Sameer Kumar, Opus College of Business, University of St Thomas, Minneapolis, Minnesota, USA
Neha S. Ghildayal, School of Public Health, Division of Health Services Research, Policy and Administration, University of Minnesota, Minneapolis, Minnesota, USA
Ronak N. Shah, Opus College of Business, University of St Thomas, Minneapolis, Minnesota, USA
Purpose – The fundamental concern of this research study is to learn the quality and efficiency of US healthcare services. It seeks to examine the impact of quality and efficiency on various stakeholders to achieve the best value for each dollar spent for healthcare. The study aims to offer insights on quality reformation efforts, contemporary healthcare policy and a forthcoming change shaped by the Federal healthcare fiscal policy and to recommend the improvement objective by comparing the US healthcare system with those of other developed nations.
Design/methodology/approach – The US healthcare system is examined utilizing various data on recent trends in: spending, budgetary implications, economic indicators, i.e. GDP, inflation, wage and population growth. Process maps, cause and effect diagrams and descriptive data statistics are utilized to understand the various drivers that influence the rising healthcare cost. A proposed cause and effect diagram is presented to offer potential solutions, for significant improvement in US healthcare.
Findings – At present, the US healthcare system is of vital interest to the nation's economy and government policy (spending). The US healthcare system is characterized as the world's most expensive yet least effective compared with other nations. Growing healthcare costs have made millions of citizens vulnerable. Major drivers of the healthcare costs are institutionalized medical practices and reimbursement policies, technology-induced costs and consumer behavior.
Practical implications – Reviewing many articles, congressional reports, internet websites and related material, a simplified process map of the US healthcare system is presented. The financial process map is also created to further understand the overall process that connects the stakeholders in the healthcare system. Factors impacting healthcare are presented by a cause and effect diagram to further simplify the complexities of healthcare. This tool can also be used as a guide to improve efficiency by removing the “waste” from the system. Trend analyses are presented that display the crucial relationship between economic growth and healthcare spending.
Originality/value – There are many articles and reports published on the US healthcare system. However, very few articles have explored, in a comprehensive manner, the links between the economic indicators and measures of the healthcare system and how to reform this system. As a result of the US healthcare system's complex structure, process map and cause-effect diagrams are utilized to simplify, address and understand. This study linked top-level factors, i.e. the societal, government policies, healthcare system comparison, potential reformation solutions and the enormity of the recent trends by presenting serious issues associated with US healthcare.
Primary care physicians; Doctors; Gross domestic product; Health care; Quality; Information technology; United States of America.
International Journal of Health Care Quality Assurance
Emerald Group Publishing Limited
The total expenditure of the US healthcare surpassed $2.26 trillion in 2007, as compared to $714 billion and $253 billion in 1990 and 1980 respectively. US healthcare spending was about $7,439 per person and accounted for 16.3 percent of the nation's gross domestic product (GDP) in 2007 and will trend upward reaching 19.5 percent of GDP in 2017. As compared to other OECD countries, US healthcare spending per capita continuously leads by huge margins. In recent years, the sociopolitical culture of the US shifted from a welfare society to an ownership society resulting in significant increases in employee sponsored healthcare premium by 87 percent. Government assisted public healthcare insurance programs such as Medicare and Medicaid also increased by 18.7 percent accounting for nearly 40 percent of the total national health spending. Despite its top ranked emergency responsiveness, advanced medical care, new drugs and ultramodern medical devices, the US healthcare system ranked by the World Health Organization (WHO) 37th in overall performance and 72nd by overall level of health (among 191 member nations included in the study) (World Health Organization, 2007). Although Americans benefit from the investment cost in healthcare services, recent rapid cost growth coupled with an economic slowdown and growing federal fiscal deficit, will influence the financial well being of the US healthcare system significantly in coming years.
Several questions have been researched through literature and answered in a simplified manner to address the contemporary issues with the US healthcare system. The questions researched are:
- How do stakeholders influence quality in healthcare services?
- Do quality considerations lead to the overuse or under-use of services by various healthcare system stakeholders?
- What factors impact the variation of services geographically?
- What factors contribute to the disparities in the quality service provided?
- What role does technology play in quality of healthcare?
- What tools or strategies can be used to promote increased quality in the healthcare system?
- What is the prevalence of medical errors in the healthcare system and what is its effect on costs?
- What lessons can be learned from the experience of healthcare systems of other countries about the role of quality?
The quality and efficiency of the US healthcare system is studied by utilizing various operation management tools. The US healthcare system, role of government and finance of the overall healthcare system is studied via process maps. The contemporary issues of the healthcare system are studied in order to address the research questions. Literature overview, analytical framework, limitations, research findings, managerial implications and conclusions are presented in a chronological order throughout the paper.
