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Health Care and the North Sea: A Dangerous Crossing

01/24/18

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Tom Robertson, Executive Director, Vizient Research Institute

At 11:40 p.m. on April 14, 1912, the largest ship in the world collided with an iceberg in the North Atlantic. Two hours and 40 minutes later, the Titanic was gone. Because ice has nine-tenths of water’s density, 90 percent of an iceberg lies below the ocean’s surface, hidden from view. The 220 foot-long gash that the iceberg cut into the hull of the Titanic occurred below the surface. Above the water line there was little evidence of the collision. The most famous maritime disaster in history holds lessons for health care providers. Among them is the warning that the risks that we don’t see are often more treacherous than the ones that we do see.

The parallels between the Titanic and health systems are worth noting. The Titanic was the largest ship at sea. Health systems have grown and consolidated in an effort to become too big to fail. The Titanic was designed for extraordinary passenger comfort – its accommodations were said to be of “unrivalled extent and magnificence.” Modern hospitals have been designed to optimize the patient experience, and the resulting design elements come with a steep price.

But the most riveting similarities between the Titanic and the health care system come in the form of not seeing the impending danger and a misguided sense of invincibility. Despite six warnings of sea ice, the Titanic was near its maximum speed when the first lookout sounded the alarm. The warning signs are abundant for health care providers, yet with health care spending threatening the solvency of middle class households, we have yet to hear a message from our bridge to the engine room to slow down.

As the baby boomers age into retirement, the ranks of Medicare beneficiaries will swell from roughly 48 million today to 74 million by 2030. When the Medicare program was introduced in 1965, there were 4.5 active workers per retiree. Today that ratio is down to 2.8; it will fall to 2.4 by 2030 and stay there as life expectancy has increased and the generation coming behind the boomers is larger than the generation that went before us. The traditional financing of Medicare, largely dependent on taxing the current workforce, becomes increasingly difficult as the ratio of workers to retirees is cut nearly in half.

In addition to shouldering a disproportionate burden for retiree medical costs when compared to their parents and grandparents, today’s workforce has seen its own health care spending triple over the last 15 years. The typical working family of four spent $9,200 on health insurance premiums and out-of-pocket medical expenses in 2002. By 2016, that had grown to $25,800. Over that 14-year period, health care spending increased at a compound annual growth rate of 7.6 percent while wages increased by only 2.7 percent per year.

The U.S. Office of the Actuary forecasts health care spending to increase by 4.9 percent per year over the next 10 years, nearly doubling the annual rate of increase expected for wages over the same period. If left unchecked, the current trajectory will find a working family of four spending $50,500 per year for health care by 2030. In a global economy, with international competition for jobs, it is hard to imagine how we make that math work for the American middle class.

The Vizient Research Institute’s latest study explores the implications of the aging baby boomer generation and the economic risks associated with another 15 years of unchecked health care spending. If the health delivery system does not take steps to fundamentally change direction, we are on a path to an unaffordable tipping point for middle income families. In the absence of change from within, external forces will trigger changes superimposed from outside of the system. To avoid further erosion of the middle class standard of living – not to improve it – would require a 30 percent reduction in projected health care spending from its forecasted level in 2030. Reliable estimates indicate that spending would be reduced by roughly 10 percent if unnecessary utilization was largely eliminated. Such an unprecedented reduction in avoidable utilization would still leave spending 20 to 25 percent higher than the middle class will be able to afford.

There is no track record in health care to suggest that a 10 percent reduction in utilization is achievable, but even if it happens, the prices that we pay ourselves will be unsustainable. Unless we think that $50,000 per working household is an affordable tab for health care spending, by 2030, price reductions (in the range of 25 percent) in the commercial sector appear inevitable.

As the polarity of political debate in Washington centers around philosophical differences with respect to access and a byzantine system of subsidies aimed at propping up a tenuous individual insurance market, the U.S. health care system is hurtling toward a time when working families will be asked to spend $50,000 per year on their own care while supporting the largest number of retirees the country has ever seen. Like the Titanic barreling through the North Atlantic at 22 knots, prudence would urge us to slow down…there is ice ahead.

About the author and the Vizient Research Institute™. As executive director of the Vizient Research Institute, Tom Robertson and his team have conducted strategic research on clinical enterprise challenges for 20 years. The groundbreaking work at the Vizient Research Institute drives exceptional member value using a systematic, integrated approach. The investigations quickly uncover practical, tested results that lead to measurable improvement in clinical and economic performance.

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