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(originally published by Booz & Company)


Global Lessons for Controlling Healthcare Costs

Health insurers are reaching beyond national borders for more effective medical management strategies.

Health insurers — the private companies and government healthcare payors that foot the majority of the US$7 trillion global healthcare bill — have a rather insular heritage. Because the structures and mandates of national healthcare systems vary widely, payors in one system have often presumed that they had little in common with payors elsewhere. But that is increasingly changing.

A flurry of activity is evident as more and more payors in both developed and developing nations reach beyond their borders. They are seeking proven treatment guidelines and attempting to utilize reference standards created in other healthcare systems. They are also investing internationally to enhance their revenue streams and gain access to broader practices and knowledge.

The main impetus for this outreach is the recognition that healthcare payors all have an urgent need to find more effective medical management strategies — i.e., those capable of improving patient access to care and care outcomes, while also bringing healthcare costs under control. Of course, some payors are part of systems that are performing better than others in these ways, but all systems face challenges — and none of them have fully figured out the formula for providing high-quality, universal care at a cost that is sustainable over the long haul.

Too Big a Burden

The quest for this formula is especially intense among payors because of the growing financial burden they are being asked to shoulder as spending in the healthcare sector continues its rise. (See Exhibit.) This burden is being driven by two trends: the ever-increasing cost of medical treatment and rising demand for care.

Cost. The cost of care, which is rising faster than the consumer price index in many national healthcare systems, is a complex function of multiple factors, such as medical innovation, rising provider costs, increasing prevalence of expensive chronic conditions, and tightened capacity, to name a few. From the pharmaceutical perspective, a number of blockbuster drugs are becoming available in low-cost generic versions, but many of the highly effective new treatments being produced in the biotechnology sector are coming to market at 10 to 20 times the cost of conventional pharmaceuticals. For example, the use of biomarkers enables drugmakers to customize their offerings for more focused patient populations. But this also means that pharmaceutical companies’ investments must be recouped over a smaller base, and prices thus need to rise. At the same time, new and technologically sophisticated diagnostics and equipment are raising the cost of medical tests and procedures.

Not only do these medical advances carry a higher sticker price, but they also create additional costs down the road. Their very effectiveness can lead to the so-called chronification of diseases that were once killers. In the process of saving lives, these powerful medicines and tools create prolonged courses of treatment that add greatly to the overall lifetime cost of care. For example, Genentech’s cancer drug, Avastin, can cost $4,000 to $8,000 monthly, and it can extend patients’ lives by as much as two years.

Demand. The other great source of instability in healthcare systems is the explosion in demand. In many developed nations, populations are aging, and older people, who consume healthcare at much higher rates than any other age demographic, are living longer. For example, in the U.S., in 2006, the Center for Retirement Research of Boston College reported that annual medical costs for people age 55 to 64 are nearly four times as high as for people age 35 to 44.

Developing nations, especially those with emerging economies, face a different challenge. Their populations are younger and expanding, and per capita income is rising — and so is the incidence of the chronic diseases of the West, such as diabetes. This translates into greater demand for healthcare. In China, for example, healthcare expenditures are expected to grow by 18 percent annually over the next several years.

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