The United States (US) health care delivery system (i.e. physicians, hospitals etc.) delivers top quality care to all Americans who have appropriate access. Similarly, the US pharmaceutical and biotech companies are the world leaders. Despite this, the US system is, by large margins, the costliest of the major developed countries and the least effective in delivering high quality care. The challenge is to find a way to provide guaranteed access while, at the same time, decreasing costs. Stated from a different point of view, there is no route to sustainable, guaranteed access without a dramatic decrease in costs.
The primary cause of extremely high healthcare costs in the US is complexity and, in particular, the complexity spawned by choice in insurance coverage. The billing, insurance and reimbursement (BIR) systems required to manage and administer the complexity of choice create armies of middlemen[1] between the patients and the providers. These middlemen generate enormous unproductive costs both in the insurers and throughout the delivery system and they provide no healthcare. A comparably important dimension of complexity is the proliferation of government programs and the bureaucracies required to administer them; again, without delivering any health care. No other country bears comparable burdens of unproductive complexity.
These complexities are largely the result of the piecemeal way in which our insurance systems, both public and private, have grown over the years since the end of WW II. Any effective program for health care reform will have to catalyze a carefully designed, multi-year, phased approach to unraveling these enormously complicated, interrelated and largely unproductive administrative systems and replacing them with a single core level of guaranteed access to all Americans. This, in turn, will require the elimination of hundreds of thousands of unproductive administrative tasks and the jobs that go with them. In fact, penetrating this mind-boggling complexity in the search for a solution is, in and of itself, a major impediment to reform.
The extremely poor relative performance of the US health care system has been well documented as has its costs of complexity. Nevertheless, failure to comprehend the crippling effects of complexity is the fundamental reason why most Americans including our elected officials have so little understanding of why our system performs so poorly; or what it will take to bring our performance in line with that of other developed nations. Not surprisingly, then, to date, no one has proposed an approach that directly addresses the problems of choice or is politically actionable.
As we shall see, an individual’s choice of coverage has relatively little effect on access to care; it primarily determines who will pay for the care when it is actually delivered. When one considers how choice has been relentlessly promoted as the key to affordable care this seems quite counterintuitive. Consequently, understanding (a) the fundamental flaw in the rationale behind choice in insurance coverage, (b) the ultimate effect of choice on the care actually delivered and (c) the insidious nature of the enormous costs that choice create is the key to unraveling the costs of complexity. Any attempt to reform health care in the US that fails to eliminate choice as the fundamental driver of the costs of complexity simply misses the point and is doomed to failure. On the other hand, simply eliminating the complexity of choice will lead inexorably to universal access and catalyze widespread initiatives to further reduce costs and improve the access to and quality of care.
The Impact of Choice on Access to Care
On the surface, providing a wide range of choice is a sensible way to permit individuals to select a program that offers coverage at premiums they can best afford. However, there are a number of problems with thinking about insurance this way. First, it puts primary emphasis on premium cost and deemphasizes the additional out-of-pocket costs of paying for care when it is actually delivered. Second, choice of coverage has little or no effect on an individual’s access to care when hospitalized. Third, the requirements for cash outlays for outpatient care often lead to avoiding necessary routine or chronic care when an individual is short on cash at the time of need. Fourth, and perhaps most important, the total costs to our healthcare system of providing choice (which far outweigh the benefits) have been largely ignored when considering reform. None of this should be surprising because there is a poorly understood fundamental flaw in the rationale for choice.
Treating private health care insurance as a consumer product is that fundamental flaw.
The real conflict over how to proceed with healthcare reform is not between the Democrats and the Republicans or between the Liberals and the Conservatives; it’s between the American people and the healthcare insurance providers.
The American people consider health care to be a basic need and want guaranteed access. A recent Reuters poll found that more than 70% of Americans support guaranteed access to health care for all Americans including a majority of Republicans.
