Transforming healthcare: Identifying the failures and unlocking the potential of our current system

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By Clark Slipher, Ronald G. Harris | 01 May 2009

The imperative for reforming our healthcare system is strong and growing. Milliman and its diverse clients, in their daily work, come face to face with shortcomings involving healthcare access, quality, and cost. In this article we hope to begin the process of establishing a framework for addressing these issues in a way that is cohesive, financially sound, and based on demonstrated approaches. Central to making meaningful reform is the conversion of inefficiency and waste found in the current system (which we conclude exceeds 25% of the total) into access and quality improvements. Doing so will not be quick or easy, but the price for failing to make significant progress is, and will continue to be, great.

The imperative

The United States is in the midst of an unprecedented financial crisis. The projected federal budget deficit is at an all-time high and is almost certain to balloon further in the near term. Outstanding debt, currently in excess of $10 trillion, is staggering. The unfunded liabilities for existing entitlement programs, including Social Security and Medicare, dwarf that number. During 2008, we spent an estimated $2.4 trillion on healthcare in the United States,1 representing more than 16% of the gross domestic product (GDP); both the dollar and percentage of GDP levels have continued to grow over time. This creates a financial burden on individuals, a competitive burden on business, and a funding burden on all levels of government. Yet we have more than 40 million people in this country who do not have adequate healthcare coverage by U.S. standards, and comparative measures of the outcomes from our present healthcare system are not commensurate with our high level of spending.

There seems to be general agreement that we cannot continue to meet the enormous societal obligations we face without identifying and systematically addressing the inefficiency and waste that help fuel the spiraling cost of healthcare. Rectifying these severe economic imbalances and healthcare-system shortcomings is likely to be a long, difficult, and painful process; and there are widely differing views on how to accomplish the needed corrections. An important aspect on which there does appear to be general agreement is the imperative for broadbased reform to improve effective access to quality healthcare coverage, while simultaneously controlling runaway costs.

Addressing access, quality, and cost together

The belief that our healthcare system is in need of substantial reform has become widespread, although sometimes for differing reasons. Most of these reasons, however, can be categorized as involving access to affordable healthcare coverage, the quality and efficacy of the care provided, and the cost of our healthcare system. It is our belief that each of these aspects of healthcare is important by itself, but that meaningful reform must consider all of them together in a sound and cohesive way.

Access and affordability - The rising number of people in the United States without health insurance coverage, along with growing concern by others about losing their coverage to economic conditions, is reported regularly in the popular press. For many individuals of modest means, the price of healthcare coverage strains the limits of affordability. For most employers and other healthcare-plan sponsors, benefit costs represent both a financial and a competitive burden.

Access to healthcare coverage obviously could be improved by finding ways to fund coverage for those who are without it and to provide assurance that others won’t lose coverage due to events outside their control. That is easy to say, but challenging to achieve in ways that are sustainable and responsible financially. Simply spending more through subsidies and/or mandates, without altering other fundamental dynamics within the healthcare system, would rapidly accelerate cost levels while rendering healthcare even less affordable and further increasing the financial strain.

Based on years of experience with the current healthcare system, we know that sound and proven approaches to broaden coverage are available, even within a decentralized and pluralistic system of financing. These approaches recognize the multidimensional nature of the circumstances surrounding access to affordable healthcare coverage, including such important considerations as the wide range in individuals’ health status and the broad spectrum of families' financial means and economic value judgments. Unfortunately, there are also numerous superficially attractive but fundamentally unsound ways to try to broaden coverage that we believe would exacerbate costs and impair access to affordable coverage.

The challenge we face is to reform the system in a meaningful way that will enable full coverage of everyone in the United States without, over the long term, simply spending more. This will require careful design and substantial redirection of spending in order to provide a sound and sustainable means of funding.

Quality and efficacy - Despite the resources that we as a nation commit to healthcare, gaps in quality, safety, and efficacy persist, and high-level indicators of outcomes from our healthcare system leave much to be desired. Comparative statistics—among countries, geographic areas within the United States, and local provider groups or delivery systems—show a wide disparity of results. Clinical evidence has been assembled on best practices for patient care, identifying efficacious and efficient treatment patterns and clinical pathways. Such evidence indicates that "less can be more" in terms of the numbers and types of services provided when delivering top-quality patient care. The totality of this assembled clinical evidence, properly structured, can provide an unbiased arbiter in the pursuit of improved outcomes, safety, and patient satisfaction without merely doing and spending more.

