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Health care: a new angle on cost containment.

Health care: a new angle on cost containment Most companies agree that health care is a corporate cost driver that has a major impact on a firm's financial statements. Is it time for corporate America to reevaluate its role as the primary financier of health care?

In nearly every country in the world, the government provides basic financial health-care protection to its citizens. But, in the U.S., you in corporate America are our government. You didn't plan it that way. Following World War II, you started financing health care as a fringe benefit that probably didn't amount to more than 1 percent of payroll.

Today, health care consumes such a large percentage that it is no longer a fringe benefit. For some, it exceeds 10 percent of your payroll. And you cannot possibly figure out how to get out of this mess.

As an economist, I believe that competitive forces offer the best way of solving problems. But in this area, the debate over competition versus regulation is a nondebate. The issues are too large for any company to solve, even a General Motors. If you think that your corporation can solve this problem, you're not looking at the issues.

Why are you in corporate America our government? Because not only are you insuring your workers, but most of you are insuring two, three, or more dependents--as well as your retirees.

As if that isn't bad enough, you now are the main insurance vehicle for 37 million uninsured people. Moreover, you are increasingly the backup financing arm for both federal and state governments that can no longer afford the cost of the hospital and other health care that they are providing to Medicaid and Medicare recipients. Hospitals have figured out that there is a deep pocket other than the government--and you are it. There is no competitive strategy that you can possibly come up with to deal with that. In other words, this a problem that has to be solved in partnership with government.

A national leadership commission, comprised of private individuals representing our largest corporations, major insurance companies, and hospitals and doctors, has been meeting for more than two years to try to solve this problem. The commission has proposed a system that provides a financial backup for all Americans. It requires all individuals to have private health insurance and provides a mechanism for slowing down the rate at which costs are increasing.

But while the vast majority of the commission members support this proposed health insurance system, there are a number of noticeable dissenters. Some members of organized medicine feel the plan is too tough and too un-American. Some insurers feel the plan could result in their losing a portion of the private insurance market. And a few corporations feel that the plan isn't tough enough and isn't going to control enough costs. Unfortunately, while all these "interests" debate the fine points of the plan, your health-care expenses keep rising.

What are those expenses? The first thing to understand is that the U.S. sits in first place in the international health-spending derby, with close to 11.5 percent of our gross national product going to health care. We're talking about anywhere from $550 to $600 billion.

If you look at our trading partners, the U.K. sits on the bottom of the pack with about 6.2 percent of its GNP spent on health care. Japan is spending 6.7 percent. That means that into each Japanese car, for instance, goes about 60 percent as much health-care spending as goes into our cars.

Germany spends 8.1 percent of its GNP, and Canada is sitting there at 8.5 percent. So we are almost double the U.K. rate and 35 to 40 percent higher than Germany and Canada.

As recently as the early 1970s, the U.S. and Canada spent about the same. What happened? At that point, Canada introduced a national health insurance system. Financed primarily by the federal government and run by the provinces, it had tough budgetary constraints across the board. Canada's doctors are fee-for-service doctors; they're not in the employ of the government. The country's hospitals are not-for-profit, but they face a very tough bargainer at the other side of the table, and it's not corporations--it's the provincial government.

Why do I tell you this story? Not because I believe we should create a totally government-financed health-care system. Rather, it is to show you that it is possible to organize, finance, and provide comprehensive care for a significantly lower percentage of GNP than we now spend.

Between 1980 and 1985, there was what many called a competitive revolution in health care. We succeeded in slowing for a bit the rate of growth in health-care spending. But I'm here to tell you that revolution is over. The rate of growth since 1985 is every bit as steep as before.

The truth of the matter is that both regulation and competition can help control health-care costs. But we won't let them. We will not let either system work. We are not willing to pay the price.

Under a totally competitive system, it might mean hospitals closing and fewer people in hospitals. It might mean physicians receiving lower incomes. And there could be less access to care. Similarly, under regulation the losers would be some hospital's doctors and access to care.