Several papers, internet websites and congressional reports were reviewed to understand the current state of the US healthcare system and the present issues associated with it. Internet websites were found to be useful in data collection and information for the proposed study. The National Health Expenditure (2008) report was used to analyze the past and projected data to establish various trends associated with healthcare expenditure. Healthcare in US (National Health Expenditure, 2008) provided great insights on payment system, regulatory environment, role of government, healthcare efficiencies and inequities and costs drivers associated with the healthcare system. This report presented a very analytical and practical viewpoint of the present issues. “The US healthcare spending in an international context” (Reinhardt et al., 2004) and “In critical condition: healthcare in America” (Colliver, 2005) shed light on soaring healthcare costs and aligning it with the state of the fiscal and economical conditions. Inflation rate, GDP growth rate, wage increase rate and many others indicated that the state of the US healthcare is very gloomy and constructive actions are required otherwise the system could become bankrupt.
Many articles discussed the various costs drivers. The US Healthcare System: Just Best in the World or Just the Most Expensive? (Hellander and Bailey, 2001) and “Nothing Short of a Complete Overhaul will cure America's Healthcare System” (City Mayors, 2007) argued that the US has the most expensive healthcare system in the world. It is the only developed country, besides South Africa, that does not provide healthcare for all its citizens. The article provided a glimpse of the US standing among other countries in terms of percent GDP spend, infant mortality rate, disability adjusted life expectancy, fairness of financial contribution, responsiveness of health system and overall system performance. It is understood from the article that people without insurance live sicker and die younger. This also causes expense to taxpayers and causes cost shifting considerations for hospital and other emergency care. Understanding Healthcare Cost Drivers (Moroney, 2003) explained a vast array of a complex healthcare cost problem and yet there is no common consensus to resolve this problem. The cursory review of this article also concludes the limitless horizon of the problem and other significant factors contributing to rising health care costs that should be addressed include: aging population, system delivery capacity, the rising cost and increasing use of medical devices and hospital operations and the overall system of health care delivery and the impact of prevention on costs.
To define quality of healthcare, WHO provides a brief internet guideline. As per BMJ published WHO guidelines, WHO recommends the emphasis on primary healthcare and shift the focus from acute to chronic healthcare in all developed countries. Numerous articles touch on healthcare disparities, geographic variations and overall impact on healthcare quality. The social case for reducing health disparities should be treated just as the business case (Lurie et al., 2008).
Few commercial websites were explored to research healthcare system of various developed nations and OECD countries. Advantages and disadvantages of single payer systems of UK, Canada and Germany compared with that of US. The debatable issue over healthcare is less a pure macroeconomic issue than an exercise in the political economy of sharing (Reinhardt et al., 2004; Peterson and Burton, 2007).
This section is divided into the following three subsections – descriptive data analysis, process map analysis, and cause and effect diagrams.
Descriptive data analysis
In this section, various trends are presented that cover the socioeconomic standpoint and how it directly impacts the US healthcare system. Several graphs are presented to analyze the recent and projected trends of the US healthcare. The relationship between economic indicators and healthcare spending are also trended. This relationship helps to determine the current fiscal health and its sustainability of the system.
Figure 1 shows per capita US healthcare expenditure from 2002 to 2017; whereas 2008-2017 expenditure is projected. In 2007, the US spent $7,439 per person on average. It is projected that in 2017, the per capita US healthcare spending will rise to $13,101, a higher amount than any other nation in the world. It can be observed from the graph that the healthcare expense is growing at a steady rate between 6-7 percent and increases by nearly 33 percent every five years. If the spending trend continues, then it will be almost doubled in the next 10 years that poses serious threats to the overall economy and welfare of the US.
Figure 2 shows the US healthcare spending as a percent of GDP. In 2007, the US spent 16.3 percent of its GDP on healthcare. The current growth of healthcare spending is even higher than the GDP growth rate. If the trend continues then it is expected that the US will spend almost one fifth of its GDP on healthcare. In other words, of every $5 spent, $1 is contributed to healthcare.
Despite this relatively high level of spending, the US does not appear to provide substantially greater health resources to its citizens, or achieve substantially better health benchmarks, compared to other developed countries. This growing gap between health spending in the US and that of other developed countries should encourage policymakers to look more closely at what people in the US are getting for their far higher and faster growing spending on healthcare.
Figure 3 shows that the US GDP spending remains ranked highest among the OECD countries. In 2006, US spent 15.3 percent of its GDP in healthcare. Switzerland ranked second, spending 11.6 percent of its GDP in healthcare. All other OECD countries have a less complex healthcare structure and delivery system. However, rising cost drivers, diverse population and geographical related disparities, government regulations, emphasis on quality delivery and innovative drugs, and device culture set the economic model of the US healthcare to contribute the higher percent GDP.
