The Challenge of Changing Healthcare Systems

--Drugs 1996; 52 Suppl. 2: 68-77

0012-6667/96/0002-0068/$05.00/0

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The Challenge of Changing Healthcare Systems Felix Weber McKinsey and Company, Zurich, Switzerland

Summary Healthcare systems are in flux throughout the world. Traditional structures and attitudes are changing. The balance of power between political bodies, payers, providers and patients is being destabilised. New approaches by governments and forward integration by drug companies and payers into care management are all major changes from the past.

In the future, healthcare providers, particularly hospitals, will have to complement medical with business skills to survive in a more competitive environment. Experience shows that there is major potential for improvement in terms of radical rethinking of how care is provided (e.g. at least a 30% reduction in hospital days per insured life together with quality-of-care improvements). In particular, the economic value of changes in treatment (e.g. ambulatory surgery, switch to home therapy) should be understood and optimised.

In a new world scenario, payers and providers will shape the healthcare environment by introducing novel approaches and integrating healthcare delivery. This process, coupled with the introduction of new approaches to competition and risk sharing by the government, could cause the emergence of high performance and more cost-effective healthcare systems.

Contemporary thinking about the provision of healthcare may bring dramatic changes to the medical profession. Such changes pose a risk, but they also present an opportunity for those ready to accept the challenge. This statement is based on 3 assertions:

1. Healthcare systems are sick. Various countries have taken different approaches, but all have led to similar results, i.e. continuously increasing clinical performance with diminishing additional return at rising costs.

2. Turbulent changes ahead will shape a new landscape, but many of the fundamental problems associated with improving the cost/benefit ratio in healthcare remain virtually unaddressed.

3. A new paradigm of healthcare delivery

fostering competition, new skills and risk assignment to payers, care providers and patients could be the way forward and could create a more costeffective healthcare system with new entrepreneurial and medical opportunities.

1. Sick Healthcare Systems

If healthcare costs and the economy continue to grow at the same rate as in the past few years, healthcare costs will have consumed the total gross domestic product (GDP)in most European and North American countries by the year 2040. This is obviously an unacceptable development. However, research demonstrates that healthcare systems have the potential for dramatic improvement in costs and quality. In order to achieve this, the old

Changing Healthcare Systems

Bismark model Annual healthcare costs (OM per person)

The Netherlands

France

Germany

SWitzerland

Austria

Belgium

1 5000

14 400

14 400

300 J 4

1 350 o

113000

to·year growth (0. real)

34°.

52°0

39°0

46°0

55·0

79°.

69

Beveridge model Annual healthcare costs 10·year (OM per person) growth

(0. real)

Sweden 7300 22°0

Italy 47°0

Denmark 4°'c,

UK 2700 29·0

Spain 1700 71·'0

Greece 1000 33·~

Fig. 1. The effect of different national financing systems on annual health care costs (in 1990). DM = Deutschmark.

paradigm, better quality at higher costs, has to be revised; better quality often means lower costs.

One representative example is Switzerland. Within 15 years, healthcare costs have tripled and growth in the hospital sector has been even higher. This exceeds economic growth over the same period by 3 to 4 times, despite measures taken to limit cost increases after 1991. Obviously, directly or indirectly through taxes, individuals spend a substantially higher share of their income for healthcare today than they would have done in the past; a share that was 10% in 1980 would have been about 15 to 20% in 1995. Politically and economically, this trend cannot continue.

One could argue that different healthcare system designs lead to different cost-effectiveness results. However, this can hardly be supported if we look at Europe. In designing their healthcare systems, countries have taken different routes based on either the 'Bismark' or the 'Beveridge' models. The 2 approaches are distinctive. The Bismark model believes in competition, free choice of medical service, reimbursement of costs as they occur and financing through an insurance scheme. The Beveridge approach builds on central planning and control, restricted access to healthcare services, cost containment through budgets and tax financing. However, system inefficiencies, overstretched social contracts and unrealistic political promises have removed systems away from the pure theoretical models.


