Health Reform Needs to Focus on Controlling Costs

January 14, 2010 -- Despite pronouncements by Congress, reforming the health insurance industry won’t curb escalating costs unless politicians confront the provider delivery system, according to Jack Friedman, CEO of Providence Health Plans.

“The money’s in hospital facilities and specialty care,” he told insurance brokers on Jan. 12. “Any reform has to get after those costs, and I don’t see anything happening.” For example, an acute care hospital day in 2001 cost $2,300, not including mental health or obstetric care. Since then, those costs have risen by 7-8 percent each year.

“We need to cap provider fees and have much more scrutiny over rates,” Friedman said. “I’m willing to give up administrative fees as long as my other brethren do.”

Friedman acknowledged it would be difficult to defend insurance administrative costs above 10 percent. “People want to know that 90 percent is going to medical care and not to CEO salaries.”

With healthcare absorbing close to 17 percent of the nation’s gross domestic product, medical costs could eventually absorb a person’s entire discretionary income, he said. “Healthcare needs to slide back to 15 percent of our gross domestic product. We need to roll back the cost trend, and make room for roads, fine arts and education and engender a culture of health, not a culture of sickness.”

Friedman’s astounded that Congress has neglected to establish a global budget for healthcare, and believes such a budget will eventually be established and run by a healthcare tsar. “We’re e expanding coverage with public dollars, and I’m flabbergasted that there’s been no dialogue in DC. A global budget will make people more accountable. It’s imperative. All other countries have established a per capita budget for healthcare.. It’s being done in Latin America, in Europe.”

The federal legislation also falls short by not having an essential benefits plan, similar to what Oregon accomplished when it created the prioritized list for Medicaid recipients nearly two decades ago. “We cannot afford to give everyone everything, and need to have this discussion in DC,” Friedman said.. “But rationing isn’t a phrase they’re willing to use in DC. That requires honesty and most people aren’t really about honesty, and they aren’t willing to sacrifice.”

Having health insurance should be a right of citizenship, not just a mandate, he insisted. Otherwise young healthy people can opt out and pay a penalty rather than purchase coverage. Without young people in the insurance pool, everyone else will have to pay higher premiums, otherwise insurers won’t be able to spread the risk.

Friedman believes healthcare is moving into the realm of a social utility, with stricter rules on disclosing cost and trend data. “I have no problem with the idea that private insurers have to open up their books. The idea that the industry is profiting from others is troubling to people.”

In his opinion, there’ll be less variation in treating medical conditions to reduce customization and control costs. “High performing systems will find different ways to pay themselves and their providers.” Insurers will start focusing on the 10-12 percent of the population who use the majority of healthcare services. “We need to find them early, and put resources in place to optimize their care.”

When elderly people with coronary artery disease are discharged from the hospital, it’s fairly common to see them back in the hospital 30 days later. Providence has begun identifying these people, sending a nurse to their home to help administer medications and monitor their status.

Providence is also spending millions of dollars to connect its hospitals, while more primary care physicians are joining its staff and new care models are under development. “Our system is getting ready for a new day; we’re preparing for a time when we’re no longer in control of our revenue as today,” he added. “I cannot defend the status quo because all we’re doing is rearranging the deck chairs on the Titanic.” A $9 billion company, Providence has over 50,000 employees in its five-state region.

“We’re working on a new reorganization plan for Providence, and looking at new ways to identify real waste in the system,” he continued.

Once President Obama signs the healthcare bill, it will take the industry 6-9 months to roll out the changes. The real question, Friedman was asked, is whether people who now have coverage will see their rates go up. Unfortunately so, he said.