As described in Figure 4, the US ranked highest among all the OECD countries in the world spending $6,401 per capita on healthcare followed by Switzerland, France, Germany and Canada. The healthcare spending growth rate for the US is assumed to remain constant at nearly 6 percent which is almost one third more than Switzerland's healthcare spending growth rate. This is a massive amount and the rising trend in healthcare expenditure will be expected to create a serious deficit for government budget and spending.
As shown in the Figure 5, the healthcare cost drivers have increased significantly in the past few years. Among all the healthcare cost drivers, personal healthcare, health service and supplies tend to increase or remain at a steady growth rate of 6-8 percent. Physician and clinical services tend to increase by 5.7 to 8.1 percent. All the cost drivers are expected to rise more than the GDP growth rate and inflation growth rate also contributing to push the growth in the national healthcare cost by 6.3 percent on average. Medical technology is expected to rise by 20 percent with the highest growth rate among all the other cost drivers.
As shown in Figure 6, healthcare premiums have continuously grown faster than inflation or workers' earning in recent years. Between 2002 and 2004, the cumulative growth of health insurance was 78 percent compared to the cumulative inflation of 17 percent and cumulative wage growth of 19 percent. Although the share of the total premium that workers' pay has remained fairly stable (28 percent for family coverage/16 percent for single) over the recent past, the rapid growth in overall premium levels mean that the workers are paying much higher amounts than they did several years ago. The average cost of the healthcare cost paid out-of-pocket increased by 34 percent in 2004. A total of 1 percent of people with the health spending account in 2004 paid 6 percent of their out-of-pocket cost (KFF, 2007).
Data tables associated with Figures 1-6 are included in the Appendix.
Process map analysis
In this section the US healthcare system will be analyzed using the process map analysis. Figure 7 represents the financial service blueprint of the US healthcare system. The US has adopted a hybrid healthcare service approach provided by private sector and the federal government. Among all the OECD countries, besides South Africa, the US is the only country that does not have a universal healthcare delivery system.
Various elements of Figure 7 are described as follows.
Individuals and businesses
Both individuals and businesses pay income taxes to the government. In addition, there is a payroll tax on employers and employees to finance Medicare. Employers pay all or most of the premium for employer-based insurance for employees, and employees pay the remainder. On the individual market, individuals pay for all premiums out of pocket. Employer-based insurance premiums and individual insurance premiums are collected by private insurers. There is another component, called direct or out-of-pocket payments, is a direct payment to a provider for health care services (e.g. a co-payment).
The government uses money generated from taxes to reimburse providers who care for patients enrolled in Medicare, Medicaid, S-CHIP and the VA programs. Public employees' health insurance premiums are paid to private insurers by the government from tax dollars. There is a tax subsidy of employer-based insurance that represents a major cost to the government (approximately of $100 billion). Employees receive health insurance benefits as tax-free compensation, and employers are able to deduct health insurance benefits as a cost of doing business (since employers are only taxed on profits, defined as any income above the cost of doing business, being able to deduct health insurance benefits as a cost of doing business is a tax subsidy for employers).
Private insurers accept premiums from individuals, businesses, and the government. In turn, they reimburse providers for taking care of patients with private insurance.
Health service providers
Providers (doctors, allied health professionals, hospitals, and other health care facilities) provide care for individuals. They are reimbursed for their services by private insurers and the government.
Figure 8 illustrates the employer-based or a private healthcare delivery system. Employers collaborated with the private insurance companies and provide the healthcare benefit to their employees. Participating employees bear a deduction from their paycheck for the stipulated healthcare plans and services. Employers also bear a percent of their share for the employee insurance.
When healthcare service is requested by an employee, a co-pay is paid by the employee to the service provider and any amount exceeding the co-pay is the burden of the insurance provider. However, any disputed amount that is not subjected to coverage in the selected healthcare insurance plan is also paid by employee.
As described in Figure 9, the government provides insurance to all its federal employees and also individuals eligible for the government assisted Medicare and Medicaid plans. Both, the Medicare and Medicaid veterans have to register with the government for their eligibility in order to receive healthcare benefits. Medicaid assists lower income citizens and seniors whereas Medicaid is offered to war veterans and disabled citizens. The federal government bears the cost of the healthcare benefits.