Still, even with the purest representatives of each system it is difficult to support the case that the choice of a system correlates with the development of healthcare cost (fig. 1). Switzerland and Germany, the closest European representatives of the Bismark model, had lower healthcare costs per person and comparable growth to The Netherlands, which has adopted major elements of the Beveridge model. Similarly, Sweden, being close to the pure Beveridge model, had the highest healthcare costs in Europe and still had a reasonably high growth rate. On the other hand, the UK, which has more elements of the Bismark model, has managed to maintain a rather cost-effective system.

What may be more important than the theoretical design of the healthcare system is how well cost and outcome are actually managed, either through central government control or entrepreneurial freedom. Figure 1 shows also that active management

Germany

France

The Netherlands

USA (average)

UK

USA (best practice)

78

J 51

143

138

J 29

~9

Acute beds per 10 000 population

Fig. 2. Structural capacity in Europe and the USA in 1992 (source: McKinsey & Co.).

Drugs 1996; 52 Suppl. 2

70 Weber

a Processes

Regulation

Government L -_ -_ -. -. -_ -. -. -_ -_ -. -_ -_ -. -. -. -_ -. -. -_ -_ -. -_ -_ -. -. -_ -.-J '---------'.

Intermediaries! health plans

Hospitals

Physicians

Suppliers (e.g. pharmaceutical industry)

b Processes

Regulation

Government

Intermediaries! health plans

...... t-------{=====}-----.~ --- ----- -----. Hospitals .. Physicians

Suppliers

• ------------ ... -----1===J (e.g. pharmaceutical industry) .. ------------ ..... , ------'

c::=:J past position ----1... future likely trend - - - - - - - -.. future possible trend

Fig. 3. The roles of various bodies within a healthcare system in (a) the past and (b) the future (source: McKinsey & Co.).

of healthcare costs can lead to major improvement. For example, Denmark's cost-containment efforts are reflected in its low healthcare cost increase over 20 years; Denmark has managed to keep healthcare cost share as a percentage of GDP almost constant. Finland has recently achieved similarly good results. However, at least in the case of Denmark, it appears that the strong focus on costs has somewhat stopped medical progress (life expectancy has not increased during the last 20 years). Thus, a more holistic approach - other than by just cutting budgets - may be required to funda-


mentally improve the cost effectiveness of healthcare provision.

There is still major potential for improvement along various lines. For example, if existing best practice were applied to each level of the healthcare system in Germany (government, health plan providers, physicians, hospitals and suppliers), total cost savings of 20 to 30% or DM70 to 105 billion would appear to be feasible without affecting the quality of medical services.

Notably, there is also major potential for improvement in the hospital sector. Because of the



substantial structural overcapacity in Europe and the USA (fig. 2), costs in this sector could be reduced by an estimated 30 to 40%. This is clearly illustrated by best practice examples in the USA: Friendly Hills, a high quality provider with a representative membership for the USA, requires only 8 to 10 acute hospital beds per 10000 members (about 10% of the current German level).

All countries are far behind this benchmark but major improvements are feasible. Within 2 years, Kaiser Permanente in California reduced hospital days per member and year by 30%, from an already good starting point. At the same time, they made major steps in quality improvement and customer satisfaction.

When discussing the enhancement of system productivity, it is impossible to neglect outcome. In an attempt to determine treatment differences and cost/outcome implications between countries, cases of 4 different disease states (diabetes, lung cancer and 2 other diseases) treated in the US, Germany and the UK were comprehensively reviewed and normalised in an internal McKinsey study led by the McKinsey Global Institute. When productivity was measured as outcome divided by input, the USA was the clear leader in lung cancer treatment (better outcome and lower resource input), followed by Germany and the UK, while the UK had the best productivity in diabetes. Thus, there appears to be clear differences in the treatment productivity between countries.

In summary, 3 conclusions can be drawn: 1. Healthcare systems and individual providers within the systems achieve substantially different productivity levels. 2. There is major potential for productivity enhancement in most countries. Rigid application of the standards set by the worldwide best practice would lead to major productivity improvement. 3. We need to improve our understanding of input/output mechanics, and to measure performance systematically. Only. then will it be possible to achieve better cost effectiveness.

