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In 1980, health care in the United States took no more of a bite out of the economy than it did in any other developed country. Then we instituted cost controls. By 2000, U.S. health care cost twice as much as everyone else’s. By 2020 or 2025, we may be back to costing the same as any other country — half the current cost in GDP.

Historical charts of the comparative cost of health care in different countries show a startling and obvious pattern. The trend lines of the leading economies form a fairly tight pack, drifting slowly upward from around 5 percent of GDP in 1960 to 8 percent to 10 percent in recent years — except for one. Around 1980, the U.S. trend line sharply breaks from the pack, and quickly establishes itself at half again as much as most other leading economies, then twice as much.

This happened over the very period that Medicare, followed by private health plans, instituted increasingly stringent and widespread unit cost controls.

I draw two conclusions from this: The notion that U.S. health care must cost twice as much as everyone else’s is not exactly the law of gravity. And there is no evidence that unit cost controls actually control system costs. In fact, through a series of complex feedback mechanisms, it may well be that controlling unit costs pushes up system costs, as members of the system find ways to increase their prices and the numbers and acuity of their utilization patterns despite the caps on reimbursements for individual items.

The Current Health Care

The answer to why U.S. health care costs more is hotly debated because it is highly complex, and the higher costs are spread through every level and sector of the system. It’s a mirror house of high costs: You can point anywhere and you’re right. What’s more, if you are clever, you can obscure your sector’s part in the higher costs. One analysis that I saw broke out all the various costs, and how much they contribute to health care inflation, but never mentioned pharmaceuticals. It turned out drug costs were subsumed within physician costs, hospital costs and so on. The survey was, of course, paid for by the pharmaceutical sector.

But you know the drill: U.S. health care prices for individual items are higher. We tend to use more of the more expensive items. We waste vast amounts on unnecessary uses. Our dysfunctional malpractice system pushes doctors into defensive medicine, which means more unnecessary care. The higher prices for, say, an appendectomy ($13,000 on average in the United States, about $5,000 to $6,000 in Canada or Switzerland, $3,000 in France) subsume much higher costs for every element of that service, including the fees or salaries of the surgeons, anesthesiologists, radiologists and everyone down the line; and higher prices for drugs, sutures, imaging machines.

What it’s due to. All of the various causes of the high cost of U.S. health care are due to the structure of the market — paying fee-for-service for individual procedures, most of them chosen by the provider, many for a user who cannot (or feels they cannot) refuse, and who is in any case generally not the payer.

The fact that the cause is structural suggests that no amount of per-unit cost controls is ever going to fundamentally change the situation. Health care paid for this way will always cost too much, and return too little.

What to pay attention to. Because the cause is structural, look to structural changes in the funding of the health care market for the big leverages. Mechanisms like Medicare’s new Independent Payment Advisory Board and more comparative effectiveness research will produce marginal downward pressure on prices and some culling of the more egregious kinds of waste for useless procedures.

But these are not the real show. They will not fundamentally change the relationship between the buyers and sellers of health care. What will: all methods of payment other than fee-for-service. Any mechanism that pays for outcomes, for the health of populations, anything that even partially spreads the financial risk for those outcomes from the payers alone to the users and the providers will fundamentally change the interactions between the buyers and sellers. Shift the financial risk, and you shift everything. So to see the future, follow the risk.

Following the risk. On the provider side, we are seeing bundled products, full Kaiser-like capitation, mini-caps (such as diabetes subscriptions), experiments in value-based purchasing and comprehensive risk-based arrangements like the alternative quality contracts (AQCs) pioneered by Blue Cross/Blue Shield of Massachusetts. Even process warranties and Medicare’s increasing refusal to pay for re-admits shift some risk for outcomes to the provider. And on the users’ and employers’ side we are seeing continued growth in high-deductible consumer-directed health plans, health savings accounts, direct pay primary care and incentivized wellness plans, all of which involve the user in making rational economic consumer-like decisions about their health care.

These large and small shifts in risk are already having their effect on the market. Across the country we are seeing hospitals merge into larger systems that are more capable of bearing financial risk and of bearing the heavier data and management cost of mitigating that risk. Both from changes that are already happening, and in the face of changes to come when the PPACA reforms fully kick in, hospitals and health systems are increasingly expanding their “medical home” primary care operations and “forward-basing” clinics in poorly served communities. Suddenly it seems that they will do better financially if they can keep people out of the hospital.

