COST: The Business Case for Health Reform

There were no bald eagles or the Boss, and our hopes for a surprise appearance from the Jonas Brothers didn't pan out (sigh), but the lunch forum we attended last week on business and labor perspectives on health care costs had more than its fair share of star power (at least in the health care world).

The event, organized by the Committee for Economic Development with the help of New America and Better Health Care Together, brought together a variety of voices to make the business case for health reform.

After introductions, representatives from Better Health Care Together set the stage with perspectives from business and labor on health reform. SEIU's Mary Kay Henry talked about the union's commitment to health reform and its efforts to create an army of health care voters. Wal-Mart's Linda Dillman spoke about efforts to apply the company's "Save Money, Live Better" motto to health care. She talked about Wal-Mart's work to provide insurance coverage to its associates, the company's $4 drug program, and its forays into providing electronic personal medical records to its employees and customers.

With Dillman and Henry providing the framework for discussion, McKinsey Global Institute chairman, Lenny Mendonca presented the findings from a new MGI report: "Accounting for the cost of U.S. health care: A new look at why Americans spend more."

According to McKinsey's analysis, the U.S. spends $650 billion a year more on health care than other developed countries, even after adjusting for differences in wealth. Mendonca called that $650 billion a "de-stimulus" that's built in to our economy. As the chart below shows, a great share of it is borne by businesses.

Outpatient spending in the U.S. (i.e. payments to physician offices and for same-day hospital care) accounted for $436 billion, or more than two-thirds, of that $650 billion. In theory, moving more care from inpatient to outpatient settings—as has been the trend in the U.S.—could produce savings. However the McKinsey analysis found that delivering more care in outpatient setting yielded savings of $100-$120 billion—only a fraction of the $436 billion above-expected outpatient costs. Drug costs and administrative spending accounted for the bulk of the remaining above-expected expenditures. See Chart below

The report offered five supply- and demand related factors driving the highhealth spending:

1. Provider capacity growth in response to high outpatient margins
2. The judgment—based nature of physician care
3. Technological innovation that drives prices higher rather than lower
4. Demand growth that appears to be due to greater availability of supply
5. Relatively price-insensitive patients with limited out-of-pocket costs

One factor that did not seem to have an effect on the higher U.S. spending was the underlying health of our population. In fact, the McKinsey analysis suggests the U.S. is slightly less sick than other OECD countries, with our relatively younger population offsetting slightly higher rates of chronic disease.

Tomorrow, in part two of our wrap-up from the event, we will provide some of the responses to the McKinsey analysis from a panel moderated by the Center for American Progress's Matt Miller and featuring several of the Health CEOs for Health Reform.