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Dennis Horrigan: Amazon, Berkshire Hathaway and JPMorgan Chase must find a way to tackle soaring costs

By Dennis R. Horrigan

Recently Amazon, Berkshire Hathaway and JPMorgan Chase announced that they are teaming up to solve the problem of our rising and unsustainable costs of health care. The announcement was short on detail. They stated they were not exactly sure how to accomplish this feat, but they would start with their own employees and their efforts could potentially tackle our national health care system.

Heath care costs are projected to trend up at 4.5 to 4.7 percent for the next few years, putting continued pressure on small businesses, corporations, consumers and government payers. This trend and the failure of numerous private and pubic attempts to bring health care costs under control are at the heart of the group’s initiative.

This will be a David versus Goliath match. The group will need to address the major challenges facing the U.S. health care system, which include administrative costs, the problems of care delivery effectiveness, safety and efficiency as well as the overall health of the U.S. population, in general, and the group’s employees, specifically.

How will the group reduce administrative costs? The major administrative components of health insurance include marketing, claims processing, customer service, benefit design, provider reimbursement, utilization review and government reporting. Administrative costs, including profit margin, range from 12 to 18 percent for private insurers while the Medicare program runs only at approximately 2 to 3 percent.

If the group is to reduce administrative costs, it will either have to contract out these services to a third party or build a new administrative platform. No doubt they will be able to use their banking infrastructure and customer service technology for efficiency, but there does not seem to be significant opportunity for major savings on the administrative side, alone, unless they contracted with the Medicare program to cover their employees.

The next necessity is improving effectiveness, safety and efficiency that could be realized by reducing unnecessary hospital admissions and readmissions, emergency room visits and unnecessary or duplicate testing while addressing the high cost of hospital care, professional services and pharmaceuticals.

Hospital costs account for 20 percent of every dollar; professional services, 33 percent; outpatient services, 27 percent; and prescription drugs, 19 percent. Each of these areas need scrutiny.

While it is estimated that somewhere near 20 to 30 percent of health care services do not bring value, few if any high-performing health care systems have demonstrated that they can achieve savings of this magnitude. But the payers of health care continue efforts to reduce unnecessary utilization and lower unit cost.

The Health Care Cost Institute recently released a study of health care cost trends, which are driven by the cost of services and utilization frequency. The institute noted that the overall cost growth in health care is dominated by higher costs for pharmacy, surgery and emergency services – not by higher rates of utilization.

This finding should lead the group to consider some options: reduce reimbursement to the hospitals and physicians for surgical care and emergency room visits and then negotiate rates for prescription drugs. It is doubtful that the prestigious health systems or community hospitals will accept price cuts, nor will employees be willing to use other network providers who are willing to reduce their prices.

Secondly, the group may try to seek “volume discounts” and drive employees into high-performing systems. This may sound logical, but it is a proverbial cost shift that simply enables one group to pay less at the expense of others who pay more – not a virtuous approach to the problem, which may provide short-term relief but never a long-term solution.

The group could also attempt to develop the value-based reimbursement model, such as bundling payments for medical and surgical care or capitation. Bundled payments are a single rate of reimbursement that includes the hospital, physicians and other care providers. This model is designed to tie payment to better coordination of care. A primary care capitation model prepays doctors a fixed amount per month for their office-based care.

Finally, they may opt to purchase components of the delivery system, and the acquisition of primary physician practices might be their first move in an attempt to better control cost and utilization.

The group may also focus on the customer and create apps that give patients information on how to shop for health care or how to use tele-health and telemedicine apps to better care for themselves. These options have had equivocal results but no doubt will be evaluated for potential cost savings

The overall health of the U.S. population and the employees creates another challenge. Smoking, improper diet and sedentary lifestyles are the major contributors to the four most costly medical conditions: cardiac and vascular disease, respiratory illnesses, cancer and diabetes.

The group may be able to develop some workplace incentives but has no chance to reverse the rising incidence of these diseases without a focus on public and community health. This is a major opportunity for the group to get upstream of the high incidence of these conditions in our population.

Thus, reducing administrative costs, lowering provider payments, establishing preferred discounted networks, using value-based payments, negotiating pharmaceutical deals, purchasing medical group and using technology to assist patients in their health care choices are all possibilities to pursue. But, importantly, can the companies expand their approach beyond their employee base and use their prominence in the U.S. economy to help our nation?

Should the group consider creating a community health model with a community rating, where all parties pay the same premium and where the business community, schools, physicians, hospitals and neighborhood groups focus on health wellness while lowering costs for the community – not just group employees? Secondly, should the group consider direct contracting with Medicare for its employees to test the option of “Medicare for all”?

This initiative is an important one, but it needs to have a broader focus than the companies’ own employees. It should be designed to lead us to a solution of our national health care problems.

Dennis R. Horrigan is a former CEO of Catholic Medical Partners and is a consultant with Optimity Advisors.

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