The tipping point. This is just the beginning. We are approaching a tipping point. The recent substantial drop in health care inflation is not just a cyclical reflection of the recession. It is, at least in part, the leading edge of the effects of the systemic, structural (and therefore permanent and growing) shift in risks across health care. The growing evidence that employers and health plans can drive costs down through such shifts in risk, accompanied by aggressive prevention efforts, incentivized wellness programs, and targeted intensive management of chronic disease, is already percolating through the broad community of payers. Self-funded employers (half of small employers, up to 90 percent of large employers), especially, have both the flexibility and the direct, bottom-line incentive to get much more heavily involved in directing the health care of their employees. Both employers and health plans are increasingly willing and determined to try new ways.

The Next Health Care

When that happens — and I believe we will cross that tipping point fairly soon over the next few years — we will see a rapid and chaotic shift across health care.

The Next Health Care will be fiercely driven by data, analysis and strongly directive management. Health care organizations will compete strongly. The scoreboard of this competition will not be, as it has been, who can provide the most reimbursable services, but who can provide the measurably best health and health care (both) to defined populations that they serve.

The industry that we are imagining here, the health care industry that costs half as much of GDP while returning much better health, is wildly different from the health care industry of today. It is as different as a Toyota Prius from a 1950 Willys truck.

Creative destruction. IBM and its competitors (such as Burroughs, UNIVAC, DEC, NCR, Control Data, Honeywell and Hewlett Packard) must have felt in the early 1980s that they stood astride a vibrant, maturing industry. That almost all of them would be irrelevant, dead, merged, downsized or sold within a decade would have seemed a bizarre fantasy to them, as would today’s smart phones and Internet, or the emergence of organizations like Apple and Google as among the world’s most valuable and powerful corporations.

Because communities are very attached to them, hospitals have somewhat more built-in resilience than computer companies. But only somewhat. The creative destruction in the computer industry in the 1980s and 1990s approximates the scale and depth of change that we can contemplate for this industry over the next decade at least.

The Next Health Care is a tough fit for hospitals as we have traditionally conceived them — loosely organized, focused on the reimbursement for the reimbursable, paid for action rather than results. The strong tendency will be for hospitals to be increasingly cut out of more and more of the market, specifically all parts of the market that can be made to pay under the new risk-bearing regimes — unless they are smart, nimble and aggressive in re-shaping themselves.

We are likely to see entirely new players entering local and regional marketplaces, new risk-bearing structures designed specifically to keep the people they serve out of your EDs, your surgical suites and your hospital beds. Your competitors at Major Memorial will increasingly not be St. Mary’s Health System or HCA Suburban. Your competition will be large multispecialty physician groups with AQC-like contracts; it will be onsite primary care clinic chains plopping themselves down in the major employer’s factories and warehouses; it will be OnlineInstantCare.com on the customer’s smart phones; it will be all manner of new structures, contracts and arrangements that we have not even seen yet.

Dealing with the end of cost-shifting. More and more you will be competing against organizations that do not have the “hospital premium” built into their cost structure. The functional result of working in a health care economy that is mixed between risk-bearing and fee-for-service structures will be that cost-shifting, not only between payers but between departments and product lines, will become much more difficult. The Next Health Care will in effect demand that every product and product line bear its own real costs.

This is dire news, the most difficult dynamic in the Next Health Care for hospitals, particularly hospitals that continue to have a heavy burden of uninsured — usually the same hospitals bearing the heaviest burden for emergency and trauma. As cities and states pare back other services and programs, EDs increasingly become not only the first responders for stroke and AMIs and diabetic shock, but at the same time dumping grounds for the mentally ill, the painkiller addicts, the violent, the drunks, the police problems. Communities desperately need and are deeply attached to competent emergency services, but are not really willing to pay for them. Hospitals have tended to be the passive victims of this dynamic, the chumps in this game, simply absorbing the costs as part of the “hospital premium” charged for every other service. The Next Health Care will make that much more difficult to do.

Stemming the emergency department tide. In response, hospitals and health systems that do not want to simply abandon their communities will be forced to become extremely creative and aggressive at paring back the burden of the populations that surge into the ED. This will include:

