing the right thing. And those who don’t aren’t going to change their behavior no matter how much money you spend a year on disease management.”

But others see hope for a win-win outcome through consumer education and incentives. “People went through driver’s education about seatbelt use,” noted Goodman. “Our parents never wore seatbelts, but today we and our kids as well wear them. In fact, we feel uncomfortable in a car without a seatbelt on.”

On the Legal Front

To truly change the health care cost structure other factors must also be addressed, among them the rampant litigation and outlandish jury awards that have sent medical malpractice insurance premiums skyrocketing-and which translate into rising prices from care providers. The fallout cost of litigation also spurs “defensive medicine,” in which lawsuit-wary physicians may perform unnecessary tests and avoid opening offices in notoriously litigious markets.

Widespread variability in care at medical institutions is also an issue. The Institute of Medicine estimates that medication errors occur as often as once a day per hospitalized patient, noted Goodman, who points out that mistakes fuel litigation. “Looking at systemic problems like that, I think you can identify institutions and hold them accountable for weeding out poor performing doctors and developing processes that can improve performance.”

The price practices of pharmaceutical companies, which meet foreign markets’ demands for price concessions while continuing to charge high rates in the U.S., also came under fire. “We are subsidizing the development, marketing, and sale of pharmaceuticals, medical devices and medical equipment in the rest of the world,” argued Brody. “The cost of the same CAT scanner in Europe and Asia is 50 percent lower than here in the U.S.

Ultimately, curing the ailing health care system will require addressing the issue on multiple fronts in myriad ways. But in the meantime, some CEOs see measures that can be taken on the homefront. “We need to get rid of the fat fryer and the hamburgers in our company cafeteria,” said Bowser. “A simple thing like that can make a huge difference.”

Encouraging employees to adopt healthier habits in the office can have a noticeable impact, agreed Mark Banks, whose firm transitioned to a smoke-free campus. “It actually decreased the amount of smoking,” he reported. “It may not be popular that first year, but it’s a small, practical thing you can do that works.”


Mark Banks, MD, is president and CEO of Blue Cross and Blue Shield of Minnesota, a private health insurer based in St. Paul.

Tom Bowser is president and CEO of Blue Cross and Blue Shield of Kansas City, Missouri’s largest not-for- profit health services corporation.

William Brody, MD, is president and CEO of The Johns Hopkins University, a research university in Baltimore, Md.

J.P. Donlon is editor-in-chief of Montvale, N.J.-based Chief Executive magazine.

Keith Fenhaus is president of Minneapolis, Minn.-based Hallmark Insights, a wholly-owned subsidiary of Hallmark Cards, the $4 billion greeting card leader.

Larry J. Goodman, MD, is president and CEO of Rush University Medical Center, an academic health center in Chicago, III.

Ilene Gordon is president of Chicago, Ill.-based Alcan Food Packaging America, a supplier of flexible packaging.

John Lettmann is chairman and CEO of Malt-O-Meal Company, a cereal manufacturer based in Minneapolis, Minn.

William Milnes is president and CEO of Blue Cross and Blue Shield of Vermont, a private health insurer based in Montpelier.

Scott P. Serota is president and CEO of Chicago, Ill.-based Blue Cross and Blue Shield Association, a national federation of 41 independent locally operated Blue Cross and Blue Shield companies.

America‘s Health Care Revolution

A handful of young companies are looking to make health care consumer-friendly.

Get your flu shot just past aisle four?

Take a strep test while you shop?

Across America, walk-in clinics are appearing in stores like Wal-Mart, offering no-frills health care as an alternative to time-intensive doctors’ offices and ever-expensive ERs. These clinics are the latest example of a common trend that may transform American health care: companies rising to the challenge of making health care more consumer-friendly.

Consumer-driven health care is in. Corporate America embraces the concept; health insurance companies have rolled out a line of products; Washington buzzes with enthusiasm from the White House to K Street.

Consumer-driven health care is seen as a way of taming spiraling health costs while improving quality. The basic concept is simple enough: people, armed with health dollars, will increasingly shop around for health care, promoting competition, and thus innovation and greater efficiency.

Percentage of patients spending more than 20 minutes with their Doctor

Source: Health Affairs

Unfortunately, health care is the most confusing and consumer-unfriendly service industry in America. Understanding even the most basic information on quality, drug prices and insurance options can seem nearly impossible. While some government initiatives-such as the New York State report card on cardiac surgery-have sought to remedy this, these remain few and far between. But companies are rushing to fill the void.

RediClinics, found at stores like Wal-Mart and Walgreens, are a case in point. Staffed by nurse practitioners, the retail clinics provide basic services at low prices: a flu shot for $30, for example. Prices are listed and appointments aren’t required. Shoppers can literally walk in and out in minutes, armed with a prescription.

