Saturday, May 10, 2008

Employers - Health Care and U.S. Employers – The Tail That Wags the Dog

A global U.S.U.S. manufacturer has asked me to talk on health care trends. The company has $10 billion in revenues, and 56% of its sales are outside the U.S. Asia is its fastest growing market.

The manufacturer already knows,

That for the last five years, health costs have spiked,

• 4.4 X faster than general inflation.
• 3.7 X faster than workers’ earnings

That premiums cost $14,500 to cover a family of 4.

That U.S. costs are crimping its ability to compete globally. As one CEO noted, “Less than half of our workforce is in the United States – but 95 percent of our health costs are.”

That U.S problems stem from deep problems.

• Fee-for-service pay, which leads to more services and an opportunistic culture.
• No consensus on infrastructure, standards, and transparency which makes it hard to put your arms around system variables or even to know what they are.
• Lack of reasons for consumers to change, due to cost insensitivity and sparse information to decide what’s best.
• Resistance to changing the status quo by special interests with lobbying clout in Washington. As one cynic remarked, “Everything changes but the status quo.”
• An aging and in some ways less healthy population, e.g. we lead the world in obesity rates with only a fat chance that will change.

Tail Waving Dog

This is a case of the tail waving the dog. Here the dog is U.S. employers who provide 69% of health care coverage, and the tail is health care, the single fastest growing uncontrolled cost in corporate America.

Employers started offering coverage 65 years ago during World War II as a fringe benefit in response to wage freezes. Little did they foresee unintended consequences of the tail growing so huge or swinging so fast and forcefully.

Or, A Butterfly in Brazil

Edward Lorenz, an MIT meteorologist who founded Chaos Theory and who died on April 17 this year, described the “butterfly effect,” the idea that a small disturbance like a butterfly flapping its wings in Brazil could cause a tornado in Texas. The flapping wings represents a small change in the initial condition of a system. This causes a chain of events leading to large-scale weather shifts.. Had the butterfly not flapped its wings, the final system might have vastly differed. Lorenz realized perfect weather forecasting was a fantasy. It required perfect knowledge of wind, temperature, humidity, and other conditions everywhere around the world at one moment of time. Even a small shift could lead to completely different weather.
This analogy applies to health care. In the U.S. care remains local rather than global, and no overarching federal system exists. No perfect knowledge of variable local conditions exists. Ending local or regional variation to lower costs and standardize care is still a pipe dream for 35 years even though Wennberg advocated it in 1972. . Even leading academic centers – models of idealism and progress – differ strikingly in costs and outcomes due to contrasting cultures. Finally, a new technology – like CT scans – can upset forecasting.

What Can Be Done Now

This company isn’t interested in metaphors or theories. It wants to know what can be done now. What are trends that might curtail tails wagging and butterfly wings flapping.

Here are a few trends that might benefit companies, not necessarily in this order, and with my opinion attached.

• Employers shifting to high deductible HSA/based plans to replace HMOs and PPOs (These new plans make up 7.5% of the market, but have grown slowly)
• Employer demanding politicians act in Washington and state capitals, or we go elswhere (reform is deadlocked, but in our shell-shocked economy, employers can break the deadlock)
• Health 2.0. Wider use of algorthims to spot “best” doctors and hospitals and to identify widely varying aggregate costs of disease episodes (These algorithms have revealed in markets like Los Vegas, that aggregate costs for disease episodes vary as much as 4X)
• Wellness and prevention programs (essentally band-aids marginally reducing costs)
• Worksite clinics and retail clinics to promote greater convenience and lower costs (This is well underway, with the entry of such retail giants as Walgreens, Walmarts and CVS into the market)
• Widespread EMR adoption with embedded guidelines ( I’m skeptical unless providers are cheaper, user-friendly systems and financial incentives).
• Performance based reimbursement ( more of a ripple than a wave)
• Larger integrated physician practices (unlikely unless integration is “virtual” and doesn’t totally disrupt office-based practices.)
• Greater transparency(Sounds good but will be slow because of competitive pressures and reluctance to share data)

Those are a few trends for lightening the load on the business enterprise.


Gary M. Levin said...

Dr Reece, I have placed a link to your blog on my own blog at

Your comments are right on, the tail and the butterfly. (do Butterflies have tails, too?).

I am guessing this company is either an oil company, a software company, or a retailer.
I wish you had named the company, not to disparage them but to make this a "real" thing rahter than a view from 40,000 feet vs "on the ground".

Keep up the great writing from Old Saybrook, CT
Gary L

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