July 2007

Can We Get It for You Retail? Moving Beyond Wholesale Markets for Health-Care Services

Major purchasing decisions in the U.S. health care system traditionally have been made by "wholesale" buyers--private employers and government health program administrators. Individual consumers remained largely passive participants in their own health care arrangements. Recent developments in the health care industry, however, suggest early signs of an evolution from this wholesale model to a more competitive, innovative retail marketplace. Illustrative examples include lower-cost walk-in health clinics, personalized concierge health care, consumer-directed health plans, more transparent information on the cost and quality of health services, remote monitoring of patients' health conditions, care delivery by non-physician professionals, and financial-planning tools to help manage longer-term health needs.

Gary Ahlquist
Booz Allen Hamilton

A close look into the problems of today's health care reveals a disengaged consumer and a dated, employer-based model. Costs are escalating, driven by aging and bad behavior and leading to chronic conditions to which we can attribute almost two-thirds of the total cost of health care. There is also an incentives problem, both on the supply and the demand side. On the demand side, consumers do not think in the long term, but rather only about periods for which they are "covered." On the supply side, physicians are being paid for services performed as opposed to the results of those services.

Solving the problem is going to involve creating well-informed and engaged consumers who think about wellness for the long term as opposed to sickness in the short term; greater transparency through simplified and integrated information about comparative costs, quality, and value; as well as more innovative avenues for access and incentives aligned with results. This is what drives retail markets in other sectors of the economy. The health care industry needs market-makers and solution-providers to figure out the needs and values of consumers, as well as a regulatory and legal environment that enables competition.

We see positive steps in the creation of consumer directed health plans (CDHPs), now occupying between seven and eight percent of the market, and growing rapidly toward the 15–20 percent tipping point that will force the rest of the industry to adjust and respond to this new trend in consumer demand. Booz Allen Hamilton research reveals that consumers are beginning to see health care as a retail market--and that physicians see this too, but do not like it.

Consumers covered by CDHPs are much more aware of price than those who are not, and they are also marginally more aware of quality. We attribute this marginality to their inability to discern avenues for extracting information as opposed to a lack of interest in quality evaluations. Consumers with CDHPs are more likely to substitute for better prices, especially when it comes to drugs with generic offerings; more likely to plan for the future; and more likely to spend money up front to avoid paying higher costs in the future. Consumers tend to shop on price for health plans, on price and quality for drugs, and on quality and service--but primarily quality--for physicians.

Physicians view this as a very real movement, believing it to be the most important trend in health care in their lifetimes. They believe it will lead patients to be concerned about cost and service, but they also believe that the movement will ultimately hurt relationships between doctors and patients.

Jay Silverstein
Revolution Health

Why does the health system need a revolution? Insurance providers and actuaries have forgotten about the consumer. When has the health industry created a product that has created as much consumer perceived value as a new technology product? Revolution Health sees two large problems with health and health care. The first is that products never meet the consumer, and the second is that information is locked up in individual "silos."

Revolution Health creates connective tissue in the health care industry. In order to empower consumers, products need to be simpler and more relevant, and information must be transparent and approachable. Toward these ends, Revolution Health has created retail clinics in malls that employ nurse practitioners and allow one to get routine primary care much cheaper than going to the doctor. Websites can be powerful tools for people to take control of their own health. Revolution Health has also created a consumer-based rating system for evaluating physicians, something the American Medical Association has frowned upon. Revolution has also created a hotline to call in order to get health information or emergency services.

The idea is that by connecting the silos, consumers can get better information faster and physicians can communicate more regularly, creating a system where there is active participation and efficient delivery of care.

Paul London
Author of The Competition Solution

The health care system needs reform. There are clear problems, not the least of which is relative cost. Health care spending comprises about 16 percent of our GDP. In most advanced industrialized nations, that statistic ranges from eight to twelve percent of GDP. Yet if we look at consumer response to the care received, more than three-fourths are very or somewhat satisfied. Almost half say that U.S. health care is expensive, yet good. But most that our national health care system is in bad condition. People are satisfied with the care they are receiving, but they want reform. What they actually want is something like the current system.

Avoidable errors result in a disturbingly high number of patient deaths. Uncoordinated care results in doctors practicing in isolation, increasing paperwork, and episodic rather than systematic treatment of chronic diseases. Generally, patients are content with the present system, but that is probably because they have never been exposed to a coordinated system. An example would be Americans and automobiles in the 1960s. Americans thought the U.S. "Big Three" made the best cars in the world. It took an influx of Japanese and German imports to show us how good a car could be.

We need changes to encourage and facilitate competition that will force industry remodeling. More than simply managing Medicare and Medicaid, the Centers for Medicare & Medicaid Services (CMS) needs to take a lead role in opening industries to competition like the Federal Communications Commssion did with telecommunications

But reform has been historically difficult in health care. In other industries (automotive, airline, and telecommunications), those affected by reform were not well-liked. But doctors, nurses, and health insurance companies are well-liked, which makes it risky to criticize them. Businesses, which pay roughly thirty percent of health care costs, are not involved in the discussion of reform to the extent they should be. CMS has provided no leadership in developing quality. It has not mandated coordination of care or conversion to electronic records. Electronic records will lead to increased safety and allow for data that could provide a sound basis for comparing doctors and hospitals. Such processes will reduce the cost of care in the future. Reform is possible, but CMS needs to step up to its leadership role.

Mark Smith, M.D.
California HealthCare Foundation

There are both finance and delivery costs in health care. Finance and delivery, while related, are different things, and the two often become merged in a way they should not be. Reform that is being talked about in California and nationally is largely about finance, or improving the money flow of coverage.

Having health coverage means being protected from financial ruin due to an unexpected, catastrophic event; having access to preventative care and affordable options for routine care; and having aid for expensive chronic care. Of these, only catastrophic coverage is truly what is meant by the term "insurance." Prevention is prepayment, routine care is the use of market power to get discounts, and payment for expensive chronic care is asset transfer. Health insurance tends to be a package that lumps all of these things together, which leads to its high cost.

The health industry is in trouble, and it has problems being viewed as a retail market. People who can afford coverage will not necessarily pay for it. Almost half of the uninsured in California earn over three times the poverty level. The idea of voluntary universal coverage is out. In health care, people protest for the right not to pay. They want employers to pay; employers want the individual to pay; the government wants either employers or individuals to pay. In every other industry, technology has driven down costs, but in health care, people say technology has made things more expensive. The capacity for labor is extremely limited, as doctors go through sometimes as much as sixteen years of training, and this makes it almost impossible to force labor to conform.

Health care needs transparency of quality and cost. In California, there is a website that evaluates hospitals and doctors. There are problems with this system, however. Conditions like breast cancer take a team of doctors to heal: a radiologist, an oncologist, a surgeon, and others. Figuring out to whom to attribute a success is difficult. But it is better than the alternative, which is no information at all. Also, we need to understand that markets do not solve everything. Health is somewhat of a social good. The government should to some extent require the rich to subsidize the poor to allow for access to some level of health care.

AEI research assistant Walton Dumas prepared this summary.