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2. Turbulent Changes Ahead

In the past, players within the system had clearly defined roles (fig. 3a). Governments issued regulations and controlled care provision, health plan providers ensured insurance coverage, and hospitals, physicians and product suppliers provided care. This was a stable situation. All participants acted within clearly defined roles, all could expect a secure income, and all faced few risks and little competition.

In the future, roles will not be so clearly defined. (fig. 3b), for the following reasons: i) governments are introducing more competition and gradually limiting their role to that of regulation; ii) care management (i.e. optimising input/output of services) is gaining the attention of health plan providers, hospitals, physicians and suppliers; and iii) health plan providers are offering managed health plans and starting to sign service contracts with individual hospitals or physicians, often at discounted rates. Hospitals are offering their services at fixed prices instead of charging a service fee, or physicians are forming group practices and taking over the responsibility of providing full care for an individual at a fixed price per year.

2.1 Governments

From widely different starting points, most countries appear to be moving towards a converging end-point. They will try to maintain or enhance social solidarity among their people. Examples include the US healthcare reform and the introduction of a compulsory insurance in Switzerland. At the same time, governments will start to foster greater competition and medical professionals may be more exposed to free market forces than in the past.

2.2 Health Plan Providers

Aggressive health plan providers are moving quickly from insuring members and paying bills towards the active management of care delivery. They will focus their efforts on a few, but important, factors to influence the cost and outcome of


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care delivery. For example, they will select cost-effective hospitals, urge physicians to send patients to these places and build sophisticated quality/cost controlling systems to monitor hospital performance. They will promote outpatient instead of inpatient care, through attractive incentive systems for physicians. Once these changes are introduced, most European countries may need at least 50% fewer hospital beds and 20 to 50% fewer pharmacies than today.

2.3 Care Providers

Hospitals and physicians are changing from providing care to being active players in care management. General practitioners will take on full medical and financial responsibility for an individual's health status and care costs. The Wintimed/Caremed model introduced in Switzerland is such an example. The patient will select as his first contact a personal doctor who manages referrals to specialists and hospitals. For each member, the doctor will be compensated at a fixed fee per year for all his services. Later, the system will be expanded. The personal doctor will then receive a higher fixed fee, but out of this he/she will need to pay all specialist and most hospital costs. A sophisticated quality control system will

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monitor each personal doctor's performance and customer service. A more comprehensive system (Medinet) has now been set up in one pilot region in Switzerland.

The speed and degree of change will differ from country to country, depending on the level of freedom granted by the regulations, but all will appear to move in the same direction towards active care management, with major implications for hospitals and physicians.

Although each of these moves is a major deviation from traditional thinking and contributes to greater system productivity, many crucial issues remain unaddressed.

• First, patients consider healthcare as a free service because it is financed either through compulsory insurance premiums or through taxes, with usage virtually uncoupled from payment. Thus, there is basically no barrier to using the system. Only education and major copayment linked to healthcare consumption can change this attitude.

• Second, most providers are still afraid to radically change the way they provide services. It will be necessary to integrate hospitals and am-

t t t 12 23 210

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Switzerland Cost of Staff! Real Population Stays! Duration Other Switzerland 1980 living bed salary growth person of stay 1990

increasel mix

Fig. 4. Individual factors responsible for increased hospital costs in Switzerland from 1980 to 1990 (measured using an index where costs in 1980 = 100) [source: McKinsey & Co.].

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Changing Healthcare Systems 73

Old product New product

833 958 ----- --- - - - ---- ------------ -,

, Ii) G) "0 c: co II) ~ 0 , -E 277 , 527 ~ D-e II)

1i) 0 0

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Product Labour Tolal Product Labour Total

cosl + cost therapy cost + cost therapy cost cosl

Fig. 5. Impact of the introduction of a new drug compared with the old agent on total therapy costs (source: McKinsey & Co.). DM = Deutschmark.

