MANAGING  THE  COSTS  OF  SPIRALLING  EMPLOYEE  BENEFITS:    The  affordable  healthcare  Act,  [ACA]  has  landed  on  us,  with  a  2,400  page  thud!    At  Gnostam  Consultants,  we  believe  that  it  is  useful  to  remind  ourselves  of  the  reason  why  this  huge  legislative  effort  was  undertaken.    In  theory  the  whole  effort  has  been  as  a  response  to  the  need  to  reduce  healthcare  cost  inflation  in  the  United  States.    At  Gnostam  Consulting  [http://www.gnostamconsulting.com]  we  have  developed  a  method  which  assists  the  industry  in  managing  data  on  healthcare  costs.    We  have  “mapped”  the  industry  structure  and  data  flows,  and  believe  that  those  industry  participants  who  engage  with  us  in  this  process  will  derive  huge  economic  benefits  from  being  able  to  discern  where,  in  the  industry  “value  chain”  to  make  investments  that  will  translate  in  lasting  competitive  advantage.    The  US  has  experienced  more  than  6.93%  annualized  healthcare  inflation1  over  a  30-­‐year  period.    The  profits  of  the  S&P,  by  comparison  have  risen  by  5.9%  over  that  same  period.    The  1.03%  gap  compounds  dramatically  to  change  the  competitive  position  of  American  employers,  [$1  at  1.03%  for  30  years  grows  to  $2.427],  threatening  sustainability.    Another  fact  is  that  we  live  longer.    But  perhaps  the  most  significant  reasons  for  the  increase  in  healthcare  costs  in  the  US  is  that  we  have  very  “inefficient”  price  discovery  mechanisms  for  healthcare  procedures.      

                                                                                                                 1  Healthcare  costs  expressed  as  an  index  in  PPP  terms  

-­‐0.4  -­‐0.3  -­‐0.2  -­‐0.1  0  

0.1  0.2  0.3  0.4  0.5  0.6  

Year  1981  1983  1985  1987  1989  1991  1993  1995  1997  1999  2001  2003  2005  2007  2009  

Change  in  S&P  500  earnings  vs  change  in  US  Healthcare  cost  Index  

PPP,  [source  OECD  S&P].  

US  Earnings  Chg  in  S&P  500   OECD  Index  of  US  US  per  capita  Healthcare  

 

 

 

   The  most  innovative  insurer  in  the  industry,  United  Healthcare  has  made  huge  investments  in  the  capture  of  data  for  different  types  of  procedures.    In  fact  the  whole  philosophy  behind  ACA  is  to  bring  more  price  discovery  to  employers.    What  we  will  discuss  in  this  paper  is  the  ways  in  which  investments  in  “healthcare  price”  discovery  will  generate  outsize  profits  for  those  industry  actors  who  invest  to  “change”  the  current  business  model.    The  data  shows  that  the  rate  of  change  of  healthcare  inflation  is  decreasing.    The  

fastest  decline  as  can  be  seen  in  the  chart  above,  has  been  in  the  Medicare  index,  which  as  we  can  see  is  now  approaching  1%  yearly  change.    The  commercial  index  is  the  one  which  has  remained  stubbornly  above  5%.    The  “commercial  index”  developed  with  Milliman  and  S&P  is  an  average  of  commercial  hospital  insurance  and  commercial  professional  services  insurance.    The  methodology  of  how  this  information  is  gathered  is  important  because  as  we  will  show,  the  best  way  in  which  to  reduce  overall  costs  in  the  industry  is  through  improved  access  to  price  discovery.    As  with  all  price  information  exchanges,  there  will  be  an  inevitable  move  towards  a  centralized  inventory  and  price  database,  which  will  allow  for  better  price  discovery.  

 The  current  way  that  the  index  data  is  collected  is  as  follows:  

 Clearly  if  we  can  discern  a  more  efficient  way  for  the  industry  to  be  organized,  those  who  will  change  and  be  able  to  restructure  their  costs,  so  as  to  engage  in  a  more  compelling  way  with  the  buyers  “value  chain”,  then  the  “economic  value”  added  will  accrue  most  to  the  first  movers,  as  we  have  seen  time  and  again  from  Amazon.com  to  Google.    As  we  know,  we  are  overwhelmed  with  data  and  information.    The  key  strategic  advantage  is  therefore  the  organizing  of  data  in  a  way  that  can  provide  empirical  insights  into  how  best  to  “disrupt”  existing  business  model  for  greatest  change.    

 

     CURRENT  HEATHCARE  INDUSTRY  STRUCTURE:    The current system has insurers at the center of the system. It is the insurer who contracts on a group basis with the employer, on the basis of actuarial risks of the employers insured population. The insurance industry claims that it has grown premiums in response to its own regular underwriting cycle, and the major increases from 2000 were, the insurers claim, a s result of managed care to catch up from the mid 1990’s. However, more recently we have witnessed extensive consolidation and concentration of market power in insurance industry majors, with increased profit margins and a huge outperformance of insurers relative to the S&P 500 index. This cycle peaked in 2006.

Another important aspect of the US Healthcare industry is the percentage of National Healthcare Expenditures spent on administration as a percentage of GDP. The US still has the highest ratio at 7.3% in 2003 vs. the next highest, Germany at 5.3%. Most analysts think that the streamlining of the many diverse administration systems may save between $32 to $46 billion per annum. These are not insignificant figures. At Gnostam Consulting, [http://www.gnostamconsulting.com] we are devising ways in which we can assist the large-scale hospitals who are the biggest $ consumers of the US healthcare budget on ways to achieve savings and efficiency. This is important because the first mover will go well beyond a “one-time-savings” improvement, and in our view help develop a long term investment which will yield very significant net gains in economic value.

One time savings include:

• Reduction of inappropriate care; • Changing incentive system, “fee for service” to one which rewards clinical value

of cost effectiveness; • Use price discovery methods to ensure that market power of insurers, other

provider and pharma providers is blunted; • Higher ratio of primary care to specialty care physicians; • Lower barriers to preventative care, that reduce need for ER and complications of

chronic disease; • Reduction in duplication, conflicting care; • Improve healthcare delivery systems with access to price discovery; • Reduction in burden of overhead expenses.

Long Term value generating strategies:

• New IT data driven, empirical price discovery information data bases which compare cost and clinical outcomes;

• Comparison of wage and prices for common purchases; • Strategies to deal with chronic diseases and expenditures associated with treating

the symptom not the cause. © Gnostam Consulting 2013  BELOW  ARE  DIAGRAMS  OF  PROPOSED  ORGANIZATION  OF  MANDATED  STATE  EXCHANGE  FUNDTIONS      

                                         

DIAGRAM  OF  STRUCTURE  OF  US  HEALTHCARE  INDUSTRY: