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Estimated Waste in Iowa Employer Health Premiums:
$2,400 Single/$6,600 Family

Imagine walking into a restaurant and being seated. Sometime after your meal, you receive the check and find an additional charge that was not indicated on the menu or previously mentioned by your waiter. The charge – before your gratuity is determined – is a 34 percent markup simply labeled, ‘Surcharge.’ After prodding the waiter, the sheepish but honest response is whispered to you: “The restaurant industry is bloated and inefficient requiring additional costs, and because of this, we must pass on this surcharge to our patrons.”

Truth be known, we are all paying this ‘surcharge’ in the healthcare that we purchase, as it is baked into our health insurance premiums and the out-of-pocket expenses we incur and pay. What is different from the hypothetical restaurant example, however, is there’s no transparency on how much these costs add up in healthcare. Opaqueness of this information allows this surcharge to be included on the final price tag – and the purchaser is no wiser.

In healthcare, it’s buyer beware – on steroids.

Healthcare Waste in the U.S.

To begin, defining healthcare ‘waste’ is somewhat tricky, but nonetheless important. Waste is defined by many in the industry to be resources that are expended in services, money, time, and/or personnel that do not add value for the patient, family or community. In fact, this non-value waste can actually harm patients, which adds more cost to the system.

I recently watched an Institute for Healthcare Improvement (IHI) webcast, “Let’s Get to Work on Waste in Health Care.” In addition to a wonderful Call to Action’ piece, IHI provided great examples of healthcare waste within the ‘Trillion Dollar Checkbook.’ The IHI used ‘trillion’ in this piece because the healthcare industry in the U.S. is about one-fifth of the nation’s economy (and growing), and the annual spend in healthcare during 2018 was $3.65 trillion. Healthcare waste in the U.S. is generally believed to be a comfortable one-third of the total spend – roughly one trillion dollars – about the size of Mexico’s economy. Click here for the audio and video of this webcast.

The IHI referred to a JAMA article published in 2012 by Dr. Donald Berwick, a highly-respected physician and health policy expert, and Andrew Hackbarth of the RAND Corporation. The article, “Eliminating Waste in US Health Care,” aptly describes that escalating healthcare costs is debilitating other worthy government programs, erodes wages, and undermines the competitiveness of the overall U.S. industry. The percentage of waste that is built into healthcare costs, according to this paper, ranges from 21 percent to 47 percent, with 34 percent being the midpoint.

‘Litter Box’ of Healthcare Waste

So what healthcare waste is found in the litter box hidden from the public?  Plenty. A ‘less harmful strategy’ described by the JAMA authors would be to reduce waste that does not add value to care. They cite six categories of waste briefly summarized below, beginning with the largest estimated waste to the smallest:

  1. Administrative complexity – Government, private payers, and others create inefficient or misguided rules for providers. By comparison, in 2015, the U.S. spending on healthcare administration dwarfs the OECD countries. One example is that payers fail to standardize forms, consuming limited physician time in having to deal with onerous billing procedures. Multiple payers do not coordinate their efforts with those providing care. Estimated waste in 2011: Between $107 billion and $389 billion.
  2. Overtreatment – Subjecting patients to care that cannot possibly help them – based on sound science and patient preferences. This care is “rooted in outmoded habits, supply-driven behaviors, and ignoring good science by providing excessive and inappropriate care. Examples include using excessive antibiotics and opioids, performing surgery when watchful waiting makes better sense, and unwanted intensive care at end-of-life for patients who don’t want this. Estimated waste in 2011: Between $158 billion and $226 billion.
  3. Fraud and abuse – Issuing fake bills and running scams to get paid by government and private payers. Estimated waste in 2011: Between $82 billion and $272 billion.
  4. Pricing failures – Well-functioning markets produce reasonable prices that come from actual costs of production plus a fair profit. In healthcare, due to lack of transparency and competition, prices are several times more than identical procedures in other countries. Pricing failure includes payer-based health services pricing, medication pricing, in addition to laboratory-based and ambulatory pricing. Estimated waste in 2011: Between 84 billion and $178 billion.
  5. Care delivery failures – This includes poor execution and lack of widespread adoption of known best care processes, such as for patient safety systems and preventive care practices and are known to be effective. Better care saves money. Estimated waste in 2011: Between $102 billion and $154 billion.
  6. Care coordination failures – Care in the U.S. is fragmented, meaning that patients fall through the cracks, resulting in complications, hospital readmissions, and declines in functional status requiring increased dependency. Estimated waste in 2011: Between $25 billion and $45 billion.