According to the Institute of Sciences and the National Academy of Sciences, the US is the only wealthy and industrialized nation that does not have universal healthcare. In the US, around 84.7 percent of citizens have some form of health insurance; either through their employer (59.3 percent), purchased individually (8.9 percent), or provided by government programs (27.8 percent); there is some overlap in these figures. Certain publicly funded programs help to provide for the elderly, disabled, children, veterans, and the poor, and federal law mandates public access to emergency services regardless of ability to pay. US government programs accounted for over 45 percent of health care expenditures, making the US government the largest insurer in the nation. Americans without health insurance coverage at some time during 2007 totaled about 15.3 percent of the population, or 45.7 million people. Health insurance costs are rising faster than wages or inflation, and “medical causes” were cited by about half of those filing bankruptcy in the US in 2001 (Wikipedia, 2008).
Cause and effect diagrams
The factors influencing healthcare costs will be presented and explained by the “fishbone diagram” tool. Healthcare costs enhanced by way of various factors will be presented and learned. The proposed solution can also be explained via cause-effect diagram that can help create a better healthcare system. The proposed cause-effect diagram will address the demographics, flawed healthcare management, medical technology, administrative costs, government regulations, healthcare facilities and supply side of economics will be discussed that impact the quality of US healthcare system.
The US healthcare costs represent a vast array of complex economic factors. Cost drivers can fit into three categories:
- price of the goods and services;
- quantity of goods and services being delivered; and
- healthcare delivery system itself.
The cause and effect diagram in Figure 4 displays the categorical cost drivers and sub-drivers of cost drivers that affect the overall healthcare cost growth and total dollar spent. The major US healthcare cost drivers distributed in six different categories are:
- Provider costs.
- Hospital costs.
- Technology costs.
- Insurance costs.
- Consumer behavior.
- Flawed management.
Various elements (or sub-drivers) that impact the cost drivers shown in Figure 10 are described as follows.
In 2006, physician service consumed 21 percent of total healthcare expenditure. Annual average growth rate of total provider costs was 6.5 percent. Cost drivers for provider costs can be distributed in three different categories – physician compensation, malpractice premiums and supply and demand characteristics. Physician compensation in 2007 increased by 5.8 percent, which is more than the rate of inflation, whereas overall increase in healthcare cost were 6.6 percent. Malpractice premiums are also a huge cost driver. As a result of the judicial system's threat of litigation, healthcare providers are forced to practice defensive medicine. In 2007, malpractice premiums increased by 11 percent. Research suggests that the more providers in a given area results in utilization of more medical technologies and services. Researchers have found that for each 1 percent growth in GDP per capita results in a 0.75 increase in physicians per capita. However, the last 50 years in US there are more super-specialist and sub-specialists have been produced than the primary care physicians. Physicians are also considered as “gatekeepers” that controls the demand side of the healthcare economy. Pushing for better and earlier diagnostics fosters greater use of the physician services.
Hospital costs will continue to rise by 6.6-6.7 percent each year from 2007 to 2017. Such cost rise in US is a combination of price and quantity as a result of increasing inpatient, outpatient and emergency services. In 2006, 37, 38.5 and 14 percent of hospital costs were nearly absorbed by private insurance companies, Medicare and Medicaid respectively. Other hospital cost drivers are:
- wage pressure and physician charge;
- the 3Cs (consolidation, competition, and construction);
- technology acquisition and use;
- government payment levels; and
- hospital support system.
Nursing shortages spurred significant increases in wages forced hospital administrators to offer higher salaries, signing bonuses, more flex time and also results in hiring more temporary staff. Hospital technology usage also increased in terms of more modern technologies and applications, i.e. MRI, catheterization and other diagnostic services. Hospital costs also increased due to competition to utilize more sophisticated equipment and capital intensive services. Consolidations also occurred to gain efficiency and reduce excess capacity and transactional cost, but, does not always save money. Facility expansion also required in the area of cardiology, neurology and orthopedic as a result of an increase in an aging population.
Technology and pharmaceuticals are major drivers of healthcare cost
In the past five years medical technology spending comprised about 20 percent of the growth in healthcare costs and now exceeds $200 billion annually. There is substantial evidence that overutilization and misuse of technology leads to spending that exceeds its value for patients. Diagnostic imaging technology increased nearly to a $100 billion business (Beever et al., 2004). According to Pharmaceutical Technology Sourcing and Management, in 2006, $637 billion global pharmaceutical market was dominated by the US. Though, US pharmaceutical growth is expected to grow by only 1-2 percent in coming years, the emerging market growth will continue to push the medicine costs upward due to R&D expenditure on the new drugs in pipeline. Direct-to-consumer advertising also increased due to FDA approved guidelines for drug ads on radio that do not require “warning labels”. In 2002, pharmaceutical industry spent almost $2.5 billion overall advertising directly to consumers.