But we won't let either of these systems work. Think of those of you who sit on the boards of hospitals. Will you let your hospital be hurt? Will you let it close?

Health planning was defeated by two forces. One force said it was totally ineffective, and the other force said it was too effective.

Thus, society flips back and forth between these two models, both of which are capable of working, but neither of which will we let work.

Business bears the brunt of our inefficient system Back in the good old days, the 1960s, before we passed Medicare legislation, 78 percent of total health-care spending was private and 22 percent was government. The passage of Medicare, Medicaid, and other laws brought the private-spending number closer to 60 percent by 1985. The trend suggested that the government's share would soon grow to 45 percent. But since 1985, the government's share in our country has actually fallen, while in other countries, it's now at 80 to 85 percent.

Today, our government's share of the health-care expense is approximately 38.5 percent, with corporate America the basic insurer for much of the remaining 61.5 percent. And the private-sector percentage is growing. The reason for this is that the government has become much tougher in its expenditure controls than business can ever be.

Where are the largest increases taking place? It is no longer in hospital inpatient care. The biggest growth is in outpatient care. We now can do almost anything on an outpatient basis. But don't think it's any cheaper. The medical system has figured that if its income is down for inpatient care, it must go up for outpatient care. And don't expect this system to be changed by ferreting out instances of unnecessary care. That isn't where the real problem is.

The cause of the problem is our inefficient health-care system. Hospital admission rates began falling in the early 1980s, and at a much faster rate than the fall in hospital capacity. Sure, a few hospitals have closed. But these closings have primarily been 25- to 50-bed hospitals or hospitals with a low occupancy to begin with. In fact, statistics show that we have more excess capacity in our hospitals today than we had 10 years ago.

It is a financial crime in this day and age for any tertiary-care hospital to be operating at less than 85-percent capacity. There should probably be no hospital operating anywhere at less than 75-percent capacity--except in rural areas where access is a real problem.

So our big problem is that we have a lot of hospitals with 25, 35, and 40 percent of their beds unfilled on any given day. And we are staffing them up. Sure, hospitals will tell you that they've closed a wing here or there. But the only way you really save money is to close the whole facility. And that's a hard thing to do in any community.

When hospital admissions fell during the 1980s, many thought we had licked the health cost problem. Health insurance premiums stopped going up and even declined for a few years. Today, of course, that genie is back out of the bottle. Why? Because hospital staffing rates are back up, and outpatient care expenditures are off the chart.

It is pertinent here to remember that Canada is spending 8.5 percent of its GNP on health care, compared to our 11.5 percent. This isn't because Canadian doctors don't put people in the hospital. Their hospital admission rate is every bit as high as ours. Their length of stay is actually higher. The difference is what happens to Canadian patients once they enter a hospital.

First of all, Canada has total hospital budget controls. The government doesn't pay hospitals per admission. It negotiates a budget with the hospital--in effect saying, national income is going up by 6 percent, so your budget can increase by 6 percent; do the best you can.

Also, the national government sets limits on what it will give to each province. If a province wants to pay its physicians and hospitals more, it has to tax itself a higher amount. This makes the provinces tough negotiators.

The provinces do sit down with their medical societies and hospital associations to negotiate physician fees and hospital budgets. They also say to physicians, if you keep jacking up the utilization of services to beat the fee controls, then halfway through the year we're going to lower your fees--because we're going to make sure at the end of the year we're only spending what's in our budget. If you can't police yourselves, you're just going to have to take a cut in fees.

When we had the big drop in hospital admissions in this country, the number of hospital workers began to decline. But not for long. Since 1985, it has been increasing. And when you look at the number of admissions and the number of full-time employee equivalents, you know that on a per-admission basis the number of workers did not fall at all.