New JAMA Study Released about Waste

A new study published in JAMA finds that roughly 20 to 25 percent of American healthcare spending is wasteful. Although this finding is slightly less than findings mentioned above, the estimated waste is considered to be an astounding $760 billion to $935 billion per year – comparable to government spending on Medicare. This waste exceeds national military spending and total primary and secondary education spending. This study also addresses the same six categories of waste explained earlier.

Waste in Iowa Employer Health Insurance Premiums

In our recent 2019 Iowa Employer Benefits Study©, we found the average annual single and family health insurance premiums are now $7,017 and $19,335, respectively. Using the midpoint of 34 percent waste (a number from the Berwick study), the annual waste built into the Iowa single and family premiums are $2,386 and $6,574, respectively. This estimated waste reflects the amount employers and their employees overpay which generates income for providers, healthcare industry vendors, health systems, and health plans.

Applying the midpoint for each of the above six categories of waste, I was able to estimate each of the six cost components for the health insurance premiums paid by Iowa employers and their employees. Below is a graphic that depicts the total estimated waste found in both the single and family premiums based on the six waste categories described earlier.

Summary

By tolerating waste, we unknowingly create and sustain a rising burden of out-of-pocket expenses, suppressed take-home pay, delays of care and other side-effects that harm our care and well-being. As mentioned in the IHI’s ‘Call to Action,’ “…it’s not just money that’s being wasted. The most precious resources – the workforce’s time, spirit and joy – are being unnecessarily drained by wasteful processes every day…No matter how many medical breakthroughs achieved…if we don’t remove waste in health care, our health systems cannot thrive.”

Healthcare waste comes from many different sources, which require multiple strategies to reduce at least a fraction of waste described above. Berwick believes that healthcare waste must be attacked through political means, such as simplification of administrative services and pushing back on irrational pricing. Others believe that enhancing regulation of healthcare monopolies can also greatly help.

Frankly, too many ‘insiders’ are afraid to speak critically about their wasteful piece of the healthcare system, fearing loss of promotion, employment or obtaining lucrative consulting contracts. This fear allows the status quo to remain largely unchallenged.

Whatever the solutions, we must begin to have an honest national discussion about the massive waste we pay to others who see this as their revenue and income. A logical start is for voters to ask candidates how they propose to cut waste and simplify our healthcare system.

With 20 to 47 percent of our health insurance premium and out-of-pocket costs considered to be ‘wasteful’, I’m ready to have this discussion.  Are you?

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Wellness Programs – New Study Confirms Cautioned Approach

During the past seven years, I have written a fair number of posts regarding wellness programs offered by employers. The core message of all blogs suggests that employers must have realistic expectations about what wellness initiatives will or will not do within the workplace.

A recent randomized clinical study published in JAMA is yet another reminder for employers to have tepid expectations when trying to keep their employees happy, healthy and less likely to incur more health costs. The study found that workplace wellness programs do not cut healthcare costs for employers, reduce absenteeism or improve the health of employees.

From the University of Chicago and Harvard, researchers used a large-scale approach that was peer-reviewed and included a more sophisticated design when analyzing BJ’s Wholesale Clubs. BJ’s has about 33,000 employees across 160 clubs. This analysis compared 20 randomly-assigned clubs that offered wellness programs with 140 BJ’s clubs that did not.

After 18 months of timeline analysis, this study revealed that wellness programs did not result in health measure differences, such as: improved blood sugar or glucose levels, reduced healthcare costs or absenteeism, or impacted job performance in a positive manner. In other words, employees with a wellness program did not experience reduced healthcare costs and other desired affects. I suppose one could argue that a year and one half was not enough comparison time to develop these conclusions.

One of the authors of this study, Katherine Baicker, dean of the Harris School of Public Policy at the University of Chicago, put it quite succinctly in a Kaiser Health News article: “[But] if employers are offering these programs in hopes that health spending and absenteeism will go down, this study should give them pause.”

