The affordable healthcare Act, [ACA] has landed on us, with a 2,400 page thud! At Gnostam Consultants, we believe that it is useful to remind ourselves of the reason why this huge legislative effort was undertaken. In theory the whole effort has been as a response to the need to reduce healthcare cost inflation in the United States.
At Gnostam Consulting http://www.gnostamconsulting.com we have developed a method which assists the industry in managing data on healthcare costs. We have “mapped” the industry structure and data flows, and believe that those industry participants who engage with us in this process will derive huge economic benefits from being able to discern where, in the industry “value chain” to make investments that will translate in lasting competitive advantage.
The US has experienced more than 6.93% annualized healthcare inflation over a 30-year period. The profits of the S&P, by comparison have risen by 5.9% over that same period. The 1.03% gap compounds dramatically to change the competitive position of American employers, [$1 at 1.03% for 30 years grows to $2.427], threatening sustainability. Another fact is that we live longer. But perhaps the most significant reasons for the increase in healthcare costs in the US is that we have very “inefficient”
The most innovative insurer in the industry, United Healthcare has made huge investments in the capture of data for different types of procedures. In fact the whole philosophy behind ACA is to bring more price discovery to employers. What we will discuss in this paper is the ways in which investments in “healthcare price” discovery will generate outsize profits for those industry actors who invest to “change” the current business model.
The data shows that the rate of change of healthcare inflation is decreasing. The fastest decline as can be seen in the chart above, has been in the Medicare index, which as we can see is now approaching 1% yearly change. The commercial index is the one which has remained stubbornly above 5%. The “commercial index” developed with Milliman and S&P is an average of commercial hospital insurance and commercial professional services insurance.
The methodology of how this information is gathered is important because as we will show, the best way in which to reduce overall costs in the industry is through improved access to price discovery. As with all price information exchanges, there will be an inevitable move towards a centralized inventory and price database, which will allow for better price discovery.
The current way that the index data is collected is as follows:
Clearly if we can discern a more efficient way for the industry to be organized, those who will change and be able to restructure their costs, so as to engage in a more compelling way with the buyers “value chain”, then the “economic value” added will accrue most to the first movers, as we have seen time and again from Amazon.com to Google.
As we know, we are overwhelmed with data and information. The key strategic advantage is therefore the organizing of data in a way that can provide empirical insights into how best to “disrupt” existing business model for greatest change.
CURRENT HEATHCARE INDUSTRY STRUCTURE:
The current system has insurers at the center of the system. It is the insurer who contracts on a group basis with the employer, on the basis of actuarial risks of the employers insured population. The insurance industry claims that it has grown premiums in response to its own regular underwriting cycle, and the major increases from 2000 were, the insurers claim, a s result of managed care to catch up from the mid 1990’s.
However, more recently we have witnessed extensive consolidation and concentration of market power in insurance industry majors, with increased profit margins and a huge outperformance of insurers relative to the S&P 500 index. This cycle peaked in 2006.
Another important aspect of the US Healthcare industry is the percentage of National Healthcare Expenditures spent on administration as a percentage of GDP. The US still has the highest ratio at 7.3% in 2003 vs. the next highest, Germany at 5.3%. Most analysts think that the streamlining of the many diverse administration systems may save between $32 to $46 billion per annum. These are not insignificant figures.
At Gnostam Consulting, [http://www.gnostamconsulting.com] we are devising ways in which we can assist the large-scale hospitals who are the biggest $ consumers of the US healthcare budget on ways to achieve savings and efficiency. This is important because the first mover will go well beyond a “one-time-
One time savings include:
· Reduction of inappropriate care;
· Changing incentive system, “fee for service” to one which rewards clinical value of cost effectiveness;
· Use price discovery methods to ensure that market power of insurers, other provider and pharma providers is blunted;
· Higher ratio of primary care to specialty care physicians;
· Lower barriers to preventative care, that reduce need for ER and complications of chronic disease;
· Reduction in duplication, conflicting care;
· Improve healthcare delivery systems with access to price discovery;
· Reduction in burden of overhead expenses.
Long Term value generating strategies:
· New IT data driven, empirical price discovery information data bases which compare cost and clinical outcomes;
· Comparison of wage and prices for common purchases;
· Strategies to deal with chronic diseases and expenditures associated with treating the symptom not the cause.
© Gnostam Consulting 2013
BELOW ARE DIAGRAMS OF PROPOSED ORGANIZATION OF MANDATED STATE EXCHANGE FUNDTIONS
DIAGRAM OF STRUCTURE OF US HEALTHCARE INDUSTRY:
 Healthcare costs expressed as an index in PPP terms