Annual Spending Growth Per Capita for Major health Insurers 1983 – 2002

Source : Joint Economic Committe

Patients having to wait more than 4 months for Non-Emergency Surgery

Source : Cathy Schoen, Robert J. Brendon, Catherine M.DesRoches and Robin Osborn

Steve Case, the former AOL chairman, is the driving force behind the chain. He says that the idea for the no-frills clinic came to him a few years ago when he took his daughter to an ER for an ear infection and waited around for hours. His company, Revolution Health Care, plans to have more than 100 clinics running by year’s end, and 500 within three years.

Other companies striving to transform health care as we know it include:

Definity Health. The company has just a dozen clients. But don’t let that deceive you-they include Fortune 500 corporations like Medtronic, Siemens and Amazon.com. Definity Health helps clients and their employees get more involved in health decisions by providing them with medical pricing information, a medical library, hospital quality ratings and a health-coaching program. It’s a potent cocktail, and Definity Health has an impressive record, holding health-spending growth to 3 percent a year. Others have taken note-in 2004, UnitedHealthcare bought the company, though Definity Health continues to run under its own name.

The Leapfrog Group. There can’t be much consumerism unless patients are armed with good information. For prospective patients, finding quality data on hospitals is difficult at best, and often impossible. The Leapfrog Group hopes to take the guesswork out of choosing surgical facilities by collecting data on high-risk surgeries in order to make comparisons (and, perhaps one day, comparison shopping) possible.

eHealthInsurance. More and more Americans are finding themselves without employer-funded health coverage and faced with finding a policy for themselves and their families. Enter eHealthInsurance. “We find the right health insurance to meet people’s needs,” explains CEO Gary Lauer. The company offers an easy-to-use Web site that allows anyone to enter his or her zip code and demographical information to get dozens of insurance options, with pricing and details. More than 150 insurance companies are participating.

Destiny Health. Based on a successful business model, Destiny Health’s parent company in South Africa markets the most popular type of private health insurance, health savings accounts. Destiny Health offers more than a standard HSA/HRA. To promote wellness, the company has a point-based system to encourage intelligent choices-like getting routine physical exams and other types of preventive care, or joining a gym.

Members who accrue enough points can cash out for rewards. These companies may not be household names, but they represent a new generation within Corporate America. And more established corporations are also noting the changing environment.

This fall, Wal-Mart started a program offering a month’s supply of more than 100 commonly prescribed generic drugs for just $4; the program is now available at stores in 27 states. The health insurance giant, Aetna, began posting prices for some physician and diagnostic services.

Health Care Spending Percentage of GDP in 67 Countries

Source: Center for Medicare and Medicaid Services; OECD

These developments are significant because consumer-driven health care seems like the right prescription for an ailing system. American health care, after all, is so expensive because it’s so cheap. With people paying just 14 cents directly for every health care dollar spent in the U.S., Americans have historically failed to demand better quality at lower prices. Thus, while the prices of home computers dropped in recent years-despite vast improvements in technology-health insurance premiums doubled since 2000, with little change in health outcomes.

Of course, this begs a simple question: what can governments do to promote the trend? After all, consumer-driven health care is pinned on the idea of people doing some comparison shopping-a challenge when even basic hospital pricing often isn’t available.

Some suggest legislation that mandates pricing transparency. Thus, hospitals would be required to disclose prices on, say, their most commonly performed procedures. Harvard Professor Regina Herzlinger, a senior fellow at the Manhattan Institute, goes a step further, proposing a new federal agency to oversee the industry modeled after the Securities and Exchange Commission.

Out-of-Pocket Share Falls and Per Capita Spending Climbs

Source: Center for Medicare and Medicaid Services; National Health Expenditures

Neither idea has much political support. A transparency bill proposed in the House of Representatives, for instance, didn’t even make it out of committee. It’s also not clear that either idea is necessarily critical to the success of building a better health care market. After all, pricing transparency exists in other sectors of the economy-not by government fiat but as a natural consequence of consumer demand. What’s needed, then, is the enrollment of millions in consumer-driven plans.

Governments-particularly state governments-can play an important role here. Best of all, they can do that without spending a penny from their already strained treasuries. How? Allow government employees to enroll in the plans.

Today, only fives states-Arkansas, Colorado, Florida, Oklahoma and South Carolina-offer health savings accounts to be combined with a highdeductible insurance plan in their state employee plans. Imagine the boost to enrollment if Governors Eliot Spitzer and Arnold Schwarzenegger allowed government workers the option. Imagine the consequences: flu shots available in every Wal-Mart.

With the growing American appetite for medical consumerism, get ready for change in health care. In some ways, it was inevitable. In every other sector of the economy, we look to choice and competition. Health care has been the exception. Until now.

David Gratzer, MD, a physician, is a senior fellow at the Manhattan Institute. He is the author of The Cure: How Capitalism Can Save American Health Care(Encounter Books, 2006).

About Jennifer Pellet

As editor-at-large at Chief Executive magazine, Jennifer Pellet writes feature stories and CEO roundtable coverage and also edits various sections of the publication.