Improving the quality of life: we must fix health care without sacrificing medical innovation.

For CEOs, the rising cost of health care has become a serious challenge with no clear, agreed-upon solution in sight. Broader access to affordable health care was a pivotal issue in the presidential election, and it will certainly be near the top of governmental and business agendas in 2005.

U.S. health care expenditures are now greater than S1.7 trillion a year and represent more than 15 percent of GDP. Since the mid-1990s, the health care spending growth rate has steadily climbed, with an estimated increase of 9 percent last year. Health care insurance premiums are projected to grow more than 12 percent on average next year. Unfortunately, about 45 million Americans are uninsured.

Demographic trends present a major challenge. The average age of our population is increasing. As "baby boomers" reach retirement age, far fewer "generation Xers" will be available to replace them in the work force. As a result, there will be a larger number of people age 60 and older drawing on company-provided health benefits, or accessing private insurance and government programs.

It is time to begin to confront the underlying issues with resolve and ingenuity. We should start by recognizing that there is no more important goal, individually or collectively as a nation, than maintaining good health. It is important to consider both the costs and the value received from health care expenditures. There is value in the health care dollars that we spend because they allow innovation. In a statement before the Joint Economic Committee of the U.S. Congress, former Food and Drug Administration Commissioner Dr. Mark McClellan said, "The value of biomedical innovation to the U.S. equals the value of innovation in all other sectors of the American economy combined."

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To be sure, health care reform is a complex, difficult task with no easy fixes and plenty of economic, societal, legal and governmental land mines along the way, but a firm set of overarching principles should help guide our thinking and prioritize our actions:

1) Face the fact that health care spending will continue to rise in absolute dollars and as a percentage of GDP, and focus on increasing the value received for every dollar spent. When one considers the changing demographics, the large number of uninsured and underinsured and the people who are insured but still don't receive the care they should, it is clear that spending will only increase as these issues are addressed. In the words of Harvard health care economist David Cutler, "We're not going to spend less, but figuring out how to get more value out of our health care spending is going to be the big issue of the future." The steps outlined below should help accomplish the goal of limiting the rate of increase of health care costs while ensuring better quality care for all Americans.

2) Allocate more resources to initiatives that encourage healthy lifestyles and prevent disease. For example, it is estimated that between 7 and 14 percent of national health care expenditures address problems associated with smoking (with significant additional costs tied to alcohol and drug abuse). Perhaps even more alarming, recent research shows that treatment for obese Americans accounted for 27 percent of the growth in overall health care spending between 1987 and 2001. Obesity is a significant contributing factor to many debilitating and expensive chronic illnesses, such as heart disease and diabetes. Keeping more people healthy, fit and out of the hospital for longer periods of time will free up needed funds to treat those who do become sick and require care. The new "Welcome to Medicare" preventive physical examination is one step in the right direction, but much more can and should be done.

3) Shift a larger proportion of health care expenditures toward direct patient care. It is estimated that about 31 cents out of every dollar spent goes toward administrative costs. That is twice the rate of some other countries and no successful business would accept that burden. We should set a goal of cutting the administrative percentage in half. Accomplishing this will require initial investments, such as moving to electronic health records, computerized prescriptions and the use of information technologies for claims processing and back-office functions, and a reduction in burdensome governmental regulations. Since more than 70 percent of health care expenditures support the treatment of chronic diseases, improved programs to prevent and better manage chronic disease must be implemented.

4) Require that all Americans have a basic health insurance package that includes catastrophic coverage. Government subsidies should be provided for those who cannot afford coverage. Insurance plans should encourage individuals to take more responsibility for their health and medical decisions, and proportionate copayments should exist so that everyone has an incentive to manage expenditures responsibly. Health insurance should also reward healthy behavior, as is the case with auto insurance.

5) Encourage employees to save more to help defer future health care costs. We encourage savings to address other future obligations and needs. Why not health care? Health savings accounts are now available and additional tax incentives targeted to those who most need them should encourage broader participation. Better education regarding the benefits of health savings accounts is also important.

6) Apply successful and appropriate business practices to health care. Advances in supply chain management, information technology, performance-based compensation and many other successful business initiatives are yet to be fully embraced or adopted across our health care system. Compare a hospital stay with moving through a grocery store checkout line in terms of accuracy and efficiency of transactions, real-time inventory management, timely invoice preparation and ultimate customer satisfaction.

7) Enact legal reform to reverse spiraling malpractice insurance rates and to reduce significant expenditures that result from fear of lawsuits. It is estimated that liability coverage and defensive medicine account for more than $100 billion in annual health care costs. Malpractice insurance rates have skyrocketed in many states and there appears to be no end in sight. If this issue isn't addressed soon, overall health care costs will continue to rise as a result and we won't be able to attract or keep our best and brightest in the medical profession.

8) Maintain choice and competition among various health care delivery and insurance alternatives, as well as at the provider and treatment level. A single provider or single-payer system stifles innovation and will not deliver quality care at more affordable rates. This principle has been continually tested and proven in other industries and certainly applies to health care. Regulations, to the degree they exist, should foster competition in all parts of the health care system. A free and open market with a well-informed consumer at the center of decision making is the best hope for improving the quality and value of our health care system.

9) Ensure that medical innovation is made available and appropriately adopted in a timely fashion. Just as technological advancements have improved competitiveness in many industries, so can advancements in medical technology help improve medical outcomes and support economic delivery of care. To this end, research collaboration among government, academic medical institutions and industry should be encouraged and rewarded. Also, steps should be taken to ensure an increasingly efficient and responsive FDA, together with more timely and adequate coverage and reimbursement decisions from Medicare/Medicaid and private payers.

10) Take steps to attract and keep an adequate number of qualified full-time, part-time and volunteer health care employees. Unfortunately, many doctors, nurses and other health care workers are increasingly discouraged by their prospects. Several studies have projected severe shortages of nurses over the next decade, and, in an equally disturbing trend, increasing numbers of frustrated health care professionals are seeking employment in other industries. While adequate compensation and working conditions are part of the solution, streamlining administrative procedures and reducing bureaucracy is also necessary so that health care workers can do their jobs in a more rewarding way.

Because there are no easy answers and it is certain that a number of strong, competing interests will collide in moving forward, some have suggested that health care reform may well replace Social Security as the "third rail" in American politics. But unless industry and government join hands now to address the current health care dilemma in a timely and responsible way, that "third rail" may short-circuit the medical and economic health of our country.

Art Collins is chairman and CEO of Medtronic and chairman of AdvaMed (Advanced Medical Technology Association), based in Minneapolis.