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Managing Costs in Health Care: Why Is It So Hard?

By Mike Bell

Some reasons why attempts to control rising health care costs have had limited success or have failed

For many years now, rising health care costs have been one of the loudest cries from both the business and government. In many cases, the only issue addressed is the cost of health care. For those who do not have health insurance or access to health care getting taken care of is their justifiable concern. For those involved in the provision of health care, bureaucracy, and unreasonable intrusion on their time and judgment is often a target of hostility.

This is all the more interesting as many very well intentioned and intelligent people have made enormous efforts to correct some or all of these problems. (There also have been some not so well-intentioned but we can address those later.) Initiatives by various medical, insurance, business, and government groups have been met with limited success and sometimes outright failure, with the associated vitriol that so often accompanies failure.

In this article, I will try to explain the causes of the failures, and the risks of not making significant changes to the entire system. The word “entire” is dangerous, as it brings back bad memories of “Hillarycare” from President Clinton’s first term. I make no pretense to have one all-encompassing solution as that actually may border on the impossible. What makes everything so hard, and why so many failures have occurred, is the lack of explicit recognition of the multiple agendas and how they are often diametrically opposed. In order for any real progress to be made in the areas of cost, access, and quality of care, everyone is either going to have to compromise or be forced to give something up. That is not to say that the U.S. cannot have the highest quality, most efficient health care system in the world. To the contrary, I believe that we have to lead the world in health care. No one else has the abilities, talents, or creative skill that we have here. But, we do need to do a few major things: Encourage and fund entrepreneurial ventures that fix some of the problems that exist, and find a few politicians that have both the courage and leadership skills to do the obvious, but unpopular things that need to be done.

So to start with, let’s lay out a few facts to indicate just how disingenuous many of these warring factions have been. First, health care represents about 17 percent of GDP now with no good reason to believe that number is going to significantly change or stop climbing and start dropping (1). The projections on the new health plans only make sense if you think you can predict the weather in 50 or 75 years. That is beyond my planning horizon and we will have a catastrophe in the system way before then.

Second, approximately 70 percent of the health care system cost in this country is driven by 10 percent of the patients (2). The statistic is startling for two reasons. It shames the 80/20 golden rule of business by over a factor of 2, no easy feat. The other shocker is that this is not a secret within the health care world. Many people have similar sets of numbers and even know how to make changes that impact the ratio dramatically. They have been stymied at every turn by an opposing constituency, and the people who lead are more concerned with the politics for a few rather than the answers for the great majority.

Third, approximately 30 percent of the entire health care spend is put toward paper. By that I mean administration, processing, financing, and the systems that in theory control all of them. Anyone who has had a problem with the system turns purple in rage when discussing insurance claims, hospital forms, lack of “how to” information or “where do I go” questions. Can this be changed without unicorns? Of course, but we can’t keep doing things the way we have been doing them and expect big changes here. (The definition of lunacy is doing the same thing over and over and expecting a different result.)

Fourth, many smart and sophisticated people seem to labor under the impression that doctors are hatched. That is, they go to medical school, graduate, and the next day are handed scalpel to perform brain surgery with a perfect surgical success rate. Yes, that is ridiculous; they have to be trained practically in a good clinical environment. Guess what? That is not free either. So, we need to find that money without harming patients or crippling the system.

Fifth, the fact that doctors are created, not born, holds true when you talk about medical research. Yes, the government spends a lot of money on it, as do the academic and clinical institutions. Guess what, again. All the money going into basic research does not cover all the costs, and we have to find that money somewhere. A thinking person does not have to spend too long pondering the value of research. Whether it is improving the odds of curing cancer, doing surgery with lasers, finding drugs that cure the problems people could not fix before, everyone implicitly knows the need for and value of basic medical research. We need to pay for it.

Sixth, all patients seem to feel entitled to all the best possible care at all the times when they might need it. That form of entitlement is simply not affordable. The benefit of all of our great science is clear. What is equally clear is that the money for every patient to get everything does not exist and to think it does means people are either irresponsible, or do not understand the basic arithmetic around the problem. Does everyone get a Maserati simply because they exist?

Seventh, the government claims to be our friend and protector in health care. But, it is not. Without getting into mysticism and voodoo, I won’t even begin to discuss government numbers at this stage. What I can say, is that while government programs do many things well, arithmetic is not one of them. For all intents and purposes, Medicare is broke now and we can watch it slowly unfold like a bad movie. Medicare was started in 1965 when overall life expectancy was around 70 years old. Is there anything that works the same or costs the same as 40 years ago?

I trust you are getting the point by now. There are at least partial answers to all of our health care problems available today, I mean right now. As noted earlier, the various players all have to give a little bit for the benefit of the whole, or the people who can’t afford basic care, or to fill the gaps needed for teaching and research, etc. Perfection is the enemy of the good and what we want here is a good affordable system for all that permits us to do the things we need to do to be the best health care system in the world.

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The author is an Adjunct Lecturer at Babson College. He is a Managing Partner and founder of Monitor Clipper Partners, a private-equity firm located in Cambridge, with over $2 billion under management and currently investing out of its third fund.

1. “Explaining High Health Care Spending in the United States: An International Comparison of Supply, Utilization, Prices, and Quality,” The Commonwealth Fund, accessed September 17, 2012, http://www.commonwealthfund.org/Publications/Issue-Briefs/2012/May/High-Health-Care-Spending.aspx

2. “The High Concentration of U.S. Health Care Expenditures,” US Department of Health and Human Services, accessed September 17, 2012, http://www.ahrq.gov/research/ria19/expendria.htm

3.“The Economic Case for Health Care Reform,” Executive Office of the President Council of Economic Advisors, accessed September 17, 2012, , http://www.whitehouse.gov/assets/documents/CEA_Health_Care_Report.pdf

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