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To solve our health care spending problem, we must first understand it

Our nation’s spending on health care is 17% of the gross domestic product, while other developed countries typically spend only 9-10%and achieve similar patient outcomes.

Our nation's spending on health care is 17 percent of the gross domestic product, while other developed countries typically spend only 9-10 percent and achieve similar patient outcomes.

We spend an estimated $2,600 more per capita on healthcare than the next most expensive nation, Norway. Despite our higher spending, Norway has more doctors and beds per 1,000 and a higher life expectancy. Adjusting for population size, the U.S. spends roughly $835 billion more on health care than Norway per year.

Given our extraordinarily high comparative costs on a global scale, we should be able to sustainably reduce health care spending without harming access or quality.

How we got to this point can be easily traced to policies enacted back in the 1960's when health care spending was less than 6% of GDP. In 1963, Congress enacted the Health Profession Education Assistance Act to stimulate growth in medical education and training programs. It led to the development of 40 new medical schools (a 50 percent increase) between 1960 and 1980. The number of Medical school graduates grew from 7,500 per year to 16,000 per year with a substantial proportion of them opting to train in clinical specialties. We now have 13 times the number of specialists per 1,000 than the average developed country (87.7 vs. 6.5).

In 1965, Medicare and Medicaid were signed into law giving millions of poor, elderly, and disabled Americans access to healthcare services paid for on a fee-for-service basis.  While all well-intentioned, a medical education system with high rates of specialty training coupled with a government financed fee-for-service reimbursement structure created a "perfect storm" for rapid healthcare cost growth. Utilization rates are now much higher than in most other industrialized countries, with the U.S. reporting nearly twice as many procedures per capita (e.g., MRI exams, CT exams, tonsillectomies, etc.).

The large amount of excess spending is the focus currently driving change in healthcare.  However, the desired change is seen differently depending upon your perspective. The federal and state governments are aggressively moving to reduce reimbursement rates to manage the cost of Medicare and Medicaid.

Similarly, health insurers are implementing initiatives to reduce costs. Shared savings programs are marketed as a means for providers to be paid more by reducing costs and increasing quality. The net effect, however, for insurers is to protect their profits.

Vendors (e.g., pharmaceutical companies, the medical device industry, etc.) are struggling to demonstrate the value their products can bring as the providers that use those products aggressively cut costs. Gone are the days when they could describe marginal differences or improvements in their products to make sales. Now they must demonstrate how they can help providers meet economic goals.

Consumers, as a result of government and health insurer actions, are being forced to pay more of their own medical bills. As a result, they are more keenly aware of the costs of healthcare. A typical family of four that pays its own healthcare premiums has an out-of-pocket cost in the U.S. of $10,000 per year higher than any other country.

Finally, the primary battle in the healthcare market is being fought between providers and disrupters.  Providers are focused on maintaining profitability of the buildings they have built, optimizing the programs they have established, retainingthe physicians they have recruited and managing the debt they have incurred. The disrupters (IBM, Microsoft, Google, Walmart, CVS, etc.) have little concern for the effects of their actions on providers. They're focused solely on securing some portion of the $835B in excess spending for their own revenues and profits.

Obamacare did nothing to define these problems and perspectives. If we acknowledge the dynamics of these different perspectives, we have an opportunity to drive down costs to more sustainable levels while retaining the excess in quality and technical skills of our healthcare delivery systems.


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