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Reducing Healthcare Costs

August 12, 2011


Despite all of the heated debate that has taken place in the U.S. about healthcare insurance over the past few years, the cost of healthcare continues to rise along with the public’s frustration. It seems that everyone talks about reducing healthcare costs, but no one seems capable of doing anything about it. As a company CEO, you know that healthcare costs are a constant concern for me. McKinsey & Company analysts Tilman Ehrbeck and Nicolaus Henke believe something can be done to reduce costs. They write:

“As leaders of health systems ponder their cost, quality, and access problems, they should draw comfort from the fact that at least some potential solutions already exist. Innovators around the globe have demonstrated effective new ways to reach and interact with patients and treat them at significantly lower cost while improving quality. The real challenge is how to implement, not how to invent. Given the pressure on health systems everywhere, their leaders should do everything possible to help organizations adopt successful innovations and thereby reap the benefits they can provide.” [“The emerging market in health care innovation,” McKinsey Quarterly, May 2010]

As the title of the McKinsey report implies, the authors believe that many healthcare cost-reducing innovations can be found in emerging market countries. According to Ehrbeck and Henke, “Health care is consuming an escalating share of income in developed and developing nations alike. Yet innovators have found ways to deliver care effectively at significantly lower cost while improving access and increasing quality.” To demonstrate their point, they provide two quick examples:

“In Mexico, … a telephone-based health care advice and triage service is available to more than one million subscribers and their families for $5 a month, paid through phone bills. In India, an entrepreneur has proved that high-quality, no-frills maternity care can be provided for one-fifth of the price charged by the country’s other private providers.”

Ehrbeck and Henke don’t ignore first world efforts at cost reduction. They note, for example, “In New York City, the remote monitoring of chronically ill elderly patients has reduced their rate of hospital admissions by about 40 percent.” They believe, however, that healthcare administrators aren’t sharing enough information about programs that both improve healthcare and reduce costs. Their study was aimed at helping reduce that information gap. Ehrbeck and Henke write:

“McKinsey conducted research in partnership with the World Economic Forum to study the most promising novel forms of health care delivery and, in particular, to understand how these innovations changed its economics. Many of the most compelling innovations we studied come not from resource-rich developed countries but from emerging markets. Two factors help explain why. First, necessity breeds innovation; in the absence of adequate health care, existing providers and entrepreneurs must improvise and innovate. Second, because of weaknesses in the infrastructure, institutions, and resources of emerging markets, entrepreneurs face fewer constraints (this is one upside of the lack of meaningful oversight, which obviously also has many drawbacks). They can bypass Western models and forge new solutions.”

Ehrbeck and Henke examined 30 successful innovations and found that successful programs “pursued a handful of strategies to change the economics of health care delivery in a fundamental way.” As they conclude, these programs “were not successful by chance. By understanding the opportunities these innovators seized, leaders throughout the health care system can identify opportunities for their own organizations.” The first strategy they addressed was locating healthcare facilities as close to patients as possible. They write:

“Innovators can lower distribution costs and improve adherence to clinical protocols by moving the delivery of care much closer to the homes of patients, providing services that take advantage of their established behavior patterns, or both.”

They give the example of an organization called VisiionSpring that “teaches local ‘vision entrepreneurs’—members of the mainly poor communities they serve—how to diagnose problems such as presbyopia (an inability to focus on nearby objects) and how to determine what type of mass-produced eyeglass would correct it.” The next strategy Ehrbeck and Henke discuss is using existing technology to reinvent delivery. In previous posts about innovation, I’ve noted that innovation often involves combining existing technologies in new ways. Ehrbeck and Henke write:

“‘Repurposing’ mobile-phone systems, call centers, and other existing technologies and infrastructure allows innovators to extend health care access, increase the standardization of care, and improve labor productivity. … The use of the existing technology infrastructure would be useful in any part of the world where health care resources are scarce. Yet this approach can also provide benefits in developed countries. Technology could be used, for example, to reduce emergency-room overcrowding by providing phone- or Internet-based advice and triage services during evenings and weekends. Similarly, it could be used to deliver care remotely for patients who require ongoing treatment for diabetes, asthma, or other chronic diseases.”