What are your expectations about workplace wellness? Do you believe such programs, when appropriately and thoughtfully implemented, will greatly mitigate your healthcare costs, improve workforce productivity and reduce absenteeism? Maybe you feel these programs are a waste. From our 2012 Iowa Employer Benefits Study, employers shared their perceived ‘return on investment’ on the programs they currently had in place.

According to a 2013 “Workplace Wellness Programs Study” by researchers at the RAND Corporation, these programs only have a modest effect. This runs contrary to claims made by wellness firms that sell workplace wellness programs to employers. The report found that people who participate in wellness initiatives lose an average of only one pound a year for three years. Another finding is that employee participation in such plans “was not associated with significant reductions in total cholesterol level.” Smoking-cessation programs show some potential, but only “in the short term.”

Most likely, both skeptics and supporters of wellness initiatives will find ammunition to support their cause. Workplace wellness programs have grown to an $8 billion industry in the U.S., primarily as a direct result of rising employer health insurance costs.

This latest report may help stabilize any pre-conceived lofty expectations each of us may have about the benefits of workplace wellness programs. However, it must be noted that some employers have found value in these programs.

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Why Do Our Health Insurance Rates Continue the Upward Climb?

Let’s state the obvious at the very beginning: The health insurance premiums we pay are a derivative of the healthcare (and administrative) costs we incur. As healthcare costs increase, so too, will our health insurance premiums.

One datapoint from the Iowa Employer Benefits Study© that has proven to be THE fixation each year is the rate health insurance premiums have increased. The results in 2018 are no exception. Iowa employers, regardless of employee size and industry, reported they experienced a size-weighted increase of 8.4 percent.

What this metric fails to tell us, however, is WHY this continues to happen every year – a phenomenon somewhat akin to what Bill Murray’s character experienced each day in the movie, ‘Groundhog Day.’ Like Murray, we continue to relive our past.

Healthcare spending in our country is quickly approaching 20 percent of our economy, about double what is found in other high-income countries. In 2019, this ‘crisis’ will be 50 years strong, with no signs of abatement. Worth noting, national health expenditures in 1969-70 was just 6.9 percent of GDP.

Unfortunately, finding comparable data that can easily provide insight on WHY healthcare consumes about one-fifth of our economy is difficult. If we can understand the fundamental reasons for higher costs, we can then make the necessary corrections to address the core problems that continue to plague our economy and adversely impact the personal purchasing power of most Americans.

We all have our own theories, credible or not, about this WHY question. Some of these theories typically include:

  • Americans are higher utilizers of care (compared to other industrialized countries) and that is WHY we pay more – because healthcare consumption is really a volume problem.
  • Tied closely to the theory above, is the belief that the U.S. lacks enough primary care physicians but has too many specialists who charge more for their services.
  • High usage of prescription drugs, in addition to our inability to negotiate favorable price concessions with drug manufacturers.
  • A fee-for-service reimbursement system that incentivizes healthcare providers to give us excess (and usually unnecessary) care.
  • A broken malpractice system that drives excessive defensive spending.
  • The U.S. under-invests in beneficial spending of social programs compared to other advanced countries. By not investing in the ‘social determinants of health,’ we pay the eventual price of having a sicker population that uses more healthcare and that drives high healthcare spending.
  • A national culture that refuses to face death, and instead, spends excessively at the end of life.

On the surface, any of the above theories have merit, perhaps merit that can even be substantiated. However, when taking a deeper dive, some theories may shake out as myths.

Unmasking Some Popular Myths

Recently, a report in JAMA indicated that healthcare utilization in the U.S. is not what we have historically believed. It turns out that, “When it comes to utilization, there is no compelling case that the U.S. rates are substantially higher than comparator countries.” Admittedly, we do have more CT scans, knee replacements and higher cardiac procedures than other countries. But we have fewer hip replacements, and overall hospital days, and physician visits per population. The authors of this work make the point that “we certainly do not overuse services at such a rate to meaningfully explain spending that’s twice as much as comparator countries.”

It is important to note, however, according to a 2017 article published in Health Affairs, there is excess utilization of many low-value services in the U.S. Because these low-value services are also low cost, this does not appear to impact the spending differences between the U.S. and other countries.

The fee-for-service (FFS) payment structure is widely believed by many to push health costs upward, but FFS does not have the impact on costs as popularly perceived. Rather, FFS adversely impacts accountability in how healthcare is delivered and undervalues the quality we expect to have. Eliminating FFS to keep costs down may provide some relief, but its demise is more about initiating better practices of care.

