Squeezing cost out of the system.

Cost containment and waste reduction must be paramount in health-care reform. These prerequisites have been lost in the din resounding from Washington.

Let's get one thing straight. There's more than enough money in the American health-care system to cover everybody. Before we levy new taxes or require employers to provide health insurance, we must mount a serious effort to contain health-care costs and reduce waste.

Experts estimate that 25 percent of the U.S. health-care system's projected $930 billion in expenditures last year was lost to waste. Ironically, Bill Clinton lamented just weeks after his election that waste in federal spending also runs about 25 percent. That adds up to waste of about $230 billion from health care and another $375 billion from the president's $1.5 trillion federal budget. Combined, the federal government and our health-care industry will squander some $600 billion--more than enough to deal with the deficit and the health-care issue.

It won't be easy to wring unnecessary cost out of the system. Waste includes fraud, extraneous testing, and administrative inefficiencies. Streamlining the cost structure also means confronting the unpleasant reality that roughly 75 cents of every health-care dollar is spent by only 10 percent of the population--typically the very young, the very old, and the chronically and terminally ill. If reform is to be effective, consumption patterns must change. But there are practical proposals to deal with each of these problems. Reasonable solutions are within our reach.

THE BELLY OF THE BEAST

Is it really possible for there to be more than $230 billion of waste in our healthcare system?

It's not only possible, it's a demonstrable fact.

Dr. Paul Ellwood, a medical doctor who is a major architect of the so-called Jackson Hole "managed competition" concept, told a group of health-care professionals in Cleveland, "There's a whole lot of fat in the system. We're overdoing everything we do by 25 percent to 50 percent. We ought to live off the fat first."

One of the largest areas of waste is excessive medical inflation. It is unreasonable to expect to eliminate all inflation, but medical inflation has been occurring at twice the rate of general inflation. That excess is the part that can and must be eliminated.

Impossible? Not at all, because we are doing it in Cleveland.

MARKET-BASED SOLUTIONS

While the national hospital inflation rate increased by 8.3 percent in 1991, Cleveland hospitals experienced inflation of about half that--4.4 percent, according to the latest available American Hospital Association figures. In 1990, while the rest of the country experienced hospital inflation of 7.8 percent, Cleveland's was only 1.6 percent.

None of that happened by accident, but rather as the result of the introduction of free-market "managed competition" principles and intensive hospital price competition. These became possible with the passage of a 1987 Ohio law allowing Blue Cross & Blue Shield of Ohio to aggressively negotiate for the best hospital prices for its 1.4 million customers. Since then, Cleveland, which in 1985 was the fourth-most expensive hospital city in the country, dropped dramatically to 19th in 1991, the latest figures available.

Total U.S. health-care expenditures were expected to climb $100 billion last year alone--from $830 billion in 1992 to $930 billion in 1993. If the entire nation cut the hospital inflation rate in half, the savings would be in the vicinity of $50 billion. Coincidentally, that's the same amount the Congressional Budget Office estimates it would cost to cover all currently uninsured Americans.

SUCCESS IN CLEVELAND

ORION Consulting, a leading Ohio-based health-care consulting firm, projected that applying the "Cleveland Model" nationwide would save nearly $20 billion a year, or enough to cover about 12 million uninsured Americans.

Working separately, various health-care industry experts and government agencies have produced numerous piecemeal examples of potential health-care savings. Taken together, even a partial list is impressive:

* $20 billion savings: "Cleveland Model" (ORION Consulting).

* $4 billion: Uniform claim forms, electronic claims processing and billing (U.S. Department of Health and Human Services).

* $20 billion: Reduction of unnecessary patient care and other administrative savings through computerized patient records (U.S. General Accounting Office, Department of Health and Human Services).

* $80 billion in 1992: Health-care fraud, estimated at upward of 10 percent of total expenditures (U.S. General Accounting Office).

* $42 billion: "Unhealthy habits"--smoking, drinking, obesity, violence (American Medical Association).

* $10 billion: Voluntarily uninsured--the estimated 12 million Americans who choose not to take health insurance available to them (Milliman & Robertson Inc., ORION).

* $6 billion: Pharmaceuticals, in terms of "excessive" drugmaker profits and research and development of "me-too" drugs that represent no therapeutic gain (U.S. Office of Technology Assessment, House Energy and Commerce Committee).

* $19 billion: Excess physician costs from 11 percent of physician procedures deemed unnecessary or inappropriate (Value Health Sciences, Blue Cross & Blue Shield Association, U.S. Health Care Financing Administration).

Using just these publicly reported figures from government agencies and industry experts, the grand total is more than $200 billion. And I'm sure other experts can add billions more in savings from other areas. In fact, America's leading consumer magazine totals up $200 billion from unnecessary medical tests and procedures and administrative inefficiencies, while acknowledging, but not adding in, $80 billion of estimated fraud.