The next strategy discussed by Ehrbeck and Henke is a bit more controversial. They call it right skilling the workforce. They explain:

“Some smart innovators challenge existing practices—and professional assumptions—about which health workers are allowed to do what. As a result, they can tightly link skills and training requirements to the tasks at hand, thereby lowering labor costs and overcoming labor constraints. In India, LifeSpring uses midwives to provide most of the care at its maternity hospitals. This allows just a single doctor to oversee significantly more patients by focusing on tasks that specifically require a doctor’s attention. The company charges only $40 for a normal delivery, rather than the typical $200. In the United States, MinuteClinic uses nurse-practitioners rather than physicians to staff primary-care clinics. In some countries, this approach also helps to ameliorate shortages of medical talent. In sub-Saharan Africa, for example, the HealthStore Foundation has trained community health workers to diagnose and treat the region’s top five diseases, which together account for more than half of preventable deaths there.”

That idea is controversial because physician groups worry that patients will be lulled into a false sense of security when they are treated primarily by physicians’ assistants or nurse practitioners. Regardless, support is growing for the idea that many patients can be treated by medical personnel other than doctors (read my post entitled Shortages of General Practice and Family Doctors are Impacting Emergency Health Care). Considering the shortage of general practice doctors in the United States, I’m stunned that podiatrists haven’t been tapped as an immediate potential source of care. Podiatrists complete a rigorous medical school and complete the same rotations as MDs, yet they are only allowed to work on ankles and feet. Permitting them to offer care other than for feet would add about 15,000 highly-trained doctors into the mix of potential general practice care providers. The next strategy is much less controversial — standardizing operating procedures. By that Ehrbeck and Henke aren’t referring to activities in the operating room as much as they are to standard business practices. They write, “Whenever possible, successful innovators use highly standardized operating procedures to minimize waste and improve the utilization of labor and assets.”


Ehrbeck’s and Henke’s next strategy won’t make the manufacturers of medical devices very happy. They recommend sharing assets, including expensive medical technology to save money. They write:

“Smart innovators use existing institutions, infrastructure, and networks of people to reduce capital investments and operating costs. They then pass the savings on to consumers. India’s Health Management Research Institute (HMRI) takes advantage of established supply chains by operating medical convoys—mobile health facilities and health workers delivering care in hard-to-reach rural areas—from public hospitals.”

The final strategy recommended by Ehrbeck and Henke involves opening up new revenue streams. They explain:

“Many health care innovators extend their activities into other sectors—even shops and restaurants—to capture additional revenue streams, use them to subsidize costs, or both. Business activities in other sectors can even promote core health care services. Thailand’s Population and Community Development Association (PDA), which focuses on family planning and the prevention of sexually transmitted diseases, established a chain of restaurants and resorts to raise revenue—and to get out the message. Greenstar, a Pakistani nongovernmental organization that focuses on family planning, operates an entire network of retail outlets that sell products such as condoms and offer family-planning advice and health services for women and children.”

I’m not sure how well that strategy would work in highly developed nations — but you never know. Of course, McKinsey & Company analysts are not the only individuals who have been thinking about ways to cut the costs of healthcare. Business and innovation guru Clayton Christensen “argues that hospitals should focus primarily on what he calls intuitive medicine, the process of figuring out what’s wrong with a patient. Once the treatment is set and can be routinized, that care should be transferred to lower-cost providers. The best way to do this is to have an integrated system, like what Kaiser Permanente runs in the western U.S., where the hospital owns the outlying clinics and surgery centers–and, ideally, also provides insurance. With more routinized care, nurses can be trained to do doctors’ jobs and specialty facilities can focus on driving out inefficiency with high-volume surgeries.” [“Clayton Christensen: The Survivor,” Forbes, 14 March 2011]


