The Wall Street Journal reported that 20 large U.S. companies joined to fight high healthcare costs, launching the aptly named Health Transformation Alliance. Employers account for one in five dollars spent on healthcare in the U.S., yet they have relatively weak influence in the marketplace. But these influential companies are intent on aggressive action. With this kind of unified leadership, the alliance promises to shake the foundations of our health care economy.
There have been other efforts to harness the power of the business community to improve health care. My organization, the Leapfrog Group, is one such effort, founded by Business Roundtable in 2000 to address quality and patient safety in hospitals. Based on what we’ve learned over the past 16 years, here are three key principles for the alliance to start with:
- Lowering costs won’t automatically lower prices.
Whenever the subject of cost reduction comes up, some providers tout the enormous cost savings they have put in place through improved efficiencies, better technology or less invasive procedures. Recently, they have also pointed to the potential of large hospital system mergers to reduce costs through economies of scale. But employers are right to wonder why their own healthcare price tag continues to rise, despite these marvelous advances. Why don’t they see the cost savings?
Simply put, cost savings to the provider are not the same as cost savings to the purchaser. This sounds like such an obvious point. But the obfuscation over whose costs are saved persists and trips up progress year after year, with purchasers left scratching their heads. The alliance members will succeed in cutting their own prices only if they clearly demand that cost-reduction strategies have visible and substantial effects on their own bottom lines.
- Lowering prices won’t automatically lower costs.
Even if purchasers do succeed in lowering prices, the cost-reduction job is not done. That’s because the amount of waste in healthcare is profound. The Institute of Medicine estimates that as much as one-third of all costs are associated with unnecessary services, errors, infections and management inefficiencies. Not all providers are the same, and some incur much more waste than others. Whatever the price of a particular procedure, it’s no bargain when there are infections, complications and mismanagement—or if the procedure wasn’t medically necessary in the first place.
This is not chump change, this is game change. A 2013 study in the Journal of the American Medical Associaton (JAMA) reported that, on average, purchasers paid $39,000 extra when a patient contracted a surgical site infection. That excess doesn’t show up on the claim as a line item called “waste.” It is buried in a series of excess fees, tests, treatments and time spent in the hospital. Employers intent on cutting costs must factor wastefulness into the pricing equation.
- Focus on the market incentives.
Our system of costs and pricing creates perverse incentives. The more a provider wastes, the more it can bill the employers. New financing models are slowly emerging, aimed at achieving value—the novel idea that payments align with patient outcomes. One of the most promising models is called “bundled pricing,” in which a health system is paid one total price for a particular procedure, including physician fees, radiology, hospital charges, etc. In this model, a provider is given incentives to actually reduce waste, so it maximizes profit under the bundle.
Some large employers have developed bundled pricing arrangements with a select group of health systems, for a select group of procedures. Walmart is a leader in this, as are employer members of the Pacific Business Group on Health. What have they found? A significant reduction in waste and better care for employees.
Another promising use of bundled pricing is coming from international medical tourism. Health services and pharmaceuticals are often much less expensive overseas than in the U.S. Most international providers offer bundled pricing and concierge hosting services. For example, Health City Cayman Islands offers bundled prices for certain heart and orthopedic surgeries, including all facility and physician fees, along with pre- and post-operative care at a lovely beachfront hotel. Its prices are one-fourth to one-fifth those for comparable services in the U.S.
The problem with medical tourism: determining the quality of international providers. Employer groups, like the Health Transformation Alliance, must address this in their work. Once again, waste and quality need to be factored into the cost equation.