THE RIPPLE EFFECT

Obviously, not every misspent dollar can be prevented, especially for bad habits and fraud. But capturing even half of them would mean having more than enough money to take care of every American--and reducing the cost of health care for everybody else--without resorting to raising taxes.

One popular misconception today is the idea that austerity-type savings are but a one-time blip that quickly would be overwhelmed in the next year's worth of health-care inflation. Nothing could be further from the truth.

Not only would these savings be reproduced each year, but they also would have a ripple effect, reversing the effects of health-care cost shifting. Today, everybody who can pay for his or her health care, either through private insurance or his or her own pocketbook, is charged a substantial markup--about 6 percent, according to the AHA--to cover the extra costs of those who cannot. Once those uninsured individuals are covered, we can eliminate the markup and reduce costs for everybody. Such costs totaled $13 billion in 1991, according to the AHA.

THE "10 PERCENT SOLUTION"

But I haven't even mentioned the biggest potential savings yet. Neither has a single health-care expert. That is large-case management, which I described in a previous Chief Executive article as the "10 percent solution" (CE: May 1992). The strategy recognizes that about 75 cents of every health-care dollar is spent by only 10 percent of the population. That leaves only about 25 cents or so for the rest of us. Simply put, we must devise a better way to pay for the care of premature infants, chronically ill senior citizens, and those with incurable illnesses.

Consider these statistics: We have extended the average lifespan during this century from 47.3 to 74.8 years. Today, in terms of days, more than 60 percent of health care is devoted to people over age 48. At the other end of the life cycle, the costs of treating the very young also are spiraling. The cost of keeping alive a premature baby is several thousand dollars a day. But the chances these children will live "normal" lives are one in four.

The consumption paradox illustrates why many traditional cost-containment strategies in the past have been so ineffective and disappointing. These strategies focus on "average" costs, and, thus, impact only a fraction of the problem. Put another way, 10 percent of consumers are more than doubling the average costs for everybody. In fact, the top 1 percent accounts for 25 cents of every dollar spent on health-care, and studies show that this inverse concentration has been intensifying for years.

It stands to reason then that we can save the most money by better managing the care of the top 10 percent (and especially the top 1 percent), who used up to $700 billion of our nation's $930 billion healthcare budget last year. Eliminating the standard 25 percent waste factor here could mean a potential savings of $175 billion.

Perhaps more realistically, shaving just 10 percent from that amount, which would not affect the quality of care one bit, would mean savings of $70 billion--once again, more than enough money to cover all of the uninsured. The fact is that Americans cannot indefinitely tolerate millions of people going without basic medical coverage while we spend so much on so few.

We must always remain sensitive to the very sick. But the controversy surrounding today's incredible costs suggests the public--and the medical community--must make some difficult decisions. Some possible approaches: Individual case management can produce major savings, especially with diseases and disabilities requiring custodial care. And reduced package prices can be negotiated with health-care providers for such high-ticket procedures as major organ transplants.

ADDITIONAL RECOMMENDATIONS

We also must look to realign our healthcare infrastructure to effect real savings and improve the overall quality of care. Should every hospital perform open-heart surgery when there is strong evidence that it can be done better--and cheaper--at places with special expertise? In fact, we should promote the use of specialized "centers of excellence" for many high-cost, high-tech procedures, not only to drive down costs through pre-negotiated package prices, but also to improve overall quality, including long-term patient survival rates. Also lost in the national health-care debate is the cost of empty hospital beds and half-empty hospitals. Just as our country is painfully closing unnecessary military bases across the country to squeeze out the excess, so, too, must we make the hard choices about shutting down unneeded hospitals and realigning the system. In the Cleveland area alone, for example, we have about 2,500 unnecessary hospitals beds--the equivalent of 10 250-bed hospitals--that drain nearly $200 million a year from our region's healthcare resources. Multiplied across the country, the savings could run into the billions. In fact, the Ohio Health Care Board, of which I am a member, has suggested closing 17,000 unnecessary hospital beds in the state.

If you are looking for a study in contrasts, here's an excellent example.

Government financial experts tell President Clinton that his health-care plan may require at least $100 billion a year more in new spending, and possibly much more, depending on the scope of benefits provided.

Meanwhile, some management experts say it's time that U.S. hospitals modernize their business practices, especially in terms of the quality revolution that other U.S. industries have been forced to undergo as a result of foreign competition. A Boston benchmarking firm, MediQual, estimates total potential savings from hospitals improving performance to "best-practice levels" to be--you guessed it--$100 billion.

Before we seriously consider raising taxes and rationing care, I suggest that we cut spending and reduce waste first. We have proven in Cleveland that the principles of free-market managed competition can produce positive results, and experts have shown where we can achieve other real savings. Yes, there is more than enough money right now to take care of the health-care needs of every American. But it is also the duty of Americans and American business to become prudent purchasers and users of health care if this is going to work.

John Burry Jr. is chairman and chief executive of Blue Cross & Blue Shield of Ohio, a $2 billion insurance company based in Cleveland. He is a leading expert in health-care cost containment.