1. Transforming Healthcare Delivery to a Service Industry Jerome H. Grossman, MD Director, Health Care Delivery Policy Program American Re Healthcare March 29, 2004

2. Economic and Societal Changes Zuboff (1988) – In the Age of the Smart Machine Giddens (1988) – The Third Way: The Renewal of Social Democracy Rabin (1998) – Psychology and Economics (Behavioral Economics) Rivlin (2002) – Challenges of Modern Capitalism Christiansen (2003) – The Innovator’s Solution Zuboff (2003) – The Support Economy

3. Elements of Healthcare Delivery Starr (1982) – The Social Transformation of Medicine Fuchs (1996) – Individual and Social Responsibility Institute of Medicine (2000/01) – To Err is Human, Crossing the Quality Chasm

4. Future Hopes Existing “Trends” FinancingPurchasing RegulatingProviding Catastrophic Account Cash Account HSA (Consumer Defined Plans) Behavioral Economics Productivity Systems Management Network Creation Health Value Added Tax Universal Health Plan Voucher Based on Clinical Condition Monitoring HEALTH FEDERAL RESERVE Safety/Safety Improvement License and Monitoring Vocab/Reporting Transparency Licensure Arbitration Malpractice SEPARATE FEDERAL AGENCY

5. Financing Health Value Added Tax Based on Clinical Condition Monitoring Universal Health Plan Voucher HEALTH FEDERAL RESERVE FDAProductivityClinical Conditions

6. Regulation Safety/Safety Improvement License and Monitoring Vocabulary and Reporting Transparency Licensure Arbitration Malpractice SEPARATE FEDERAL AGENCY FAA/NTSB FASB SEC/NASD Federal Reserve METAPHORS Performance Based Regulations Management Based Regulations Risk Based Regulations RESEARCH

7. Providing: Complex Interdependent Systems Data Exchange 7 x 24 x 365 The Patient Customized Protocol Front Line Team Flexible Management Organization Post Introduction Surveillance Bioterrorism Regulation Environment Productivity Reengineering Human Factors Job Redesign Organization

8. Scanning the Environment - Costs Increasing at a steep rate Increased uninsured – increased middle class concern Employers pass increasing cost to employees Employers pass increase onto retirees – not new employees Government passes increase onto retirees and states (Medicaid) Medicare Bill includes medical savings account The beginning of 401(k) Employers/govt. decreasing responsibility for health insurance

9. Quality Quality focus dominates media and legislation However progress stays neutral –Scattered successes balanced by new revelations of error Strategy shifting from projects to “systems thinking” Lack of transparency and safety oversight becoming larger issue –Finance has SEC –Civil Air Transport has FAA –Health has JCAHO – malpractice (mainly self-regulation)

10. What Hasn’t Happened Very little progress has been made. Source: Wall Street Journal Medical Injuries Cost Billions Every Year Researchers studying health- care quality have concluded that medical injuries caused during hospital stay kill tens of thousands of patients annually, requiring at least 2.4 billion extra hospital days resulting in potential medical charges of $9.3 billion. The work underscores both the scope of the problem and the relative lack of action in solving it. In 1999, for instance, the Institute of Medicine recommended the creation of a “nationwide mandatory reporting system” for medical errors. That hasn’t happened. Very little progress has been made.

11. “ A ” Perfect Market Large numbers of consumers and firms Free entry and exit Marketability of all goods and services including risk Symmetric information with zero search costs Key Failures in Health Asymmetric information/costly search Marketability of risk

12. Bearing More of the Burden Employers Costs Rising Too Between 1998 to 2003, annual healthcare costs paid by employers rose from about $3,000 to over $5,000 per employee. Source: New York Times, Hewitt Associates Employees annual healthcare costs, paid by... In 2004, healthcare costs are projected to rise to about $8,000 per employee.

13. The New 401(HEALTH) Must buy catastrophic insurance Medical “Savings Account” Rollover Portable Must buy catastrophic insurance Medical “Savings Account” Rollover Portable 401(HEALTH) Corporation Government Self Defined Contribution Risk Tolerance “Auto Insurance Points” + for healthy behavior + for preventive tests + for chronic disease compliance Result – Lower “rates” next year

14. Distribution of Costs 19981999 Medical Expense Category in 1998 Average Per Capita Expenses, $ Total Enrollment, % Total Expenditures, % Average Per Capita Expenses, $ Total Expenditures, % Low (<$2000) 3248723119158 Medium ($2000- $24999) 56581256538535 High (>$24999) 49032121158007 Source: Dove, HG, et al, “A Prediction Model for Targeting Low-Cost, High-Risk Members of Managed Care Organizations.” The American Journal of Managed Care, May 2003.

15. Catastrophic Insurance x 1,000,000 lives Epidemiologic (Incidence & Prevalence) x Predictive Risk Modeling (Disease Severity and Comorbidity) x Normative Resources (From Productivity) = Outcomes (Outputs) Technical Functional Trust Service

16. Keeping Patients Connected Source: Boston Globe Digital Camera Speaker Phone Microphone Built-in modem Sends data to VA computers Video-touch screen For video- conferencing HOW THE SYSTEM WORKS A portable monitor equipped with a digital camera and devices such as a blood pressure sensor and stethoscope is set up in the patient’s home.

17. Every Home an ICU Source: Boston Globe

18. Sequential Information Experiments DataAnalysisHypothesisValidation