Consumer behavior impact on price and delivery
The public has been increasingly demanding specialty care and that demand is a main reason why managed care failed. Patient demand for the latest technology along with more advanced diagnostics, more costly drugs, new and higher cost vaccine and regulatory environment mandates are some of the real causes of rising medical costs.
In recent years, the US shifted into an ownership society away from a welfare society. Insurance premium cost increased by 42 percent in the last five years from 2002-2007 (National Health Expenditure, 2008). Premiums for employer-based health insurance rose by 6.1 percent in 2007. Administrative cost also contributes to higher premiums. The US spent roughly 31 percent administrative costs or $1,000 per person in 2007 which is significantly more than double as compared to Canada's costs.
Figure 11 describes the potential reformation drivers proposed by authors that may contribute to a better US healthcare system. They are grouped into six different categories:
- Universal coverage.
- Prudent purchase promotion.
- Healthcare-IT promotion.
- US Policy to support for primary care.
- Aligned payment system.
- Increased use of medical technology and pharmaceutical research.
Various elements (or sub-drivers) that impact the potential reformation drivers and are shown in Figure 11 are described as follows:
- Universal coverage. It significantly reduces the administrative costs, expedites the deliverability and by providing legal guarantees to the coverage, government can deliver more incentives instead of relying on private sector.
- Prudent purchase promotion. Prudent purchase allow consumers to take ownership of their own healthcare management. Consumers can make own decisions and select a plan that allows them to pay based on their income level instead of pursuing a forced plan that requires them to pay a higher amount of healthcare expenses.
- Healthcare IT promotion. In recent years there has been a huge push to reduce healthcare costs, especially administrative costs. Many OECD countries have adopted the electronic data enterprise system for various purposes such as billing, record tracking, insurance claim processing etc. Utilizing healthcare IT administrative costs can be reduced significantly, which also increase customer satisfaction and system efficiency.
- US policy for PCP support. There are over 100 million citizens in the US suffering from chronic illness. WHO has recommended shifting healthcare focus from acute to chronic healthcare. US has produced more specialists than PCPs. The federal government can change policies and increase the training of more PCPs to boost the care of chronic illness and also reduce many costs implication associated with chronic illness.
- Aligned payment system. Presently, the US healthcare payment system is a scattered and non-aligned system. The payment methodology is not based on performance or achieving a service objective, but rather it is based on the volume that is requested against the healthcare service delivery. Geographic variation exists in the payment system and sometimes reporting of the payment creates dysfunctionality. This can be avoided by creating an aligned payment system. It will also boost incentives for quality improvement.
Reverting to research questions
Questions posed in the beginning of this paper are addressed next.
How does quality impact the use of healthcare services for consumers, providers and other stakeholders?
According to WHO guidelines, the quality of the US healthcare system is defined based upon good health measures, responsiveness and fairness in financing. Good health is making the health status of an entire population as good as possible over the whole life cycle. Responsiveness is characterized as a response to people's expectation of respectful treatment and client orientation by health providers. Fairness in financing is ensuring financial protection for everyone with cost distribution according to one's ability to pay.
Rising medical technology cost, defensive medicine practice enhanced diagnostic costs; prescription drug cost caused the US consumer to face the ordeal of paying a higher insurance premium, out-of-pocket and prescription drug expense in recent years. There are 42 million people in the US without insurance and every year more than one million file for bankruptcy because of an inability to cover medical costs. Consumer-driven health plans offer more transparency, encourage consumers to take ownership of their own healthcare and become more prudent with healthcare money (Kaiseredu, 2008). As consumers benefiting from the tax favored health reimbursement arrangement (HRA) accounts contract, the healthcare service providers have to cover the portion of the healthcare costs increase by pushing low income earners to pay more for the services rendered. Administrative costs have increased as the overall healthcare model shift from a non-profit to a profit bearing base.
Does quality consideration lead to the overuse of services by various healthcare system stakeholders?
Quality considerations will lead to the overuse of services by various healthcare system stakeholders. WHO calls for the countries to shift from acute to chronic care because increased longevity, urbanization and unhealthy lifestyles require reacting to prevalent chronic conditions (BMJ, 2008). Research suggested that over 100 million US citizens are suffering from at least one or more chronic conditions that costs more than $679 billion in healthcare and $233 billion in lost productivity in 2000. Overuse of the services can be expected in terms of diagnostic tests, preventive medical treatments, radiological imaging, i.e. MRI and PET scan, frequent visits to PCPs, recommendations of sophisticated medical devices, minimally invasive surgery procedures and modern drugs to prevent and cure such disease conditions.
What factors impact the variation of services geographically?