bulatory care, rigidly specialise clinics and address the key cost drivers that are often ignored. Some examples follow: 1. Improvements in cost and quality are gained by integration, not by better control. US examples of health plan costs show that better controlling saves only about 4% of costs. On the other hand, integrated health maintenance organisations with managed care delivery processes, systematic exchange of experiences and good performance evaluation systems achieve about 25% lower costs at comparable or even better quality care than the traditional approach. 2. Performance of sophisticated treatments is improved by specialisation, not by enlarging the scope of service. Using surgery time as a measurable criterion for effectiveness, top performing hospitals score 25% to 30% better than average, and specialised clinics are up to 70% better. Specialised clinics are also usually superior in terms of rehospitalisation rate, which is a measure of treatment quality. 3. Better effectiveness is achieved by radically addressing staff levels in hospitals, not by reducing capital investments. For example, in


Switzerland 78 of the 110 points of cost increase over 10 years were attributable to increased hospital staff per bed and salary per person (fig. 4). In contrast, the impact of the aging population was much smaller; only the 12-point increase in the number of admissions may, at least partially, be a function of the changed population age structure. Pharmaceuticals played only a minor role in the cost increase; they are included under 'others' and account for about 6 to 7 points. 4. Dramatic improvements can be made by reducing total therapy costs, not by focusing on marginal cost elements. Say, for example, that a new drug costing twice the price of the old leads to a 45% improvement in total therapy cost (fig. 5). Even if the new product were 4 times as expensive as the old one, it would still be an attractive proposition. Thus, pharmaceutical products have played and will continue to play a major role in reducing healthcare costs.

• The third unaddressed issue is the ethical question of whether healthcare delivery should be maximised or optimised. It is ultimately a political and ethical question whether a country wants to give the same care


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to all patients, or whether it wants to focus (e.g. in cancer treatment or surgery) on the probable survivors and provide palliative care for the others. Such focusing can substantially enhance the value of funds for medical care, because it could reduce treatment costs for society by up to 50%, offer more adequate care for all, and improve the treatment quality for the likely survivor group.

3. Paradigm of High Performance Healthcare Delivery

How can such a giant leap in healthcare productivity be achieved? When one considers all the unsuccessful attempts so far, this appears to be a difficult undertaking. But let us look at a possible model- 'Utopia' - the country with the most productive healthcare system in the year 2010.

Utopia's 20 million inhabitants enjoy a highly effective, productive and affordable healthcare system. Access, cost and quality are optimised within politically agreed economic limitations. The quality of outcome is outstanding. Healthcare costs grow at a lower rate than the economy. Institutionalised comparisons between 10 industrial countries rank Utopia's cost/outcome performance among the top 5 in all diseases. Clear outcome and cost improvement objectives are set for all major treatments, and the government initiates frequent improvement efforts to optimise treatment cost/benefit. A well defined basic package grants access to all at affordable cost.

Utopia moved from a fragmented approach to an integrated redesign of healthcare provisions. It changed the behaviour of individuals and implemented systematic performance measurement. It built a new, competitive framework with conscious delegation of risks to health plan providers, care providers and patients. Care providers took up the challenge and improved their care management skills. They merged into larger, sophisticated organisations, or developed a unique clinical expertise whereby they achieved world class performance. In this highly competitive environment, many new health plan providers offer innovative


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insurance products and support care providers in their care management efforts.

For example, Utopia has initiated an education programme to limit consumption. Research showed that nearly 20% of the visits to physicians were avoidable (because they were preventable, for patient satisfaction or not essential). Today, 'healthcare consumption containment' is a subject at all high schools. Health plan managers have also taken up this opportunity to lower costs and offer patient education courses on a regular basis. These courses include training for 'do-it-yourself' disease diagnosis and selection of the most suitable overthe-counter (OTC) pharmaceutical.

Regulators carefully and regularly measure the healthcare performance or productivity of each care provider according to clearly defined variables. Every quarter, the results of the previous 3 months are published. If the performance of a specific provider is consistently low, patients and referring physicians are advised to avoid such an institution, and this organisation is asked to raise its performance or productivity to the national average within 2 years.

Utopia annually assesses its results against other major industrial nations. On the basis of these comparisons, productivity benchmarks and improvement objectives are set for the next years.