On the other side of the conflict, the private insurance companies want to continue to treat health care as a hugely profitable cost-plus consumer marketing business with all the attendant complexity introduced by market segmentation. More specifically the only constraint the Affordable Care Act places on healthcare insurance companies is the Medical Cost Ratio that requires them to pass through a minimum of 80 to 85% of premium dollars to the providers of care. In other words, the more complex the insurance system is, the more people it takes to administer it and the more money the insurance companies make. Not surprisingly, the number of home office employees in the health insurance industry increased from approximately 300,000 people in the year 2000 to approximately 500,000 in 2017.
Consumer product marketing is based on market segmentation that provides a broad range of choices to people based not only on their needs but also on their wants and their ability to pay. For example, in our modern society an automobile is a necessity for most adults. People need their cars. The consumer’s decision of how to satisfy that need, however, can range from a beat-up 10-year-old Chevy to a Cadillac or a Lamborghini. That choice is driven not only by need but also by want and ability to pay. Providing those choices is the purpose of market segmentation in consumer products. The more you pay the better the product or service you expect to receive. Health care is very different. A person with appendicitis doesn’t choose whether or not they need to have their appendix taken out. The physician does. Nor does the patient decide whether they want a Cadillac or beat-up old clunker version of an appendectomy. The physician does; he or she will choose the standard of care procedure.
In fact, in health care there is very little difference in practice between need and want. In other words, health care is not a consumer product.
Once a physician determines that a person has a medical need that requires hospitalization whether this occurs in a private physician’s office or in an emergency facility or a neighborhood clinic they will be admitted. As an inpatient, they will receive all necessary care independent of their insurance coverage or ability to pay as required by Federal mandate. If insurance doesn’t fully cover the cost, the hospital will bill the patient, attempt to collect and, in many cases, turn it over to a collection agency. If all attempts to collect fail, the hospital will write it off as a bad debt or charity care. But in all cases the care will have been delivered. So, an individual’s choice of insurance coverage doesn’t determine what care you will receive in a hospital; it only determines who will pay for it. In other words, the built-in limitations of insurance coverage (e.g. deductibles, copays, coinsurance) that are designed to contain unnecessary delivery of care produce little if any cost avoidance. So the delivery of care in hospitals (which accounts for about $1.1 Trillion in annual expenditures) is unaffected by one’s choice of insurance The real-world impact of the limitations is to kick off the collection cycle when a patient is discharged with all its attendant costs and emotional and financial stress for those who lack full coverage or are uninsured. And in the end only a fraction of these out-of-pocket charges is actually collected.
The major categories of care delivered outside the hospital setting are professional services ($694 Billion)
and prescription drugs ($333 Billion). In the outpatient setting the limitations on insurance coverage are effective in discouraging unnecessary delivery of care. However, these limitations also encourage patients short on cash to skip routine care (e.g. annual check-ups and diagnosis of early symptoms) and outpatient treatment of chronic diseases (monitoring, adhering to prescribed medications and outpatient procedures). Unfortunately, these categories of care are the most cost/effective ways of preventing and controlling the chronic diseases which account for about 90% of total healthcare expenditures. Accordingly, the denial of access to necessary care leads inevitably to higher costs and less effectiveness in preventing and treating these diseases.
In summary, the choice a person makes in selecting a specific coverage plan is hollow when it comes to access to care. It will not affect the care she or he will receive when hospitalized and the only effect it has on outpatient care is to deny care to those who are unwilling or unable to pay out-of- pocket costs when care is needed. Total out-of-pocket spending by households for health care is about $370 Billion. Assuming the cost of care avoided is as much as 30% of that number, the total cost avoidance in the outpatient sector (effectively the total cost avoidance of the limitations on insurance coverage that constitute choice) amounts to about $110 Billion.