Our present quality-related shortcomings, coupled with the comparatively high level of spending on healthcare in the United States, point to a healthcare delivery system that, as a whole, is not performing effectively. Some of this failure is patient and lifestyle driven; some is provider, supplier, and technology driven; some, reimbursement-structure and payer driven; some, government, litigation, and regulation driven—and almost all of it is affected by incentives that are often not productively aligned among the parties or structured to promote optimal performance.

The evidence that the delivery system is not performing effectively overall does not mean that it fails to do so all the time and everywhere. Our consulting work exposes us to top-performing participants or parts of the system, as well as to mediocre or poorly performing areas. It is the latter portion that creates inefficiency and waste in the system, thereby impairing quality and increasing costs. Meaningful healthcare reform requires substantial reduction in that inefficiency and waste by improving overall quality, safety, and cost performance.

Cost and capacity - Some would argue that cost must not enter into the discussion of how the healthcare system should operate, but this is simply not realistic. All societies have limited resources and, proportionally, the United States already spends much more on healthcare than any other Western nation, with outcomes that too often are inferior. The notion of limited resources is a harsh reality with which we, as Americans, are just now coming to grips. Choices must be made. As a 21st-century society, we want quality healthcare coverage to be available and affordable for all our citizens. In order for that to happen, we must make difficult choices.

One way to reduce costs is through strict, centralized budget controls—thereby fixing supply and effectively producing mandated prioritization and rationing of care. Another way is to identify and substantially reduce the inefficiency and waste that is embedded within the system. Improvement in efficiency and elimination of waste are much more acceptable and enduring strategies within a U.S. context than budget controls and rationing.

What do we mean by waste? And, once waste has been defined, where should the remediation process begin? We agree that some of the administrative costs embedded in the U.S. healthcare payer system are inefficient and wasteful. Certainly, simplifications and cost efficiencies could and should be pursued there; however, we believe that the impact of those improvements on overall costs would be modest compared to the savings that can be realized within the healthcare delivery system (including its embedded administrative costs). For the purpose of this discussion, we define healthcare waste as the impact on cost of unnecessary, redundant, or ineffective treatment that is contrary to, or not demonstrably associated with, improvement in healthcare quality and outcomes.

In order to reduce inefficiency and waste in ways that improve quality and outcomes while simultaneously reducing costs, a dramatic transformation of the poorly performing portions of today's healthcare system will be necessary. Accomplishing the task will require knowledge transfer, infrastructure development, alignment of incentives, and accountability. Achieving results will take time. The opportunity, however, is before us, and it can happen if we begin the process of truly meaningful reform in a determined and informed way.

Inefficiency in the healthcare system

chart 1There are several ways to attempt to measure and quantify the extent of ineffectiveness and inefficiency, i.e., waste, in the healthcare system. One way that we find useful is to approach the problem from the opposite direction, by observing top- performing provider groups, suppliers, and delivery systems. We find this useful because it is concrete, rather than theoretical or abstract. It enables us to identify actual means by which specific healthcare practitioners and institutions have been successful in achieving high levels of measurable performance. Adopting achievements by top-performing entities as targets, we can then begin to measure, assess, and compile the extent of inefficiency or waste in the rest of the system.

An important caveat must be stated here. No system is perfect and there is no single pathway to success. Geographic, financial resource, and population disparities (among others) preclude adoption of a single methodology to achieve "well managed" status universally. Still, we have concluded that a reduction in overall healthcare costs in excess of 25% would be possible if care were delivered under best observed practices.2 In 2008-dollar terms, such a reduction would have equated to more than $600 billion.

This conclusion is based on our observations and data from the highest-performing healthcare systems and health plans in the United States, coupled with our experience and informed professional judgment. We would note that such results are broadly consistent with numerous published studies and the variation in published aggregate utilization levels across geographic areas and among various medical provider groups, HMOs, and insurers. We would also note that the observations we used in drawing this conclusion reflect the delivery patterns of the top-performing providers involved at their existing unit price or cost levels—these savings are not merely due to across-the-board payment-level reductions.

