AHRMM: Prepare for serious healthcare shrinkage

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BOSTON—Why did healthcare reform pass in 2010—after various versions had failed to pass for decades? Because it finally had to. So said Jamie Orlikoff, president of Orlikoff & Associates of Chicago, in Tuesday’s general session of the 2011 Association for Healthcare Resource and Materials Management (AHRMM) annual conference.

“We finally hit the point where we had to do something about healthcare, and it had less to do with politics than economics,” said Orlikoff. “The politics may change, the specifics of the healthcare reform bill may change, but the drivers underneath this are not going to change and, in fact, they may accelerate, depending on what happens with the market over the next week or two.”

Orlikoff offered economic insights by unleashing a cascade of bracing, and related, facts. Among the highlights:

  • During a period of war, with combat being fought on multiple fronts, the U.S. spends 4.9 percent of its gross domestic product on the military. “During a period of healthcare normalcy”—when we’re not fighting a pandemic or any particular health catastrophe—“we’re spending more than three times as much on healthcare” (17.7 percent of GDP).
  • China spends just 3 percent of its GDP on healthcare; India, 1 percent. Meanwhile, “we have to add the costs of our 17.7 percent to our production costs,” said Orlikoff. “And right now the global market is saying, ‘I really don’t care about healthcare. Socially it’s wonderful, but think about how you all act as consumers.’”
  • Economic globalization has been going on for years, but now the pressure of the U.S. debt has been added to the dynamic. “We always figured we could grow our way out of debt and now we’re realizing that the global dynamics have changed all that,” said Orlikoff. “We have this one-two punch of economic unsustainability based on pricing issues,” which are greatly exacerbated by healthcare expenditures, with “the need to figure out a way of reducing the debt.” Stated another way: We owe China a lot of money, and China wants its money back.
  • Add in the factor of Baby Boomers retiring and greatly increasing healthcare expenditures over the next decade, and it becomes clear that painful decisions are going to be forced into the system. Before predicting a return to the sort of “self-rationing” that his grandparents’ generation practiced—“If the blood ain't flowin’ and the bone ain't showin’, we ain't goin’!”—Orlikoff said, “Legislation can be read, I can analyze it, I can respond to it [more] rationally than I can to a market that is saying, ‘Look, you’ve got two choices: Would you rather spend all this money on healthcare and destroy the economy, or would you rather maintain the economy at the expense of, and possible destruction of, the American healthcare system?’ One of the first things we have to do is disabuse ourselves of the notion that, because we’re providing what we believe is a socially desirable value, we are somehow immune to the laws of economics and the laws of market forces. I assure you that we are not.”
  • We have had a system that, however inadvertently, rewarded us for injuring patients, said Orlikoff. Give poor treatment and discharge a patient too early, and you “get to” readmit soon after the fact—and file another set of claims for reimbursement. “If we are going to pull costs out, there has to be some re-jiggering of the rewards system so we can move away from a volume-based model of reimbursement to some type of reimbursement system based on value.

“Your hospital is not going to survive unless you can break even on Medicare. If you cannot break even on Medicare, you will not survive,” he said. "Most of us are losing about 13 percent on Medicare. So we’re talking about having to pull costs down at least 13 percent and more like 20 percent, because there’s going to be further cost reduction on the Medicare side. And much of this is going to rest on the shoulders of providers, because the mantra that’s coming out is ‘Cut Stuff, Not Staff.’”

He continued, “If we cut staff, we’re going to see quality drop like a rock. There will be some reductions in healthcare employment, but the real issue is going to be management of the supply chain, changing the management methodologies to reduce supply costs because you’re not going to have 15 different ways of doing the same procedure. Standardize the procedures for reasons of quality and for reasons of cost, and then simplify the distribution system and the supply chain systems