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 / Autumn 2009 / Issue 56(originally published by Booz & Company)


A Better Model for Health Care

Health Care’s Structural History

Structural change is especially difficult in health care — an industry representing nearly 18 percent of the GDP of the United States. Perhaps that’s why, since the creation of the modern U.S. health-care system in 1965 (when Medicare and Medicaid were introduced), only one major structural change has been heavily promoted as a cost-saving measure: the health maintenance organization (HMO). This was originally conceived as a set group of doctors, often directly employed by the HMO, who would reduce costs by limiting consumer choices to a restricted group (a “closed panel”) of providers. Despite a laudable emphasis on prevention and a structural shift of risk from payors to providers, the movement lost momentum for two major reasons. First, as the recession of the early 1990s gave way to a seller’s market for labor, employers could no longer push their workers into limited-choice plans they disliked. Second, after an initial downward shift in utilization rates, demand jumped back onto its old growth curve, robbing HMOs of much of their economic rationale.

Since HMOs failed to sweep the country, ambitious wholesale attempts at structural change have been nearly absent. But some important smaller changes have taken place. Hospitals and physician groups have consolidated, allowing them to dictate terms and resist cost pressures. And some structural innovations have been tried, most notably the creation and mainstreaming of consumer-directed health plans (CDHPs).

CDHPs, particularly those with portable health savings accounts (HSAs) owned by the consumer, shift risk, accountability, and power from employers and sponsors to individual consumers, who make more choices about their treatment options and costs. The CDHP rollover and lifetime portability features — allowing enrollees to carry savings balances from one year to the next and to stay enrolled in the plan even if they change employers — encourage them to take a longer-term view of their lifestyle choices and the associated risks and costs. The increased role of personal responsibility is a nontrivial change; for example, data published by Aetna Inc. shows that CDHPs are saving money for payors and consumers, without the feared reductions in the use of preventive services and disease management. The use of CDHPs is growing rapidly — estimates vary from 11 million to 18 million individual members, depending on how the programs are defined. Although they have not led to system-wide reform, these programs demonstrate beyond doubt the value of innovative, broad-based approaches that directly address some of the fundamental fragmentation and perverse incentives built into the current system.

Now, in 2009, the U.S. faces a deep economic recession and continued rising health-care costs. Most of these costs are driven by utilization, and demand is likely to escalate as obesity rates rise and baby boomers age. This will be exacerbated by the longer-term costs of caring for wounded veterans of the wars in Iraq and Afghanistan. The problems won’t get smaller anytime soon. And waiting for the level of personal responsibility among U.S. citizens to rise or for altruism to prevail along the entire value chain of health care is not a strategy for success. New structures, relationships, and incentives are needed.

Options for Reform

A relatively small group of specific supply-side and demand-side challenges account for a sizable majority of total costs. Thus, there is a fairly short and noncontroversial list of changes that must take place before any new regime can be successful:

  • Reduced fragmentation of care, through more effective integration of and collaboration among health-care providers
  • Early identification and management of risk factors for disease
  • Effective management of chronic and pre-chronic conditions
  • A more standardized approach to interventions, such as acute treatment and rehabilitation, based on the best-quality science and delivered in the most cost-effective setting
  • Emulation of best practices in management and IT to reduce cost and variation in treatment protocols as well as preventable medical errors
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