Glimmers of hope vs. health care inflation

If you dig deep enough, it’s possible to discern some relief from the roaring inflation in health costs that is putting major hurt in the budgets of government at all levels, on businesses and on individual Americans.

Milliman consultants put the 2017 heath cost inflation at 4.3%, a high number at twice the general inflation rate, but the lowest since it started tracking it in 2001.

That could mean that the concerted efforts at cost reduction, especially by private companies, are starting to “bend the curve” on what was once hyperinflation. Pressure by payers on the Medical Industrial Complex (MIC), which constantly seeks more revenue, may finally be having an impact.

There are other signs as well. The bundled price of a joint replacement at some bone shops in the Milwaukee region has been running between $26,000 and $28,600 for a half dozen years, meaning that price increases have disappeared for those procedures. In other words: zero inflation.

Hallelujah for that small wins! It’s amazing what happens when prices emerge from the MIC -induced fog and consumers can see transparent prices clearly.

Further, the bundled prices appear to have rationalized prices for joint replacements across the regional market. The median price in Milwaukee ran $47,500 a half dozen years ago; it has dropped to $36,500 today. That is actual deflation. Hallelujah again!

That’s how markets are supposed to work. They are supposed to reward value, the combination of quality, service and price. They are supposed to eliminate vendors that can’t compete, like the ones in Milwaukee that charge as high as $80,000 for a new metal joint. Those can only survive in a “non-market,” the prevailing model.

Another encouraging trend is shift from in-patient care at expensive, dangerous hospitals to outpatient clinics. Prices and infection are usually lower at the clinics.

I encourage friends who need an elective procedure, like a heart bypass, to seek out the cheapest one they can find. It’s counter-intuitive, but cheaper is better. Just like in manufacturing, high quality means fewer defects, less waste and therefore lower costs and prices.

In short, there is an inverse correlation between price and quality.

Payer insistence that MIC providers shift away from an obsession with volumes of procedures, medical edifices and revenue increases to the delivery of value is yet another positive trend. Eventually, value-based purchasing will rule the day.
Better analytics using big data will increasingly pierce the MIC opacity on prices and quality so consumers can find best doctors, clinics and hospitals and the lowest prices.

Often the value-oriented consumers will find themselves being treated at “lean” clinics and hospitals. Innovators in Wisconsin, like Theda Care in Appleton and Bellin in Green Bay, have led the way to the same lean disciplines that Toyota invented and American manufacturers, of necessity, adopted.

Because MIC competition is limited, the lean transformation was slow to take off. But after ten years of evangelism by John Dr. Toussaint out of Theda Care, there is progress. More and more hospital corporations have gotten religion on the need to deliver defect-free quality and less price inflation.

By no means, though, has the inflation beast been tamed in the health care. It is still chewing up bigger chunks of GDP every year – 18% and heading to 20%. Out-of-control drug prices are the latest demon, for which no one seems to have an answer. Witness President Trump’s lame speech on the topic last week. It contained no action items of note.

The 4.3% inflation rate is not good enough. That is especially true in the private sector. Because Medicare and Medicaid use price de-facto price controls to set the pace for half of the nation’s health care spend, the inflation rate hits 7-8% for private plans. Premium, hikes are far worse for individual plans on the Obama exchanges.

A truly sad part of the overall picture is that average Americans end up holding the bag for the bloated costs and prices. They are also on the receiving end of cost shifts from employers to employees.

The employer/employee split is now 57%/43%. For a family of four that means an average of more than $11,000 on the employee side. That’s a big annual hit to a family budget.

As proved out over the last decade, reform will not come from either political party. It’s hard to bring about meaningful, value-based change if you don’t listen pragmatic problem-solvers, if you only listen to wonks who have never paid for a health care plan for employees or to people inside the MIC.

Still, the early returns from payer pressure for value-based health care are encouraging. The recent wins are reason to keep fighting the good fight.

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