I'm a university dean. If I didn't have to worry about a budget, there is no way we would staff up as meagerly as we do. I can use double the number of professors. I actually had 30 students in my classes lately. That's terrible. That doesn't represent the level of education I want to provide. I would much prefer 20 students per class. But, unfortunately, I've got a president and a treasurer who tell me there's no cost-based reimbursement system in the university, even though we have the third highest tuition in the country.

But in the U.S. health-care system, we essentially say to the medical profession: tell us what you believe you need, and we will write you a check. As a result, we have staffing ratios in our hospitals that are about double those of Canada. By no means does this mean that Canadians get less health care than we do. They appear to get as much as we do. But the people who provide it do it with less.

You've heard a lot about the nursing shortage in this country. I think nurses have been terribly underpaid, and we ask them to do a very tough job. But the fact is that we have more nurses working in America today than we have ever had. True, the supply has increased by almost 50 percent, but the demand for nurses has increased even faster.

When we look at the staffing ratios in hospitals over the last five years, we see that the average number of registered nurses, in terms of full-time equivalents, has gone from 80 per 100 patients to almost 100 per 100 patients. Back in 1976, it was only 50--which means the number of registered nurses per patient has doubled.

In the Boston area, where I live, an RN can make $40,000 to $45,000 after 10 years. They deserve that amount, but can we justify using their skills at $20,000 jobs? We have to make more efficient use of this increasingly expensive and scarce resource. That's one example of why we've got problems with our costs today.

I have said many times that we need to restructure the way we provide hospital care. We designed the U.S. health-care and hospital system in a cost-based environment where costs were no constraints. The more that was spent, the more we paid. Therefore, we created a very labor-intensive system. New expensive equipment has almost always been labor-using rather than labor-saving. That is not the way to provide the same or better quality care for less cost.

A new look at hospital care One of my side jobs is to chair the Prospective Payment Assessment Commission, which is a group of private individuals who provide advice to the Congress and the President on how to pay hospitals under the Medicare DRG, or diagnosis-related group, system. The system was devised by the federal government to control its health-care spending.

For a while, in 1984 and 1985, when the increase in hours-per-discharge actually fell below zero, we thought DRGs had finally solved the problem. Well, they haven't. For the last three years, hospitals have said they cannot or will not provide the desired level of care with fewer people. And so the hours-per-discharge are growing again. We have become less efficient, not more efficient.

What are hospitals telling the government today? They are going to Washington and saying, Mr. Congressman, Mrs. Senator, you need to give us more money. This is just at a time when the Office of Management and Budget and the President are saying Medicare spending has to be cut substantially. But the hospitals are saying that their costs are rising at 10 to 12 percent a year, and they are receiving only 3 and 4 percent under Medicare. Look what's happened to our profit margins, they say. And the truth is they're right. But why are their costs rising 10 to 12 percent?

Up to 1983, the government paid hospitals under Medicare on a cost basis. In that year, it introduced the prospective payment system, under which each hospital would get a fixed payment per patient based on the diagnosis of that patient. A hospital in an expensive area got more money. If it was a teaching hospital, it got even more money. It was an attempt to be fair, but in the first two or three years, the government terribly overshot the mark, and profit margins for Medicare patients rose to almost 15 percent when they were supposed to be just above zero.

What I'm saying is that over the first two years of the DRG system, an extra 15 percent, or about $5 billion more a year, was given to American hospitals. But since then the government has cut back on that rate, and there has been a steady decline in the Medicare hospital profit margins. That's why hospitals are now looking at the business world to replace those funds.

The clearest evidence of this trend is that corporate health insurance premiums are now going up by 25 to 30 percent a year, while overall health-care inflation is half that. The DRG system was set up to offer very tough financial incentives. Hospitals were to get so much money for each diagnosis. If they provided additional tests and procedures, they would receive no more money.