The 10 major health plan managers are obliged to offer everyone a basic package with clearly defined content at a price irrespective of age and sex. They have no right to refuse an application. This package covers treatments with well proven outcome, an acceptable cost/benefit ratio, and a reasonable hospital comfort level, but excludes minor, frequent diseases (e.g. treatment of simple colds with fever). The cost of such diseases is borne by the individual when they occur and is not financed through insurance. The package also limits payments for pharmaceuticals. However, a maximum of $US 100/year/member is refunded for OTC pharmaceuticals in order to create an incentive to self-medication. Finally, the basic package includes a compulsory major annual copayment



requirement to encourage members to limit consumption.

For supplementary services, intensive competition with attractive optional packages has emerged in Utopia. Innovative health plan managers have developed packages for specific professional and age groups, with sophisticated copayment pricing schemes. Finally, the health plan managers have created, jointly with the government, a fund to finance experimental research programmes for novel treatments.

Health plan managers also actively contribute to performance enhancement. They contract individual hospitals, physician groups and health maintenance organisations. Supplementing the government's effort, the performance of services and customer satisfaction of each provider is measured on an ongoing basi~. Each year, contracts are renewed with the best 80' to 90% of existing contract providers and a few new ones are added. Those dropping out have to improve quickly, or face the risk of bankruptcy.

On the provider side,the old system of mostly independent general practitioners and hospitals has gone. 20 integrated care providers have been established. Typically, they serve about 80 000 to 150 000 people through a network of group practices, each with about 10 physicians, and a hospital with about 100 beds. Through information exchange, continuous case review and ongoing improvement of treatment processes, they have achieved dramatic improvements in outcome quality, at lower costs and with about 20% fewer hospital beds than in 1995. These integrated providers can cover most treatment needs within their own network. For highly critical, specialised treatments such as heart surgery, organ transplant or hip replacement, they use the services of specialised clinics in Utopia. For some treatments, they refer patients to the best clinics abroad.

These integrated providers in Utopia compete intensively for patients. They assume entrepreneurial responsibility, as they contract their services at a lump sum price per member per year and bear the full financial risk of utilisation or

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cost overrun. To be successful in this competitive arena, they have established sophisticated incentive systems for their physicians that are geared towards customer satisfaction and cost/outcome evaluation.

This change has led to new roles for hospitals and physicians: from independent, closed system providers to an open, interlinked network; from quality at any cost to simultaneous cost/quality enhancement; from cost plus refund of services to fixed lump sum compensation per member per year; and from virtually guaranteed remuneration to risk of loss of job and income in the case of poor performance. The most successful providers have further improved their medical skills, but they have added new capabilities such as cost management, quality management and marketing.

Impossible? Probably not. The building blocks of Utopia exist in many places in the world today. It is up to those involved, in particular the medical profession, to tum such a vision into reality.

Correspondence and reprints: Dr Felix Weber, McKinsey & Company, Unterwerkstrasse 3, 8065 Zurich, Switzerland.

Discussion

Prof M.P. Glauser: With regard to your comparison of the treatment costs of lung cancer in the UK, USA and Germany, how did you account for the 30 million Americans who do not have access to healthcare in your calculation? Also, I did not see any mention of quality of life or patient satisfaction In any of your arguments.

Dr F.. Weber: Although the system in the USA is productive, there are many people uninsured. The main rdson why the US system is more expensive than the: European systems is because the Americans earn more money than the Europeans; if you were to apply the cost/doctor in the UK to the American system you would have an enormously productive system. A similar trend exists with purchasing parities.

Regarding the uninsured population in the US, careful scrutiny shows that, in reality, less than


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50% of the 30 million (10 to 15 million or about 6% of the total American population) are actually uninsured per se; about 10 million have no insurance because they are between jobs and some (about 2 million) do not wish to be insured because they believe that they can have better treatment at lower cost if they are uninsured. Hospitals that treat the uninsured receive tax advantages, so there is an incentive to treat such patients. It cannot be ignored that there are very different standards of treatment in the USA; however, it is possible to see that integrated healthcare delivery has led to dramatic improvements in performance. For example, Friendly Hills deliver excellent care (measured by patient satisfaction) to their patients. At the same time, they have achieved a cost level per member that is about 60% of the US average.

