By Paul Traub
U.S. consumers are reported to be spending an ever increasing amount of their personal income on health care each year. According to Personal Consumption Expenditures data from the Bureau of Economic Analysis (BEA), consumers spent close to $2.0 trillion on health care in the United States in 2014. Based on this, spending in 2014 on health care was equal to 11.5% of total gross domestic product (GDP). The Affordable Care Act (ACA, P.L. 111-148) together with the Health Care and Education Act of 2010 (P.L. 111-152) expanded access to health care coverage for millions of Americans who were without health insurance. The ACA (also known as Obama Care) has been the center of much debate and has been cited by some as a major impediment to job creation since it requires employers with more than 50 full-time employees to provide health care insurance for their workers. Between 1980 and 2010, the compound growth rate in inflation-adjusted health care spending equaled just 4.9%./1 As Chart 1 below illustrates, in the four years since then per capita spending on health care has increased by about 10%. But should all of the concern about health care be just focused on cost or are there other issues just as important that should be discussed? In an effort to get a better understanding of the issues surrounding health care and the ACA, the Detroit Association of Business Economists (D.A.B.E.) presented a program on the state of health care in the U.S. with guest speaker Nancy Schlichting, CEO of Henry Ford Health Systems. Henry Ford Health Systems is a nationally recognized $4.0 billion health care organization with 23,000 employees.
Schlichting opened her presentation by pointing out that health care is one of those services about which everyone has an opinion and that opinion is often based on personal experience. While the experiences that form a person’s opinion can at times be positive, more times than not they are likely to negative. Witnessing a sick parent or family member go through a difficult time is often the experience that people remember. Schlichting highlighted three important features of health care.
First, health care matters most when you need it. Schlichting went on to explain that the perceived need for health care is much different for someone who is healthy than for someone who has experienced a debilitating illness. When people are young and haven’t experienced many medical difficulties, they often believe they are immune to illness. Older individuals, who are more likely to have seen someone else go through a medical problem, more easily recognize their own frailties. This leads people to recognize a need for insurance against the unknown. The same need to be prepared for anything is felt more strongly by someone who is the head of a family or a household more than by someone who has no dependents.
Second, a person who has never been uninsured doesn’t understand what it is like to live without health insurance. It is not widely recognized that many individuals that don’t have insurance do work, often multiple part-time jobs. Schlichting said more than 50% of the people not covered under a health care plan do work and many of them are young people.
Third, the American health care system is the most complex in the world. Consumers often don’t understand how their coverage works and what is covered and what isn’t. This complexity also adds cost to the system. It is estimated that $0.25 of every dollar spent on health care in the United States goes to cover administration costs. This complexity has also led to the need for more administrative staff than care givers in some institutions. The confusing process is also one of the reasons that uncompensated care is still rising. Consumers find it difficult to navigate through the complexity of the system of co-pays and deductibles, Schlichting argued, and often choose to ignore a bill that they believe is the responsibility of the insurance company.
Schlichting said, in her view, the passage of the ACA will be a positive for the industry in the long run. Hospitals and health care providers have been working to improve services and lower costs and are doing so by concentrating on some specific areas. Schlichting said the largest opportunities for improvements are related to the incentives the ACA provides to improve the quality of health care procedures. For example, the act imposes penalties on hospitals for readmitting patients. This is forcing providers to do a better job in caring for their patients and making sure they are ready to be released. Another way to help eliminate frequent trips to the hospital is to provide patients with the ability to share information with their care giver either by phone or email. Schlichting’s company is also trying to improve quality by studying other models of success and adopting reliable quality systems, such as the Six Sigma process, The Deming Institutes quality management principles, and Baldrige performance programs. These processes are helping to lower costs while improving the patient’s experience, which is an important aspect of success in the highly competitive health care industry.
What does the future hold? The health care industry will continue to change, Schlichting said, as providers work to reduce cost and improve care. The consolidation of hospitals, physician practices, and insurance companies will most likely continue as part of the industry’s overall efforts to cut costs. The marketing of health care services is also likely to become more important, she pointed out, as providers recognize the need to market to individuals who are opting out of group coverage and shopping for their own coverage on health care exchanges.
1/ Current dollar BEA PCE health care spending was adjusted for inflation using PCE chain-type index.