There are several factors that can contribute to variation of services geographically. The main contributors are: prices paid for medical services, health and illness status of residents of a given region, regional preferences about the use of health care services and the determinants of those preferences, such as income (Congress of the United States Congressional Budget Office, 2008). Demographic factors such as, race, gender and age can have an impact on the service level. However, only 5 percent of variation can be explained by the demographics. Differences among regions in the prices of medical services and in the population's health status explain some of the observed geographic variation in Medicare spending. The amount of variation explained by those factors is most likely less than half of total variation, as in some areas the physician services, hospital supplies differ in cost from those in others. Variation in health status can also be explained by education attainment, income level and dual policy holdership.
What factors contribute to the disparities in the quality of services provided?
The term “health disparities” is broadly defined as “observed clinically and statistically significant differences in health outcomes or healthcare use between socially distinct vulnerable and less vulnerable populations that are not explained by the effects of selection bias” (Kilbourne et al., 2006, p. 12). Health disparities are apparent in the data on health outcomes, socioeconomic status, and access to health/insurance and health care provider selection effects (Kilbourne et al., 2006). Societal factors such as, income level, insurance status, access to healthcare, cultural-communication and language barriers and partnership in decision making are the major contributors to the healthcare service disparities. Ethnic factors also contribute to the healthcare disparities that are influenced by the socioeconomic factors (Kilbourne et al., 2006).
What role does technology play in the quality of healthcare?
Healthcare costs are increasing at an annual rate of 7 percent per year. If sustained, this will bankrupt the Medicare program in 9 years and also increase the nations' overall healthcare bill to $4 trillion in 10 years. New or increased use of medical technology contributes 40-50 percent to annual cost increases, and controlling this technology is the most important factor in reducing them. The average age of the population in the US, Japan and Europe continues to increase. By the middle of this century, the worldwide proportion of people under age 15 will decrease to approximately 20 percent. This demographic change creates enormous pressure on the ability to finance the US healthcare system. Considerable potential for improvement can be foreseen through the use of minimally-invasive technologies, for example in surgery, cardiology, stomach or colon endoscopy. In medicine, minimally-invasive technologies include diagnostic and therapeutic measures that lead to the least possible surgical strain for the patient. These technologies allow for a more gentle treatment of the patient, as well as, a reduction in pain. The use of minimally-invasive technologies leads to quicker recovery times and to considerably shorter hospitalization (Bio Pro, 2009).
What tools or strategies can be used to promote the increased quality of the healthcare system?
Many experts agree, the real problem with healthcare is not a lack of money, technology, information or even people, but the lack of an integrated system connecting these resources, that deliver a more cost effective care. There are several tools and strategies to promote increased quality:
- Overcoming cultural barriers. Established procedures in the healthcare system can be improved by cost reduction efforts. Systems such as electronic medical records (EMR) can help physicians and clinicians to communicate.
- Reducing barriers to integrate health system development. Unreasonable pricing practices can be reduced and the quality of healthcare can be increased by utilizing EMR in a newly created, large, integrated, multi-specialty physician network.
- Enhancing healthcare performance measurements. Removing the resistance of hospitals and physicians to expand price and quality transparency by creating a central nationwide system to record and access the performance measures.
- Creating financial incentives for healthcare quality and value. Government and private sector can promote such programs like P4P – pay for performance reimbursement. This will significantly increase the quality of healthcare, the extent of financial incentives, and performance measures.
What is the prevalence of medical errors in the healthcare system and its effect on costs?
There are four types of medical errors that result in medical inefficiency of a healthcare system:
- Diagnostic errors. Error or delay in diagnostic, failure to employ indicated tests, use of outmoded test therapy, or failure to act on results of monitoring or testing.
- Treatment errors. Error in performance of an operation, procedure or test in administrating the treatment, error in dose or method of using a drug, avoidable delay in treatment or in responding to an abnormal test, inappropriate care.
- Preventive. Failure to provide prophylactic treatment, inadequate monitoring or follow-up treatment.
- Other. Failure of communication, equipment failure, other system failure. The total national medical cost of medical errors was $37.4 billion annually.
In 1999, the Institute of Medicine released a report entitled “To err is human” that found medical errors to be the eighth leading cause of death in the US, with as many as 98,000 people dying each year as a result of medical errors. Studies have shown the inconsistency of the medical liability system in determining negligence and compensating patients, and doctors struggle to pay soaring medical liability premiums. The report indicated that as many as 44,000 to 98,000 people die in hospitals each year as the result of medical errors. The Institute of Medicine report estimates that medical errors cost the nation approximately $37.6 billion each year; about $17 billion of those costs are associated with preventable errors. About half of the expenditures for preventable medical errors are for direct health care costs (Migdail, 2000).
What lessons can be learned from the experience of healthcare systems of other countries about the role of quality?
