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Tackling Healthcare Spending – One Percent at a Time

One Percent Steps Adding Up to Something BIG?In healthcare, there is plenty of waste…and this waste is enormously costly to those who pay. This unnecessary spending is baked into the outrageous health insurance premiums we pay. In 2019, I estimated that ANNUAL waste baked into Iowa premiums for single and family coverage averaged $2,400 and $6,600 respectively. This translates into nearly 34 percent of all healthcare costs as non-value-added. 

Now, to be fair, there are those who make a living from this waste. Waste becomes a paycheck. Removing this unnecessary payroll, however, will most likely erupt into anguished rebellion. Justifications can always be made by various healthcare stakeholders about the necessity of their ‘value’ in a highly-convoluted and dysfunctional system. Admittedly, some may have a point. 

Six Domains of Waste

In the broadest sense, waste is found in six ‘domains’ of healthcare – as identified by Donald Berwick and Andrew Hackbarth in a 2012 study:

  1. Overtreatment (low value care)
  2. Failures of care coordination
  3. Failures in execution of care processes
  4. Administrative complexity
  5. Pricing failures
  6. Fraud and abuse

Using each of these six broad buckets of waste, my aforementioned 2019 blog provided the estimated impact of waste to health insurance premiums. Eliminating too much unnecessary spending at one time, however, will most likely create a backlash of stakeholder opposition. This may result in missed opportunities to actually fix the expensive leaks in our healthcare ‘system’.

How can costs be incrementally reduced to make a sizeable impact to payers?

One Percent Steps for Health Care Reform Project

According to a February article in Health Affairs, authors Zack Cooper and Fiona Scott Morton discuss implementing a series of one percent solutions that could collectively lower healthcare costs by hundreds of billions of dollars. If you are an employer that offers health coverage, this should grab your attention.

The authors explain their reasoning on using the one percent solutions:

Rather than speaking about health spending via abstractions, we should view high U.S. health care costs as the result of a series of discrete problems that each incrementally raises health spending by a percent or two — so-called ‘one percent problems’. While each problem is unremarkable in isolation, the collective impact of a series of one percent problems can help explain why the U.S. spends more than other nations.

The vastness of healthcare issues require new approaches that disrupt the status quo from being replayed into the future. Doing so begins with smaller steps that make sense. Cooper and Morton prescribe 16 steps that economists and policymakers can take to reframe healthcare spending as a series of one percent problems. These problems, they argue, can be used as a road map for cost reduction. 

If implemented, the following 16 steps would decrease overall annual healthcare spending by nearly nine percent. This amount of savings may not sound impressive, but when nearly nine percent can be lopped off from the health system that absorbs $3.8 trillion of costs, it is an impressive beginning. Each step does not serve as a silver bullet, but rather, an incremental solution that makes sense.

These 16 evidence-based steps are ranked by their projected annual savings as a share of national health spending:

  1. Regulating healthcare provider prices: 1.89 percent
  2. Addressing surprise medical bills: 1.67 percent
  3. Increasing the efficiency of claims adjudication: 1.25 percent
  4. Addressing vertical integration of hospitals and physicians: 0.91 percent
  5. Introducing smart provider networks: 0.83 percent
  6. Addressing hospital consolidation: 0.69 percent
  7. Improving health insurance plan choice: 0.63 percent
  8. Improving plan auto-assignment in Medicaid managed care: 0.24 percent
  9. Reforming how Medicare reimburses biosimilars: 0.21 percent
  10. Addressing orphan drugs: 0.15 percent
  11. Reducing fraud in home health: 0.12 percent
  12. Reforming the payments for long-term care hospitals: 0.11 percent
  13. Decrease cost barriers for living kidney donations: 0.08 percent
  14. Expanding preferred pharmacy networks: 0.04 percent
  15. Eliminating prescription copay coupons: 0.03 percent
  16. Expanding kidney exchanges: 0.02 percent

Zack Cooper, Associate Professor at the School of Public Health and the Department of Economics (Yale), discusses the ‘one percent’ approach in a ‘Creating a New Healthcare’ podcast. He can also be found on Freakonomics Radio, “How to Fix the Hot Mess of U.S. Healthcare.”

As we fight the daily battles of the Covid-19 pandemic, we are reminded that many inherent problems continue to persist in our costly healthcare system. Without action, these problems will not go away. Will market solutions be able to fix many of these issues? The clock continues to tick – and healthcare costs continue upward.

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Comments

  1. Brian Smith says

    Where does paying providers for health of their patients versus episodes of treatment come into play? Also I think this list over-emphasizes surprise billing as a real economic problem and under-estimates the importance of government programs. Perhaps that is solutioning, but I have seen the huge ripple effects of changes in payment by government programs.

    • David P. Lind says

      Brian, these are great points and I tend to agree. Would this list from Cooper, et al serve as my or your list, not likely. I’m confident if 100 people were asked to come up with their list of finding culprits of unnecessary spending, there would be 100 separate lists with a multitude of approaches – much of it pertaining to our unique perspectives and biases. Surprise billing, as an example, tends to be the flavor of the day. For me, I would prefer to see more unified administrative protocols from ALL payers, rather than the piece-meal approach by each payer…which is absolutely nonsensical. Thanks so much for your comments, Brian!

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