The Insidious Costs of Providing Choice
Nevertheless, choice is endemic in healthcare insurance infecting all private and public insurance except for Medicare Part A. Administering these many thousands of choices is responsible for a spider web of complexity not only within the insurance companies but also within every single health care provider in the United States. A detailed analysis by The U.S. National Library of Medicine (NLM) estimated that the resulting billing, insurance and reimbursement (BIR) costs were $471 Billion in 2012. This total includes $70 billion in physician practices, $74 billion in hospitals, $94 billion in settings providing other health services and supplies, $198 billion in private insurers, and $35 billion in public insurers. After adjusting for increases in premium prices and other costs, the total cost projects to over $600 Billion today. The NLM further estimates that 80%, ~ $500 Billion, could be eliminated by bypassing the insurance companies[2]. Importantly these estimates do not include the dollars spent by businesses, educational institutions, eleemosynary organizations and other employers to administer insurance programs for their employees. Nor do they reflect the substantial time, energy and money expended by families and individuals to manage their coverage.
Notwithstanding the rough nature of the calculations and estimates above, spending $500 Billion in administrative costs to avoid $110 Billion (as noted in the previous section) by denying the most effective categories of outpatient care to our middle- and lower-income families defies common sense.
Eliminating these enormous unproductive costs would provide the financial flexibility for the US to provide guaranteed access to our world class health care providers for all Americans. Moreover, reductions in the complexity of choice will also shine a light on some of the inexplicable cross subsidies which plague the system – e.g. significant differences in price of as much as 8 to 1 for exactly the same procedure or drug both from hospital to hospital as well as within individual hospitals depending on who’s paying. Exposing these pernicious cross-subsidies would enormously simplify the problems of controlling costs at the hospital level as well as understanding variations in the cost of care among hospitals and across regions and controlling the costs of overutilization and fraud.
Medicare for All
The Democratic Party seems enamored of Bernie Sanders’ Medicare for All (single payer) plan that would provide an appropriate level of guaranteed access to “primary care, outpatient services, prescription drugs, dental care, substance abuse and mental health treatment, full reproductive services as well as long-term care and services”. These are, in fact, the essential elements of a core guaranteed access plan. However, the plan does not specifically address costs and simply proposes various options to fund it with higher taxes. Moreover, Medicare for All would be enormously disruptive and would literally decimate the insurance industry and waste enormous productive administrative resources in place. Not surprisingly, then, Medicare for All (or any single payer approach) would face enormous resistance from the private insurance industry, conservatives and many other Americans distrustful of ceding so much control of the nation’s health care to the Government. In other words, it would be DOA. However, there is a much simpler, straightforward path to achieving guaranteed access and reducing costs by simply eliminating choice in all insurance plans and standardizing the reimbursement rates for hospitals and professional services. This approach would co-opt and reshape the health care insurers instead of destroying them while, at the same time, dramatically decrease the costs of complexity throughout the entire health care delivery system.
Reshaping the Healthcare Insurance Industry
The essential first step in reshaping the healthcare insurance industry will be to kick-start the elimination of choice by specifying an identical Guaranteed Care Plan (GCP) for all – e.g. comparable to the level of access contemplated by Medicare for All or those provided by other developed nations. The GCP would have a single set of limitations (e.g. deductibles, copays and coinsurance) for controlling unnecessary utilization with appropriate safety nets for lower income families. The GCP would also be complemented by standard rates along the lines of the Diagnostic Related Groups (DRGs) used by Medicare and some private insurers. Although defining the specifics of the GCP and the DRGs is crucially important, this is a situation where being approximately right is good enough since mid-course corrections can be made with the stroke of a pen.
The second step would be to require all extant health insurance policies to include two separate and independent segments – in effect two separate policies priced separately: (a) the CLGA and (b) optional supplementary coverage. This will force the private insurance companies to compete on the effectiveness and efficiency of their management of their GCP – i.e. primarily their costs of managing the delivery of care to control overutilization and fraud. This simplification will, in turn, compel them to downsize by eliminating the great majority of unproductive marketing and sales costs and most of the costs of negotiating with providers – on the order of 15-20% of their staffs. They would also compete for the remaining supplementary insurance segment in much the same way as they do today, but this segment would represent less than 5% of the total market.