With regard to the issue of quality of life, it is extremely difficult to measure the productivity of a system. It is wrong to look only at life expectancy and, although it is difficult to define quality, quality of life must also be taken into account and has been included in our research.

Dr N. Hoiby: One of your figures showed that, of the countries studied, Denmark had the lowest healthcare costs during the period 1970 to 1989. This is due to the fact that Denmark has 3 political tiers, and the second one (the counties) takes care of the taxes for the healthcare system. Only about 10% of taxes goes to the counties, and health care accounts for 60% of their budget.

The WHO has 2 ways of measuring the standard of a health care system: average life expectancy and perinatal mortality. Denm'ark has the highest perinatal mortality in Scandinavia and the average life expectancy (which is the lowest in Europe) has not changed in 20 years. This has caused many problems politically and, as a result, efforts are being made to increase funding.

Dr Weber: The introduction of antibiotics had a very important impact on healthcare, and thus on life expectancy. Since then, any gains have been relatively minor. While there have been improvements in the mortality rate of children, the life ex-


Weber

pectancy of a 45-year-old in Europe increased by only about 1 and 2 years between 1960 and 1995.

In Denmark, healthcare has been forced to optimise within the existing system. However, I do not advocate such an approach because it hinders the development of medical progress. Instead, we should measure the real impact of medical progress and have a means of determining the cost-benefit of this development. Performance has to be measured, and it is in this area that we currently have a problem.

Prof W. Stille: In Europe, there are far too many pharmacies. For example, a small German town will have 4 to 6 pharmacies where 1 or 2 would be enough. Germany also has very strict regulations prohibiting doctors from distributing drugs. However, allowing doctors to do this would save money and make treatment much simpler (e.g. single dose treatment for otitis). Also, in Germany specialists can practise outside the hospitals, which leads to very high costs.

Dr Weber: The impact of the costs of pharmaceuticals on total costs is minimal. In Germany, pharmaceutical costs account for about 15% of the total system costs. Of that, about half is spent in the hospitals and half through pharmacists. There is no question that these costs can be reduced. I anticipate that about 30% of pharmacists will close down in Germany within the next 5 to 8 years because of the introduction of some form of pharmabenefit management, which will reduce the margin for the pharmacist by 30 to 40%. Pharmacies will be increasingly at risk and there will be more pharmacy chains (similar to the situation in the UK). I support your point about giving general practitioners the right to distribute pharmaceuticals. I believe that we should look at pharmaceuticals as a means of reducing and not increasing costs. We should also regulate the introduction of new products more rigorously so that they are introduced only when they improve therapy costs or results.

In Utopia, there would be 30 to 50% fewer specialists, and the general practitioners would have a



much more important role than in the past. Some specialists would change to a general practice.

Dr C. Kungu: You did not mention the fear of litigation that is prevalent among doctors. Can you comment on this issue?

Dr Weber: It is true that the costs of litigation are extremely high, and fear of such action does affect how a doctor treats a patient. To deal with this we should turn the problem around. How can we enhance the quality of the services we provide so that litigation becomes less of a problem? However, it is virtually impossible to remove the threat of lawsuits.

Dr P. Vernazza: In Utopia, you suggest that a patient with only a 10% chance of survival if treated will not be given therapy. How can we make our patients accept non treatment? Surely we will be liable if we do not offer this treatment?

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Dr Weber: This is a very valid question. I do not want to make a judgement as to how far treatment should go. However, I believe that, ultimately, societies cannot afford to do everything that is medically possible. Society will have to decide how it wants to manage socially funded healthcare. If a country agrees to some sort of 'rationing' , that rationing has to be discussed and agreed upon. From that point on, doctors will work by these rules. These rules also allow better measurement of performance. Individuals who want the best treatment even if they know that the likelihood of a positive outcome is minimal will have the option of additional coverage and the treatment. With such an approach there will be 2 groups of people: those who have the basic package and those who can afford the supplementary package. This is virtually unavoidable. To my knowledge, a system such as this is already in place in the UK and Spain.


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The Challenge of Changing Healthcare Systems