Drew Armstrong writes that doctors and insurers are cutting costs by sharing information. [“The Simplest Rx: Check on Your Patient,” Bloomberg BusinessWeek, 23 June 2011] He writes:

“On a computer in his St. Louis medical office, Dr. John Rice often pulls up a list of his 10 patients with the largest bills. They suffer from diabetes, heart disease, or emphysema. They sometimes land in the hospital where they rack up a long list of charges. Rice’s job is to make sure they don’t set foot in that emergency room. To accomplish this, the chief medical officer of Esse Health, an 80-physician practice, does what policy makers say too few doctors do now and what they hope all doctors will do in the future. Using technology supplied by a private insurer, Rice has a window into his patients’ health that extends far beyond the clinic’s examining rooms. He can tell when patients have stopped taking their medication or when they’re overdue for a routine test. Armed with that information, he can direct his staff to fill out a prescription and deliver it to a patient’s home or schedule an appointment at a diagnostics lab. Rice once spent $40 on cab fare for a patient whose daughter couldn’t pick her up from the hospital—a bargain, considering an additional day’s stay would have cost $1,500. The 57-year-old internist has a good incentive to take these extra steps. Every time he avoids a hospital admission or emergency-room visit, Esse splits the savings with the patient’s private insurer. .. By Rice’s estimates, his elderly patients spend 39 percent fewer days in the hospital over the course of a year than Medicare patients nationwide.”

According to the federal Agency for Healthcare Research and Quality, Rice and his associates are doing the right thing. It says that “preventable re-admissions … add more than $30 billion a year to the nation’s health-care tab, or $1 of every $10 spent on hospital care.” [“Don’t Come Back, Hospitals Say,” by Laura Landro, Wall Street Journal, 7 June 2011] Landro reports that one way some hospitals are trying to prevent readmissions is through the use of a “virtual nurse.” She explains:

“Can a virtual nurse named Louise help keep patients from landing back in the hospital after they are discharged? The animated character on a computer screen, who explains medical instructions, is one of several new strategies hospitals are using to help patients make the transition to home, including sending patients off with a ‘Home with Meds’ packet of medications and having real-life case managers and nurses monitor patients by phone.”

Landro discusses a number of programs being tried across the country to reduce readmissions. Katherine Hobson indicates that another way to help reduce costs is simply to let doctors know how much certain tests are going to cost their patients. [“One Way for Hospitals to Cut Costs of Tests,” Wall Street Journal, 17 May 2011] She writes:

“Making physicians aware of the costs of blood tests can lower a hospital’s daily bill for those tests by as much 27%, a new study suggests. It is common practice at hospitals to test patients’ blood every day and it is wasting money and time, according to the study’s authors from the University of Miami and Brown University.”

Sarah Murray reports that “integrated systems will facilitate better care that costs less.” [“IT allows patients more control,” Financial Times, 29 September 2010] She writes:

“When it comes to the benefits of technology, hooking everything together is seen as the key to progress, something health-care providers are coming to recognise. In addition, in the wake of the financial crisis, governments have pledged funds to accelerate the implementation of health-care IT systems. In the US, for example, the administration has devoted stimulus funding to the digitisation of patient records. Moreover, with health-care costs rising rapidly (in the US, healthcare accounts for one dollar in every six spent), the urgency to find solutions that can reduce those costs is intensifying. IT holds that promise, with the potential to generate efficiencies through electronic prescribing and an improved ability to co-ordinate patient care, cutting paperwork and unnecessary tests. According to Deloitte, the funding pledged by the Obama administration could save up to $90bn over the next decade.”

Murray points out that integrated healthcare systems augmented by personal monitoring devices hold the potential of creating much better (and probably much cheaper) healthcare. Although some people could be concerned about privacy issues, Murray reports that “evidence suggests [that personal and home monitoring] is … something people welcome.” In economically dire times, getting a handle on healthcare costs is going to continue to receive a lot of attention. As the articles cited above confirm, people are putting a lot of thought into how this can be done.

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