At the same time, each and every provider of care throughout the system will be able to eliminate most of their BIR administrative staff. These savings will be spread through the total universe of providers and can be realized with little disruption. Perhaps more important, physicians, nurses, and other professional would be freed from the nuisance of interpreting the complexities of the BIR systems and could devote substantially more of their total working hours to delivering health care (improved morale would be an important side benefit). As outlined above in the discussion of the costs of complexity these changes would eliminate more than $500 Billion of unproductive administrative costs with little impact on the delivery of care. Private insurers spent $1.2 Trillion in 2017 on health care services and products. Because approximately 85% ($400 Billion) of the administrative cost reductions will come from these expenditures, private insurance premiums should decrease by about a third.
The impact on public insurers will be much less since Medicare A is already a no-choice system funded primarily by payroll taxes; and Medicare Parts B and D are primarily funded from general revenues. Nevertheless, the costs of government insurance programs would decrease by about 8%. Concurrently consolidating Medicare Parts A, B and D into a single access plan identical to the plan offered by the private insurers would begin the process of reducing the costs of complexity of multiple government agencies and programs. Medicaid and Medigap would also be folded into Medicare further reducing complexity and eliminating additional duplicative administrative costs. The result would be an expansion and significant simplification of government provided insurance and lower costs for enrollees. Over time, all government insurance programs could be folded into Medicare eliminating redundancy and further reducing costs. Depending on their income level the uninsured would either be enrolled in the newly consolidated Medicare program or required to purchase a guaranteed access plan.
Importantly, the delivery of care would remain primarily in the private sector and the private insurance companies would continue to have a major though somewhat scaled back role. In fact, on the surface, the actual provision of care will not appear to have changed very much except for the increased access. The real changes will be in the elimination of unproductive back-office administrative jobs throughout the system and the additional time that our healthcare professionals will be able to devote to their patients.
Finally, eliminating the inequity in access caused by the tax preference for Employer-Sponsored Insurance would complete the restructuring of the industry. This step could be taken concurrently with the decision to restructure the industry around a GCP and would immediately deliver an additional $280 Billion in foregone revenues primarily from the highest earning sectors of the population. The total impact of these three initiatives will be quick and dramatic. Most importantly all Americans will have guaranteed access to our world class private health care delivery systems. In addition, the $780 Billion that will be freed up will not only pay for any additional costs for guaranteed access but should also reduce the nation’s total expenditures on health care. Finally, the increased transparency enabled by the simplification of the private insurance industry will point the way to further savings such as the consolidation of Medicare described above; more effective control of overutilization which wastes hundreds of billions of dollars providing unnecessary care; and targeted programs to shift lifestyle choices to reduce the incidence of chronic disease much as has been accomplished with smoking .
Assessing Political Salability
As noted above, the private insurance companies would be the most affected and would have to reduce staffs by roughly 15-20%. Painful but certainly doable over a few years and much preferable to the near extinction alternative envisioned by Medicare for All. People now covered by private insurance could continue with their current insurers. Those with Employer-Sponsored Coverage would receive salary increases equal to the premiums previously paid by their employers and pay directly for their core access plan. They will be taxed on these salary increases but the increases would be relatively small and because the tax preference is highly regressive, the brunt of the tax increases would fall on those in the higher income tax brackets and would be quite manageable. Those individuals who were self-pay would see a reduction in their premiums. Overall total costs for all enrollees would be lower in most cases due to the cost savings from the reductions in complexity and the additional revenues from the elimination of the tax preference. All participants could supplement the core access plan with additional coverage on a self-pay basis as they saw fit. Enrollees in the expanded Medicare program as well as those in private plans would be covered by the same core Guaranteed Care Plan (GCP). They would also be free to purchase supplemental coverage from the private sector.
All health care providers from major hospital systems to individual practitioners would be very happy with the reductions in administrative costs as well as the substantial decreases in the nuisance time spent by their professional staffs in negotiating reimbursements. These professionals would be able to devote significantly more hours to patient care and provide additional capacity for the guaranteed access plans.