A 2016 article in JAMA basically found the spending for end-of-life utilization in the U.S. to be in line with other countries, meaning that it is also high everywhere. End-of-life spending occurs due to uncertainty about when a person is going to die – we spend a great amount of money on people who are really sick, but they die anyway. Because most other countries are similar to our perceived “unique culture” in the U.S., this narrative does not hold true on why costs are higher in the U.S. than elsewhere.

Two (Primary) Reasons for Grossly High Health Costs

I’ve just spent some time debunking commonly-held beliefs on why healthcare costs are high in the U.S. (and Iowa). Harvard professor and physician, Ashish Jha, one of the authors to the JAMA article that refutes high healthcare utilization in the U.S., provided a fascinating discussion about understanding healthcare costs to the Senate Committee on Health, Education, Labor, and Pensions this past June.

Jha argues that two major culprits are responsible for gobbling up the U.S. GDP:

  1. Administrative Complexity
  2. High Medical Prices
Administrative Complexity: 

As consumers of goods and services, Americans love to have many choices available to them – and healthcare is no different.  We desire choices in the providers who perform the care we seek and in the various health plans we purchase – either individually or through our employers. But with choices come complexity and additional costs. In healthcare, how many choices become too many?

Fragmentation of our healthcare system centers around the number of health insurers – we have about 858 insurers in the U.S. With each insurer, there are various protocol requirements by physicians and hospitals when confronting billing and insurance-related activities. There is a myriad of different claim forms, hoops to jump through to ensure a claim will be paid, zillions of different benefit plans that require unique compliance procedures and varying challenges of claim denials.

When compared to other high-income countries, the costs of administrative inefficiencies in the U.S. are enormous. One aggressive 2014 report puts this cost at 30 percent of total healthcare spending. Another more cautious report from the OECD uses a narrower definition of administrative costs and estimates the U.S. to be at eight percent, which is over twice the average of other advanced countries.

High Medical Prices:

Reinhardt et al. (2003) argued in a Health Affairs article, “It’s the prices, stupid.” Again, compared to other industrialized countries, the U.S. has the highest prices for medical goods, services and labor – and nearly all brand-name drugs. A recent Wall Street Journal article, “Why Americans Spend So Much on Health Care,” states that “Among the reasons (for high medical prices) is the troubling fact that few people in health care, from consumers to doctors to hospitals to insurers, know the true cost of what they are buying and selling.”

Primary care doctors are paid, on average, $218,000 in the U.S. – about $85,000 more than similar physicians in advanced countries. Computed tomography (CT) scans, MRIs, colonoscopies and many other procedures are about double the cost compared to other countries. As an example, I recently had a CT scan performed at a Des Moines hospital, taking no more than five minutes. I learned a month later through my insurance company’s Explanation of Benefits, that the charge was a whopping $8,323.01, while the network ‘savings’ was $7,608. I would love to learn how that charge (and write-off) was determined!

Jha points out in his comments to the Senate committee that Prince Louis, the “royal baby” born to Kate Middleton and Prince William earlier this year, was delivered in a “luxurious private maternity ward in expensive London.” The Economist article cited by Jha indicated the cost was $8,900 for this delivery, while the ‘average’ delivery cost in many U.S. communities is around $10,800 – but can be much higher depending on the location. Even the cost of the best and most luxurious delivery care in London pales to what us common folk have in this country. Put another way, the delivery cost of the ‘royal baby’ was comparable to the exaggerated charge of my five minute CT scan!

Of course, it might be somewhat of an equalizer if the care we received in the U.S. outperformed care in these other countries. It does not. In 2017, The Commonwealth Fund ranked the U.S. as the lowest performing country when compared to 10 other countries. Healthcare outcomes, in addition to access, administrative efficiency and equity placed a dismal 10 or 11 in these categories.

Administrative inefficiencies and high medical prices are two simple evils found in the healthcare cost crisis. Sounds as though the solutions should also be simple – tackle the factors that determine prices and simplify administrative services. We must combat a dysfunctional healthcare ‘system’ that desperately needs infusion of common sense and the embracement of the right incentives to perform efficiently. Doing so would drive competitive battles to reduce costs to a more reasonable level.

Until then, the premium increases experienced by employer-sponsored plans will continue into the foreseeable future.

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