The US can learn by studying what works well in other countries and by applying the best practices to the US in terms of distinctive political systems, values and culture. However, no single system studied is perfect and each has trade-offs. In general, single payer systems have lower administrative costs, high quality, and satisfaction. However, cost controls may create shortages and delays. On the other hand, pluralistic systems can be designed to achieve universal coverage with individual freedom to purchase additional services, but are less equitable and have higher administrative costs.
Primary care is the foundation of high performing delivery systems
In France, Germany and UK, societal investment in medical education has achieved a well-trained workforce with the right proportion of primary care physicians and specialists and is large enough to assure access. Investment in primary and preventive care can result in better health outcomes, can result in reduced costs, and help assure an adequate supply of primary care physicians. Federal government should intervene to avert the impending catastrophic shortage of primary care physicians. The US should set specific targets for producing generalists and specialists to boost the level of healthcare available to masses.
All high performing systems have universal coverage
The OECD countries have adopted the universal coverage system either by a single payer (i.e. governments of the UK, Canada, Japan) or by a pluralistic – mixer of both private and public system (in Australia, France, Germany, Switzerland). Guarantee by law that all people within the US have equitable access to appropriate health care without unreasonable financial barriers. Both systems have tradeoffs that the public will need to weigh in making a choice. Fiscal budgets and price controls can restrain costs but can have negative consequences and do not improve efficiency unless the budget is reasonable and the target region is small enough to motivate individual providers. Price controls can restrain costs, but may lead to cost-delays for elective procedures, cost shifting and creation of a parallel private sector.
US should align payments to physicians with quality and care coordination
In the US there is need for a policy to provide incentives for physicians to achieve evidence-based performance standards. US needs to revise existing volume based payment systems used by Medicare and most private insurers to create care coordination payments for primary care physicians working with health care teams to manage care (patient-centered medical home).
High performing systems invest in healthcare IT, have uniform billing, and lower administrative costs
Germany, UK, Canada, Taiwan and many other countries have adopted a uniform billing and electronic processing of claims which improves efficiency and reduces administrative expenses. An inter-decision operable health information infrastructure can enable physicians to obtain instantaneous information at the point of medical decision-making and enhance electronic communications among health professionals. The US should reduce the costs of health care administration and invest in HIT infrastructure to assist physicians in delivering evidence-based healthcare. HIT will also help create uniform billing and credentialing systems across all payers.
The analysis provides a macro model of the current US healthcare system and identifies major drivers of the country's escalating healthcare costs. Some of the identified cost drivers include healthcare service providers' costs, hospital costs, consumer behavior, new technologies, health insurance costs, and flawed management (e.g. medical errors, recording errors). Increasing healthcare costs in the US have made millions of citizens financially vulnerable, resulting in personal bankruptcies, a lack of healthcare delivery access, and an overall lack of consumer confidence in the US healthcare system. A number of solutions to improve the current system are then described, including universal health coverage, prudent health insurance plan purchase option for consumers, healthcare-IT promotion (such as, electronic medical records), federal government policy to support primary care as a foundation, aligned payment systems and the continued promotion of growth in medical technology and pharmaceutical research.
Limitations of the study
The US healthcare system is very diverse and complex as compared to other nations. The quality and efficiency measures are also very diverse to achieve a universal healthcare policy. The entire healthcare model is institutionalized around the corporate culture such that there are many complex areas required to analyze. The healthcare reform proposals include restructuring the private health insurance market, employer “pay or play” requirements, premium subsidies to help individuals purchase health insurance, increased use of health information technology, research and incentives to improve medical decision-making, reduced high risk behavioral factors, reforming the payment of providers to encourage efficiency, limiting the federal tax exemption for health insurance premiums, and reforming several market changes such as resetting the benchmark rates for government sponsored plans and allowing the Federal agencies to negotiate drug prices.
A fundamental problem in evaluating reform proposals is the difficulty in estimating their cost and potential impact. Proposals often differ in many important details, therefore, it is difficult to provide meaningful side-by-side cost comparisons. The empirical data and theory underlying cost estimates in this area are limited and subject to debate, increasing the variation between estimates and limiting their accuracy. Any healthcare reform solution that potentially impacts the healthcare model of the US needs to be aligned with the new healthcare practice. This subject is beyond the scope of this study, yet needs to be addressed and studied in subsequent research.