All American businesses and other enterprises will be relieved of a major headache: the necessity to fund health care for their employees and the concern that future increases in cost could affect their competitiveness.
Middle- and lower-income Americans would be relieved of much of the financial strain on their resources as well as the time spent managing their care and the threat of serious financial difficulties if serious illness should strike. Higher income Americans would likely see a reduction in their costs of health care because premium reductions would overwhelm modest tax increases. Perhaps most importantly, all Americans would be able to understand how our health care system works. We should all find this quite relaxing.
In summary, reshaping the insurance industry by directly attacking the costs of complexity is a win/win scenario for all constituencies when compared to Medicare for All. Accordingly, it should be eminently salable on a bi-partisan basis.
The End Game
The end game would be a marketplace where all Americans enjoyed affordable access to comprehensive care. Care for the population above the age of 65 (Medicare) would be financed primarily from general revenues, modest premiums and a standard set of copays, coinsurance and deductibles with safety nets for low income participants. Over time, all Americans below the age of 65 would be able to either choose a guaranteed access plan from the private insurance companies or enroll at their expense in the identical access plan provided by Medicare. Competition for guaranteed access between the private sector and the public sector would be primarily on the basis of costs. Eventually, market competition would determine what share of the population would choose private or public guaranteed access.
Leadership
A major political battle over healthcare reform is likely to substantially shape the outcome of the 2020 elections. At the moment, the Democratic candidates seem to be coalescing around Medicare for All which is a stance favored by the electorate but could divide the party and is probably DOA as discussed above. On the other hand, the Republicans appear to be on the defensive; still apparently favoring tinkering with the current system. However, President Trump has demonstrated his willingness to address the most difficult issues when he is committed to solving a problem. Tackling the elimination of choice as the first step to health care reform would seize the initiative from the Democrats and, at the same time, present them with a program that would be difficult for them to reject since it leads inexorably to guaranteed access in a relatively short time without the major disruptions of Medicare for All. Moreover, his own party – even the Conservatives – should also buy in because it will clearly result in substantially lower costs for both individuals and the nation as a whole. In other words, Reforming the Health Insurance Industry represents a unique opportunity to seize the day on a major bipartisan program of change.
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Fred Gluck joined McKinsey and Co. in 1967 and led the Firm as its elected Managing Partner (CEO) from 1988 to 1994. Upon retiring from McKinsey in 1995, he joined the Bechtel group and served as Vice Chairman and Director. In 1998 he retired from Bechtel and rejoined McKinsey as a special consultant to the Firm serving in that capacity until 2004.
His extensive background in health care includes serving as the presiding director of HCA as well as on the boards of Amgen, RAND Health Care, and the Cottage Hospital System of Santa Barbara. He also served on the board of the New York Presbyterian Hospital for over 30 years before achieving emeritus status in 2006. Fred was also the founding Chairman & CEO of CytomX Therapeutics (NASDAQ: CTMX) and Cynvenio BioSystems a private company pursuing early detection of lung cancer. He continues to serve on both of these Boards. He also served as Co-Chairman of TrueVision Systems, a world leader in computer guidance for microsurgery, prior to its recent sale to Alcon.
Fred has also written and spoken on health care reform dating back to his service on an Advisory Panel for the Budgeting for National Priorities project at the Brookings Institution in 2005-2006. Fred started his professional career at Bell Telephone Laboratories in 1957 and was the program manager for the Spartan anti-ICBM missile system when he left to join McKinsey.
[1] Plan designers, marketers, salesforces, negotiators in the insurers and coders and negotiators in the providers
[2] These detailed studies are also consistent with common sense observations – for example the average BIR cost per physician calculated from the finding of this study would be about $65,000. If anything, this seems low. Similarly, analysis indicates that unproductive BIR costs in US hospitals average about 6.4%. Eliminating these costs would bring the US just below the top of the range in other developed countries but still almost double the low end of the range.