• Triage: vigorously, quickly, and accurately triaging non-emergency cases to clinics.
• Behavioral triage: Make psychological triage a normal part of the ED intake process. Mental health plays an astonishingly large role in addictive, traumatic and chronic disease processes — and an astonishingly large number of people find ways to need emergency services simply because that’s the only place where someone will really pay attention to them. Find someone other than a trauma specialist physician to do that. Mental health services are generally far cheaper than the medical and surgical services they can supplant.
• Identify and track problem users, especially those just seeking narcotics. Use biometrics if necessary. Establish regional patient identification registries to deal with “ER shopping.” Give your emergency nurses and physicians the legal and technical backup they need to not waste time and resources playing “What’s My Line” with addicts.
• Identify and track “frequent fliers” with untreated chronic disease. Establish pro-active Camden-style clinician groups to seek out such problem users and help them. If someone is showing up in your ED every three weeks with multiple chronic problems, you will spend far less money if someone goes to their house and helps them vigorously and intensively before they show up again.
• Seek new sources of funding from states and municipalities, such as direct contracts for emergency services, and direct revenue streams from sales taxes and property taxes. Yes, taxes. The current mania for never taxing anything and drowning government in its bathtub will run its course. It will be possible to make the case to municipalities and states that the people need to pay for the services that the people demand.
• Campaign for state and federal legislation to cover the un-coverable. Don’t call such legislation the “Give Free Health Care To All Those People You Don’t Like Act.” Call it the “Hospitals Rescue Act.” Because that’s what coverage for the un-coverable is: helping hospitals survive the onslaught of the cost of caring for them.

Upgrade your cost analysis. The technically most difficult part of managing this transition is simply continually computing your real costs, not per reimbursed procedure but per benefit provided. If you’re in the fee-for-service business of doing back surgeries, your cost analysis question is whether you can keep the average costs of the surgery below the reimbursement level. But if you have a contract for a set amount for every aching back referred from, say, all the warehouse workers at the airport, then you have a different and much more complex analysis to make: What are the average costs of fixing all those aching backs, some of which may need surgery, but most may not? Suppose you have a comprehensive risk contract for all the back care for all the warehouse workers, whether they have aching backs or not? Then you have a further element to your analysis: What can you do to prevent chronic back aches in this population?

Cut waste. It is obvious that hospitals and health systems need to “go lean,” finding much more cost-effective ways to do every process. But in the Next Health Care, it is even more important to stop doing unnecessary procedures. Under a fee-for-service system, waste is not waste, it’s revenue. Put an implanted defibrillator in someone who does not need it, and you get paid. Under a risk-based contract like an AQC, waste is waste. Do something expensive, unnecessary and risky for the patient, and it costs your bottom line.

Move fiercely upstream. When you assume financial risk for the health of a population, everything headed your way is not a revenue stream, it’s a cost. There is no doubt that everything coming your way will be easier and cheaper to deal with if you can get to it sooner. You must become your customer’s friend, using real people (not just robo-nags and websites) and working through naturally trusted pathways in customers’ schools, workplaces, churches, bars, police athletic leagues and local hangouts. At the same time, you will need to become world class in tracking, characterizing and understanding your customers and potential customers. This is miles beyond marketing research. It’s population health management on steroids. The skill set is in its infancy, but it includes tracking on individual and aggregate levels; mining and understanding the now very deep literature on prevention, incentivized wellness and healthy communities; geographic information systems to “geocode” the data onto neighborhoods, workplaces, churches and other community connections; predictive modeling to suggest what interventions will have the best effect; and tracking the return on investment of particular interventions. The skill set will have to include the ability to create targeted, flexible responses, to “mass customize” interventions and resources to individuals and to micro-populations (such as the residents of a particular convalescent home, or employees on a particular site, or all of your customers who have a particular condition). All of this is new, and there will be an extraordinary premium on getting it right.

Campaign for legal reform. There are significant legal barriers that get in the way of hospitals competing effectively in the Next Health Care. These barriers are found especially in the federal Stark laws and anti-kickback legislation (which can be interpreted to prohibit or inhibit many of the kinds of risk-sharing structures that this shift calls for). The varying and inconsistent state “corporate practice of medicine” laws can similarly inhibit new necessary medical corporate structures. State scope of practice laws often, in effect, mandate the inefficient use of health care resources, demanding, for example, that a physician give a subcutaneous vaccination that could just as easily be given by a pharmacist. The efficiencies of the Next Health Care will need all clinicians to be operating at the top of their license and at the full extent of their training.

In the Next Health Care, these laws will tend to disadvantage hospitals and health systems, because the new-style competitors will be more nimble and well situated to find ways around them. Hospitals and health networks will need changes in the laws not only not to be disadvantaged, but to be able to make use of these new entities as allies and partners.

Re-Invent Yourself

The economy of the Next Health Care, emerging over just the coming few years, will re-apportion financial risk for the health outcomes from the payers to the providers and the users, driving the entire industry to a smaller, leaner, more efficient and effective model. Such a shift is an existential threat to hospitals and health systems. To survive and thrive will take insight, unprecedented flexibility and creativity, strong leadership, and courage.

This article first appeared in H&HN Daily, from the American Hospital Association, March 27, 2012

By Joe Flower