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Why understanding medical risk is the key to US health reform

Excerpts from McKinsey report

The fundamental nature of medical risk in the United States has changed over the past 20 to 30 years—shifting away from random, infrequent, and catastrophic events driven by accidents, genetic predisposition, or contagious disease and toward behavior- and lifestyle-induced chronic conditions.

Treating them, and the serious medical events they commonly induce, now costs more than treating the more random, catastrophic events that health insurance was originally designed to cover. What’s more, the number of people afflicted by chronic conditions continues to grow at an alarming rate.

As the nature of risk has evolved, neither the funding mechanisms nor the forms of reimbursement for health care have adapted adequately, so the system’s supply and demand sides are both hugely distorted.

Consumers are over insured against some risks and underinsured against others; woefully short of the savings required to pay predictable, controllable expenses; and all too likely to be dealing with doctors who have big incentives to treat individual episodes of care rather than prevent illness and manage chronic conditions effectively.

            From 2007:  total $1.9T, some of the major categories of risk

Chronic:                                        $359B           Chronic + catastrophic = $1,182B

Catastrophic, not chronic:                 $588B

Catastrophic, attributed to chronic:   $235B

 End of life:                              $141B                     Only 7.4% end of life

Routine and preventative:  $227B + $54B

This misalignment is a relatively recent phenomenon.  Insurance is effective if it pools random, infrequent, and unpredictable risks. When health insurance was introduced, in the 1930s, it did precisely this.

Over the decades, however, it expanded to cover an increasing array of services, largely because employers wanted to attract workers by providing a tax-advantaged benefit. In the 1980s and early ’90s, managed care promoted this trend by offering consumers “first-dollar coverage,” reimbursing routine services and expenses for treating conditions that weren’t random, infrequent, and catastrophic in exchange for the patients’ willingness to cede decision rights on treatment choices to primary-care physicians.

When managed care lost popularity, consumers regained choice but largely retained first-dollar coverage.

Seeking proper alignment

The underlying goal of reform should be to align risks—both risk exposure (lifestyle choices inducing chronic conditions) and expenses incurred (treatment choices affecting costs and outcomes)—with the parties best equipped to control them. To achieve this goal, it will be necessary to determine the most appropriate financing mechanisms and provider-reimbursement models for each health care risk category; one-size-fits-all approaches are counterproductive in an increasingly complex health care world.

For some risks, it will be appropriate to use sophisticated reimbursement methods: bundled payments for episodes of care, capitation (a fixed payment per year per member), or risk-sharing arrangements. In many cases, however, relatively simple fee-for-service payments will remain the model of choice.

As reform efforts move forward, the guiding principle should be to redesign the demand side (financing mechanisms for consumers) and the supply side (reimbursements and the delivery system) to align medical risks—and the attendant financial incentives—with those who can most effectively control and manage them. Reform will provide a great opportunity to restrain costs, deliver more cost-effective care, and ease the financial and psychological burden on hard-pressed US consumers. It can be undertaken fairly, we believe, if the government helps people in difficult financial straits pay for their care.

(Note:  there is also the risk of a structural misfit, brought about by sustained growth in the government spending and influence in processes.   This also needs to be addressed, at a higher level of urgency, but McKinsey knows that, and is perhaps not free to express itself in this political climate.)