We thought the net impact would be that hospitals would become more efficient. They would specialize rather than provide every service. They would decide where they could make the most money--in some cases it would be burn centers and, in others, cardiac centers or birthing centers--and the system would become less costly. But, instead, every hospital became a full-service hospital. They wanted the HMOs and PPOs to contract with them. So, rather than getting smaller, our system expanded. But it cannot continue to do that with today's profit margins--unless, of course, corporate America is willing to pay the bill.

From the hospitals' point of view, they believe there is no alternative. Labor market forces are pressing them for 25-percent increases in wages. And pressures for introducing new technology are very strong. Doctors will not stay in a hospital that is not modern. But who will pay the bill?

Which raises a rather interesting point. In the past 15 years, the number of doctors has grown from a little over 150 per 100,000 patients to almost 225 per 100,000, and the number is projected to increase even further. Given the laws of supply and demand, with that kind of growth rate, you would expect doctors' average earnings to fall. But this has not happened. Actually, in the last year or two, physicians earnings have begun to go up. The answer? It has to do with that big increase in outpatient use.

What's the national priority? To summarize, in terms of trying to control their health-care costs, your corporations are not only competing with the providers of care for your employees, but also your government. And should you ask the government to spend more money, you're going to be laughed at.

Are you going to go to the Ways and Means Committee and ask Congressman Rostenkowski for more money under Medicare? He's going to ask how he's going to get the deficit down. Medicare is the single biggest growth item in the federal budget. So, the end of this whole story is that corporations need to be vigil, to be aggressive, to do all the things your consultants are telling you to do. Buy right. Be concerned about what kind of care you buy. Make sure you negotiate hard with your HMOs, your PPOs, and your EPOs.

But that is not enough! Somewhere along the line, government and the private sector have to come together and decide that every American should be insured. Not because it's humanitarian, which it is, but because it makes business sense. Also, we need to establish a total health-care reimbursement system that is fair for providers but that has each payer group--private and public--paying its fair share.

Corporate America is currently paying disproportionately for the care that the American health-care system provides. Companies are paying for the increased medical costs of their employees, as well as for the care of those who are uninsured or poorly insured. It is also helping to pay for the care of those insured by the government.

We need to figure out a way to insure all citizens. I know business is concerned about a mandate. But, frankly, health care is already mandated. Companies are fighting the wrong issues. There are ways to solve this problem that will help the bottom line of most corporations, but they will have to include some form of a government mandate to insure that all employed individuals have a minimum amount of health insurance. We also have to figure out a way to get our total system to be more responsive to costs. This means we need a more systematic approach that combines the power of government and the private sector. Each cannot do it alone. This systematic approach, I believe, has to have these components: * A system that will insure all Americans. * More understanding about what medical intervention makes sense. * An over-arching health-care reimbursement system that is tough but fair.

I'm asked often to evaluate the impact of cost-sharing that many corporations have introduced. Cost sharing, particularly for dependents and for certain kinds of services, is a temporary relief, a kind of artificial cost saving. It reduces the bottom line, but it doesn't reduce total spending.

My own view is that, if we are to have any form of systematic control over health-care spending, it will not come from Washington. It will come from you. Corporate America controls the situation. You are the leading insurer. You are the deepest pocket. And as long as you are willing to remain the deepest pocket, our system will stay pretty much the way it is. You cannot expect Washington to solve your problem unless you join with the country's leaders. In other words, Washington, left alone, will focus on its own problems.

In the 1970s, government was concerned about the total healthcare system. In the 1980s, it is concerned about the Medicare budget. And, basically, it's saying: "You control your own budgets. We're going to control the government's. You've told us you want us to keep taxes down and keep the deficit down and to stay out of the private sector. Okay, we're going to do it by controlling our budget, and so you do the same thing."

In that footrace, corporate America alone is going to lose, and then we all will lose. Stuart H. Altman Dean of the Heller Graduate School of Social Policy Brandeis University
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Title Annotation:includes articles on an individual company's cost containment efforts and an alternative view on health care
Author:Altman, Dean
Publication:Financial Executive
Date:Jul 1, 1989
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