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The Unsustainably Big Business of Healthcare

Laura Joszt
In a session covering the future of the business of healthcare in the United States, Kevin Grabenstatter, managing director for L.E.K. Consulting, asserted that healthcare is an unsustainably big business, which means that change is coming.
In a session covering the future of the business of healthcare in the United States, Kevin Grabenstatter, managing director for L.E.K. Consulting, asserted that healthcare is an unsustainably big business, which means that change is coming.

To back up his claim, Grabenstatter and his colleague, Todd Clark, managing director for L.E.K. Consulting, followed the money in healthcare and used the data to predict changes in the industry’s future.

Grabenstatter and Clark used 5 key points to show the business of healthcare.

1. Providers

The provider sector, according to Grabenstatter, is out of line. While there are some pretty remarkable examples of best practices in the United States, even among systems considered as delivering efficient care, the total healthcare cost per employee was still $3859 in 2015. In the rest of the world, the average cost is $2749, which is 60% lower than even best practices in the United States.

What about the argument that the US has the best care? Life expectancy in the US is down 0.1 years from 2014 to 2015 and it ranks last behind other first-world countries, Clark pointed out. Grabenstatter added that other research comparing outcomes have found that usually the US is last or close to the bottom.

“So we’re not getting the outcomes,” Grabenstatter asked. “What’s happening to the dollars?”

The money is being wasted on excess pricing and excess utilization, he explained. Comparing the total healthcare cost in the US to other rich nations, he showed that 40% of the difference is too many surgeries and other interventions and some fraud, and that 60% of the difference is provider profit, capital investment, and payer administration and profit.

2. Payers

Payers are generally along for the ride, said Clark. While enrollment in private health insurance has been mostly flat from 2005 to 2015, spending has increased 53% over the same time period.

“That seems like a lot,” he said. “Is that a lot? Well, it’s more than twice the rate of inflation over that time period. So that’s a pretty good business.”

Clark stated that the business is inconsistent with other industries, where you would expect that if you’re spending more, you are getting better outcomes, which Grabenstatter showed earlier isn’t the case in the US.

3. Out-of-Pocket Costs

Surprisingly, the prescription out-of-pocket spending trend is down even while the overall drug spending trend is up. Clark showed that the share of out-of-pocket prescription drug spending has declined from 25% in 2005 to 14% of total drug spend in 2015.

In 2005, the average person in the US was spending $174 out-of-pocket on prescription drugs. In 2015, the average person was spending $140.

4. Employers

At the beginning of the session, Grabenstatter claimed that employers are an “unwoken, stirring giant.” However, they are beginning to come together and discover how they can combine forces for more leverage in the marketplace.

“Leverage matters in business, and the business of healthcare is no different,” he said.

The healthcare cost problem that employers face is about 26% of a worker’s total compensation goes to cover healthcare. In 2000 it was only 14%, and in 2024 Grabenstatter expects it will 34% of a worker’s compensation.

“I think its pretty striking to see the impact healthcare can have on standards of living,” he said.

He highlighted the goals of employers who might start to throw their weight around:

  • Avoid unnecessary utilization
  • Partner with high-quality and low-cost providers and make sure the workforce gets care there
  • If effective partners do not exist, force providers to adapt or introduce non-local competition, such as sending people to clinics outside of the area
  • Shift the market more toward high-quality, low-cost care

5. Long-Term Future

Grabenstatter closed the session by discussing what changes may be in the future of healthcare business.

Employers may start to take control and aggregate market power and realize they have more control over healthcare spend. In addition, out-of-pocket trends may start to align with cost trends.

“Will we start to see the consumerism engine work but in reverse where we actually have the workforce the patient the member aligned and trying to control the growth in healthcare spending?” he asked. “I think we will begin to see that.”

A potential future may be Medicare or Medicare-like programs for most, especially in commercial and private managed care programs. Lastly, a 3-tier delivery system may start to develop in markets with a middle tier emerging between the high-priced renowned medical centers and the safety-net providers.

“We see this in a lot of markets through integrated systems,” Grabenstatter said. There is both payer-led, such as with UnitedHealthcare, and provider-led, such as with Kaiser Permanente, activity taking place across the country. “Do we start to see some collaboration between these efforts?”

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