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Sky-high health care costs expected to keep rising

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Editor’s note: The fifth in a series of seven articles by A.T. ­Kearney on the trends that are radically transforming the health sector.

Jerry Cacciotti

America faces skyrocketing health care expenses. The Centers for Medicare and Medicaid Services (CMS) projects that national health spending will grow by 5.6% annually to 2025. The growth in health expenditures is driven by medical service inflation, prescription drug price hikes and the aging of the large baby boomer generational cohort. To rein in such runaway spending, the country’s health treatment and payment decision systems will need to be altered significantly.

Real cost reductions and outcomes improvement, however, will only be possible if they are enabled by payers. Ultimately, insurers, the CMS, and state Medicaid agencies determine acceptable courses of treatment and the deployment of medical innovations through their reimbursement decisions. Until recently, payers have largely used a “fee for service” (FFS) payment model for health services in the United States. In this model, physicians and other health care providers receive payment for each individual service they perform. The implicit incentive for providers to conduct more procedures — often redundant or otherwise unneeded — under this model has contributed significantly to rising health ­expenditures.

Driven by high cost trend and legislative and regulatory changes, payers are now shifting from FFS to “fee for value” (FFV). FFV payment models reward physicians based on the value — or outcomes — of the services they provide. These models typically incorporate bundled payments for all services in treatment of a specific episode, or population-based models that cover a specific set of insured lives for a defined period. Longitudinal studies of FFV in the U.S. and other countries support its effectiveness in reducing costs and improving health outcomes.

But more data and research are necessary. Clearer definitions of what constitutes good outcomes, and better data collection systems are essential. The current fragmentation of our health care system makes it very difficult to collect data that captures the full patient experience. While individual providers maintain data on their patients, their systems are not necessarily interoperable. And while fitness and health trackers provide valuable information for individuals who are trying to achieve better health or manage conditions in which diet and exercise are important, these basic measures are less useful for understanding acute diseases, neurological diseases, infectious diseases and some autoimmune conditions.

Outside players are starting to push the industry toward this much-needed interoperability. In its most recent iOS releases, Apple, for example, has embedded functionality that can link personal health data with the formal electronic health records that hospital systems are using to track care. In fact, some of the most progressive, coordinated health systems around the country, including Stanford Medicine, Mayo Clinic and Cleveland Clinic, are using this platform to push health records out to patients, giving patients more control over their health. Many patients can now see their full health records on their iPhones if the system used by their hospital is participating on the Apple data-sharing ­platform.

The government could also take steps to move toward greater interoperability and better data collection. First, it can set standards for cost and quality and share these standards with other players in public forums. Second, it can accelerate efforts to make its own data available to the public, private companies and researchers. As the government pays for close to 50% of all health care today through Medicare, Medicaid and veterans’ programs, among others, it already maintains a trove of economic and health status data. Furthermore, the government’s role in measuring the quality of different health care institutions means that it already holds substantial data about hospitals, quality metrics, costs and outcomes. Much of this raw data is already available, but the government can play a leadership role in creating standard data definitions and ensuring broader data sharing and interoperability.

Once the industry has an interoperable data platform, institutions will need to generate insights using this data. Payers and providers — who will benefit most from the promise of cost savings — will have a vested interest in these analytics and must be engaged to drive these efforts. Academia, public entities and medical schools can also play an important role here. Not only can these institutions mine the available data, which includes both electronic health records and the personal health data that is tracked through wearable technology, but they can also marry this data to existing claims data. These broader data sets would allow visibility into, for example, how much an individual insurer is paying for the treatment of its sick patients and how these costs compare to those paid by Medicare or other private insurance companies for similar patients. It would enable comparison of outcomes for patients who received different treatment for similar diseases. And it would provide the means to determine which treatments both lower costs and improve outcomes.

Indeed, health care is on the brink of a data and digital revolution that will be similar to those that have occurred in other sectors of the economy. And the shifts taking place in the payer environment may enable the sweeping changes that are needed in health care. Consumers are more aware of health care costs than they have been in the past, and they have a greater financial stake in maintaining their health. Millennials in particular seek answers to questions about their health and, as digital natives, are primed to use digital tools and data to improve their lifestyles. Their interest in sustainability, both for the environment and for the patterns they establish for their own lives, will lead them to be more proactive about disease prevention, more willing to make lifestyle changes and more prepared to integrate insights from data into their personal lives. They are positioned to receive more information and insight about their health than any previous generation — and also to use this information to create real change.

Jerry Cacciotti is a partner for the Americas in the health practice of A.T. Kearney, a leading global management consulting firm. He can be reached at jerry.cacciotti@atkearney.com.


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