In order to curb rapidly rising US healthcare costs, decision makers in the US government, insurance companies, and hospitals should be proactive in implementing policies which could be effective in removing inefficiencies from the US healthcare delivery system. For instance, decision makers should insist on using acute care to prevent future chronic care, and the physician community should be given incentives to practice preventive medicine to avoid later consequences. Also, healthcare decision makers should promote the “pay for performance model” in order to support a culture that reduces defensive medical practices and litigations. To further reduce hospital costs, hospital management should take actions to increase staff efficiency and reduce hospital contributed medical errors. In addition, hospital management should increasingly utilize technologies such as Teleradiography in order to reduce diagnostic treatment costs, and central IT systems to enhance record keeping and billing practices. Lastly, management in private and government organizations should promote healthy lifestyles among US workers. In the past few years, US society has increasingly developed into an ownership society instead of a welfare society, and consumers should continue to make responsible lifestyle choices and educated healthcare decisions.
Healthcare expenses are one of the largest portions of annual consumer spending in the US. The US GDP is growing at a rate of 2 percent, whereas the healthcare spending in the US is increasing much faster than the GDP growth (Wikipedia, 2008). Therefore, close scrutiny of the US healthcare delivery system efficiency and effectiveness will be prudent. In our analysis, the state of US healthcare delivery system is examined by utilizing various operational management tools such as financial process maps and cause and effect diagrams. In the cause and effect diagrams, US healthcare cost drivers and the various elemental causes of the cost drivers are identified to explain the major sources contributing to US healthcare system expenditures.
After pin-pointing the major cost drivers, we determined that the focus of decision and policy makers should be on various important measures of US healthcare system performance, such as treatment cost, access to healthcare, health and well being, responsiveness, fairness in financing, and consumer satisfaction (Hellander and Bailey, 2001). There are several steps that can be taken to reform the US healthcare system by reducing the costs and increasing the quality and efficiency. Computerized medical records, active promotion of primary care physician services, pay for performance paradigm shift, universal healthcare coverage and many other solutions can be applied to reform the US healthcare system. The US government policy makers, corporate strategists and public welfare committee representatives should work jointly to revitalize the US healthcare system (Hellander and Bailey, 2001).
This study does not extensively examine the influence of the healthcare systems of other OECD countries and their impact on the social and cultural factors on the US. Since the US is such a diverse country in terms of race, geographic variation, genetic implications on hereditary diseases, taxation differences in the government system towards healthcare spending and many others – the lack of full-scale comparison is a limiting factor of this study. Other tools can be used to study the cost drivers, such as, regression analysis to incorporate unemployment rate, lifestyles in various age groups and economic standings, and so forth to further understand the effect of cost drivers on US healthcare system efficiency and effectiveness.
Figure 1Per capita US healthcare expenditure 2002-2017 ($000s)
Figure 2US healthcare spending trend in percent of GDP from year 2002-2017
Figure 3Healthcare spending among several top OECD nations based as percent of GDP in 2006
Figure 4US dollar per capita healthcare spending among top several OECD nations in 2006
Figure 5Various cost driver trends in recent years (2004-2008)
Figure 6Relationship between insurance premium, inflation and wage growth (1988-2007)
Figure 7The financial process map of the US healthcare system
Figure 8Process map of employer-based healthcare delivery system
Figure 9Process map of the government-sponsored healthcare delivery system
Figure 10Various sub-drivers of the major costs drivers of the US healthcare costs
Figure 11Proposed cause and effect diagram with potential to contribute to better US healthcare system
Table AIUS healthcare expenditure from 2002-2017 (2008-2017 projected)
Table AIIHealthcare expenditure of various OECD countries in 2007
Table AIIIPercent growth of various economic indicators (1988-2007)
Table AIVHealthcare cost distribution and US population growth (2004-2008 projected)
Table AVEconomic indicators (wage growth, inflation, population growth), healthcare premium growth and healthcare expenditure growth from year 2003-2007
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About the authors
Sameer Kumar is a Professor of Decision Sciences and Qwest Chair in Global Communications and Technology Management at Opus College of Business, University of St Thomas. Major research interest includes optimization concepts applied to design and operational management of production and service systems where issues relating to various aspects of global supply chain management, product and process innovation, and capital investment justification decisions are considered. Sameer Kumar is the corresponding author and can be contacted at: firstname.lastname@example.org
Neha S. Ghildayal is currently pursuing a PhD in Health Services Research, Policy and Administration in the School of Public Health, University of Minnesota, Minneapolis. Prior to joining the doctoral program, she graduated from Carlson School of Management, University of Minnesota with a BS in Business Administration majoring in Finance and Risk Management and Insurance.
Ronak Shah is pursuing an MBA at Opus College of Business and holds an engineering position with a start-up medical device company. He is a seasoned development engineer working on the numerous leading medical devices in the cardiovascular and endovascular area, which he has successfully brought to the market. He worked for Fortune 500, midsize and start-up companies – Boston Scientific, Accellent Inc., Black and Decker and Aclara BioSciences in various engineering capacities and earned an MS from the University of Massachusetts Lowell in Plastics Engineering.