The cost curve
I received an email recently from one of our physicians expressing frustration about the growing number of patients who were unable to afford his recommendations. His patients either a) didn’t have insurance, b) were about to lose their insurance, or c) had high deductibles.
The problems our colleague is experiencing provide a tiny glimpse of the impact of what I call the “cost curve” – the growing lack of affordability of healthcare in this country. The cost curve is an enormous force, not attributed to reform, that is disrupting the landscape of American healthcare. Park Nicollet must anticipate turbulent changes resulting from the cost curve and position itself to thrive.
To understand the cost curve, let’s start with a brief lesson in economics, beginning with the gross domestic product (GDP), the market value of all final goods made and services provided within the U.S. in a year. The cost curve predicts the increasing percentage of GDP consumed by healthcare, including government, individual and business. Health care currently comprises 18% of the GDP; in 5 years it will be 19%, in 10 years 21%, and in 20 years 27%.
The Cost Curve
But it isn’t just that healthcare costs are an increasingly greater percentage of our GDP. State and federal government cannot afford Medicare and Medicaid today, despite these programs only paying 70-80% of costs to deliver services. At the state level, because the current biennium’s budget was balanced last July to end the state shutdown through borrowing and shifts, next year’s legislature will face a budget short-fall again. The size of the shortfall depends partly on new forecasts next year due to improved economic conditions. Some project the shortfall will be at least $1 billion. With health and human services comprising 30% of the state budget, we must assume ongoing Medicaid reductions despite Minnesota paying 14% less per service than it did in 2002.
At the federal level, the government faces insolvency of the Medicare trust (money earmarked to pay for Medicare services) within 7 years. Options to address the shortfall include increasing taxes, reducing benefits or reducing payments. Guess which option appears most politically palatable?
It’s also important to note that government costs, as displayed by the graph, represent only a minority of the total. Individuals and businesses actually account for the greatest proportion, and they are struggling, too – as evidenced by our physician colleague’s comments. Park Nicollet, for example, is one of the largest employers in St Louis Park. Over the last 5 years, the rate of increase in our costs to provide health insurance far exceeds the rate of increase in our revenue. This imbalance is unsustainable for Park Nicollet – and for all other employers, as well.
Cost curve drivers
What’s driving this cost curve? There are two major factors: 1) the growing number of baby boomers aging into Medicare; and 2) growing utilization including the impact of new technology and pharmaceuticals.
Let’s take a look at each one.
1. America faces a tidal wave of baby boomers aging into Medicare at a rate of 8,000 per day. By 2030, the senior population expands to 20% of the population, from 35 to 72 million Americans. Baby boomers aging into Medicare account for approximately 25% of the cost curve increases. The graph below depicts the growth the population over age 65.
2. Increasing utilization of new technologies and pharmaceuticals fuels the majority of the cost curve. With the fee-for-service payment model, greater volume translates to more profit regardless of whether added volume brings value. In other words, fee for service payment encourages more scans, tests and drugs, accelerating utilization. We must anticipate changes to fee-for-service payment – either there will be fewer dollars for service, or a shift to paying for value.
Suffice it to say that the country cannot outrun the forces unleashed by the cost curve. America cannot outrun the demographic tidal wave of aging baby boomers. Park Nicollet cannot outrun the resulting disruption. Stay tuned for how our strategy will position us to thrive within these new realities.
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