Where in the healthcare system can the opportunities for efficiency improvement and waste reduction be found? The short answer is, in nearly all parts of it. Exhibit 1 shows where spending occurs today within the overall healthcare system, based on estimated values for 2008. Our experience with top-performing systems does show opportunities for efficiency improvements in practically all service categories, but especially in facility-based care. With shifts in the types of treatment and places of service under best-observed clinical practices, certain categories would increase accordingly.

Who will benefit from the savings generated from efficiency improvements and the reduction of waste? The short answer to this question is, patients and virtually everyone who pays for healthcare coverage. Exhibit 2 shows the sources of spending today for healthcare, based on estimated values for 2008. The single largest segment is government programs (primarily Medicare and Medicaid), followed by private-sector coverage (group plans and individual insurance).

The elimination of all inefficiency is obviously not possible, as a practical matter. Entire systems are never perfect, and high-performance techniques are not always fully portable. However, with a potential magnitude for reduction of more than 25%—even if only partially realized across the entire healthcare system—the opportunity for reduced spending by improving the effectiveness of the system, which could then be used for other purposes, is enormous.

What about the uninsured?

In the past, perhaps the greatest obstacle to fully covering the uninsured has been the cost and its financing. We estimate the average number of uninsured people at about 46 million for 2008, with the number of persons uninsured at any time during 2008 substantially higher. A report prepared for the Kaiser Family Foundation estimates that $86 billion is currently spent on or by the uninsured, which includes out-of-pocket expenditures and government dollars spent on uncompensated care. The Kaiser report estimates an extra $123 billion is needed for full coverage.3

By comparison, the more than 25% potential reduction in healthcare-system inefficiency and waste equates to approximately $600 billion. If the system were made substantially more efficient—achieving, for example, even one-third of this total potential savings—resources sufficient to provide coverage for the uninsured could be available without increasing the current level of overall spending on healthcare. Obviously, the important issues of how to structure such funding for coverage of the uninsured must be addressed. However, this serves to illustrate the magnitude of the inefficiency involved and as an example of an alternative use to which such savings could be designated.


Our present healthcare system has widespread shortcomings involving access, quality, and cost. Each of these aspects deserves attention in a way that is cohesive, financially sound, and based on demonstrated approaches. Central to all of these aspects is the inefficiency or waste that exists in the present system.

chart 2Achieving meaningful healthcare reform, we believe, will require a systematic approach to the identification and elimination of as much as possible of the inefficiency and waste that currently siphons off more than 25% of our country's healthcare spending. Will there be losers in such a transformation? Probably, including those segments of the healthcare system that have prospered in the past, despite ineffective or wasteful practices, and that may be unable to adapt to a high-performance environment. Will there be winners? Yes—patients who need and will receive the right care, people currently without coverage, and the individuals, businesses, and governmental entities that pay for coverage, as well as those parts of the healthcare system that can adapt and thrive in the new environment.

Ron Harris is a principal and consulting actuary with the Philadelphia office of Milliman. His areas of expertise include consumer-oriented and managed-care product design, strategic plan development, and financial planning and forecasting. He has served as an expert in state and federal regulatory matters, and previously served as chief actuary at the Centers for Medicare and Medicaid Services.

Clark Slipher is Milliman's Health practice director and a principal with the Milwaukee office. He has extensive experience in medical plan design, health cost projection, consumer-directed plans, experience analysis, retiree medical liability valuation, and strategic planning.

1 Unpublished Milliman Health Care Reform Model. See Documentation Notes.

2 Pyenson, B., Fitch, K., Goldberg, S., "Imagining 16% to 12%: A vision for cost efficiency, improving healthcare quality, and covering the uninsured," February 2009.

3 Hadley, J., Holahan, J., Coughlin, T., Miller, D., "Covering the uninsured in 2008: Key facts about current costs, sources of payment, and incremental costs," health affairs, 27, no. 5, w399–415, 2008. Prepared for the Kaiser Commission on Medicaid and the Uninsured, Henry J. Kaiser Family Foundation, August 2008.