MEMORANDUM ON REASONS FOR HEALTHCARE COSTING TOO MUCH AND

OUR POSITION ON RESTRAINING ITS GROWTH:

TO:

Dr. Forney Fleming and the Class of Fall14 for American Healthcare System

FROM:

Iyappan Somasundaram

DATE:

OCTOBER 15, 2014

Healthcare in the US is very expensive and it isnt showing any signs of restraining. Some of the
key problems and the reasons for these high costs are discussed below, followed by realistic
ways that can be followed to restrain its growth.
Reasons for healthcare costing too much:

Healthcare system is economically unsustainable. It has been slowly and constantly

eating into all stuffs. Though we talk on expenditure per capita, 5% of the population uses
50% money so careful consideration into which segment needs change in focus has to be
taken.

There is enough proof to suggest that hospitals arent the major source of health care cost
increase % (The number of beds per 1000 has actually decreased over the years and yet
the cost is increasing over the years.

Major causes for healthcare inflation:

Aging population(Old people with more chronic conditions are eating into the
Medicare expenditure)
Higher quality of medical services available today
Malpractice costs (Fear of lawsuit)
Technological Innovation (In all other the systems technology drives down prices.
That is not true with healthcare industry. Technology increases the cost here)
Pharmaceutical funding(Pharmaceutical companies have managed to create a
clause for non-negotiation of drug prices under Medicare)
Monopoly Pricing Power of Providers
Higher per capita GDP

Highest per capita GDP

Though the GDP per capita of Americans is generally higher than most of their European
counterparts the average per capita healthcare expenditure is very high (Nearly twice as much as
the European counterparts). The approximate per capita total healthcare expenditure is about
$8000 which is more than twice of the expenditure in other countries. The average cost has

grown threefold in the past 20 years. The biggest talking point is the rate of this growth is higher
than the rate of inflation which ultimately results in people paying the price for this deficit.
The average family premium for insurance was at 12% in 2001 and it is 25% now
(approx.). This rate of increase is unsustainable and something or the other has to be done to
restrain this growth. The deficit in the employers contribution is ultimately being paid by the
employee. Employees percentage of contribution is increasing at an alarming rate. Each
employee is taxed a certain percentage and this money is directly going to the trusts that manage
Medicare funds. At this rate of expenditure future generations will have no money when they are
eligible for Medicare.
Aging Population:
The biggest problem in todays healthcare system is that 5% of the population is contributing to
50% of the expenditure. This 5% comprises mostly of people aged above 85 and above who live
with nearly 5 or more chronic conditions. People who instituted the Medicare law never
forecasted that technology would extend life to such an extent and though cure isnt available,
people can control these conditions by the latest advanced treatments but this comes at a big cost.
When we look at the average healthcare spending per person is seen age wise the biggest
spenders are the people aged 65 and above (nearly 4 to 5 times the average spending of people
aged 25-45) and the people aged 80 and above are relatively the highest spenders.

Bottom line: People aged 65 and above are the biggest contributors to the healthcare
expenditure. Chronic care is the pressing issue in todays world. Chronic Illness Care or
Chronic Care is the major goal of this century as they are draining a lot of money.

Healthcare Quality:
Paying too much doesnt necessarily mean we are getting the best quality of care. This is true in
the US healthcare system. For example, LA and TX are known for their higher average
expenditure and still they are believed to be last in the quality of care for the money spent. In
reality, there is a huge gap between the required care and the care to be delivered. Quality of care
varies substantially no matter how much money is spent on healthcare. There are various factors
for this variation such as chronic illness and the expense of the treatment of chronic illness. The
biggest problem is even though we pay so much still there are nearly hundred thousand people
die due to human errors in treatment every year.
Another
Future problems:
Medicare wont pay for readmission for the same issues within 30 days. 30% of
readmissions of Medicare readmissions are within 30 days big problem for the future.
Hospitals virtually have to give 30 day warranty. Hospital will call you to regularly check on
your condition. [What if patient gets readmitted in different hospital? Wholl collect payment
from the first hospital because Medicare is not going to pay anyway? NOT WORKED OUT
YET]
DRG (Disease Related Groups) made a significant change in the healthcare industry

Major cause for big problems between healthcare system and medical staff. Medicare
created fixed scheduled payments and all private insurers adopted this technique based on
fixed fee for a diagnosis. Payment is same irrespective of number of days (Based on
diagnosis, not the hospital charges). This resulted in hospitals gearing towards clearing
beds because of fixed payment. Government did not change payment methods for the
hospitals and this is turned out to be a big problem. Physicians didnt care about the
hospitals

COST-SHIFTING:
Cost-shifting is the allocation of unpaid costs of care delivered to one patient population
through cost payments collected from other patient populations. Cost shifting is endemic to the
US healthcare system. One way or the other we are paying for uninsured. Medicare and
Medicaid shift cost to everyone (old to young, sick to well, uninsured to insured). Medicare is
more in volume (Increasing too). Payment-to-cost ratios for Medicare and Medicaid always
below 100%. Private Payers are critical for cost shifting. Cost shifted by private payers. This cost
shifting causes policy price increase. Ultimately we pay for the price increase!!

Key reason for higher insurance premiums is cost shifting. To compensate for underpayment and EMTALA Sick Tax is levied. This is the reason for increased premiums.
Ultimately each one of us is paying for the rising costs.

Sustainable Growth Rate (SGR):

A cost control mechanism which sets a target for physician
spending based on factors like physician fees, GDP and fee for enrollment. The flaw of this
system of cost control is GDP is not related to cost of providing care (fails to recognize
technology, coverage decisions, drug costs, shift to office care) and that the base year spending
target is 1966 resulting in a big deficit now.

PPACA Components to increase Primary Care:

ACA is trying to focus on shifting to the population more towards primary care to reduce
overall costs. It has incentivized by increasing the PCP compensation by increasing Medicaid
payments to PCP up to Medicare levels (2013 to 2014). RVUs are assigned based upon the
CPT code. RVUs of several codes have decreased over the years and CMS is pushing
towards a primary care oriented scenario.

Multigenerational workforce is also a growing concern as the each set of people have
different objectives and needs, and satisfying each one of them and maintaining the
hospital at the same time is one of the key challenges healthcare administrators face.

Both hospitals and physicians have their own problems but more problems arise when
there are conflicting interests such as physicians wanting complete autonomy on care
decisions whereas hospitals focusing more on efficiency and effectiveness, hospitals
being focused on compliances and regulations whereas physicians are focused on high
quality care.

How should providers respond to such pressures?

Biggest response to cost shifting would be delving into medical tourism. Even the most
advanced surgeries cost less in developing countries like India, Taiwan and Thailand.

Acquisitions and mergers are the way forward. ACA are slowly bringing an end to free
standing hospitals. Its either acquire or get acquired now. The healthcare industry is not
economically sustainable for small players in the coming days so big players should
acquire free standing hospitals based on various criteria (like demographics & estimated
revenue).

Re-investment of profits towards population health is being partially regulated for NPOs.
This has to be regulated more stringently to make sure the efforts reaping rewards by
achieving the shift towards primary care. Chronic care is the goal of the 21 st century. So
hospitals finding a way to help people to keep them healthy through population health
programs.

Trying to shift the doctors to salaried employees of the hospitals would be another step
forward as this reduces the risk of free standing hospitals to a great extent (E.g. Scott and
White, where all the doctors are contracted and employed directly under the hospital).