White paper on how to improve price discovery in healthcare providers in the US.

1. MANAGING
THE
COSTS
OF
SPIRALLING
EMPLOYEE
BENEFITS:
The
affordable
healthcare
Act,
[ACA]
has
landed
on
us,
with
a
2,400
page
thud!
At
Gnostam
Consultants,
we
believe
that
it
is
useful
to
remind
ourselves
of
the
reason
why
this
huge
legislative
effort
was
undertaken.
In
theory
the
whole
effort
has
been
as
a
response
to
the
need
to
reduce
healthcare
cost
inflation
in
the
United
States.
At
Gnostam
Consulting
[http://www.gnostamconsulting.com]
we
have
developed
a
method
which
assists
the
industry
in
managing
data
on
healthcare
costs.
We
have
“mapped”
the
industry
structure
and
data
flows,
and
believe
that
those
industry
participants
who
engage
with
us
in
this
process
will
derive
huge
economic
benefits
from
being
able
to
discern
where,
in
the
industry
“value
chain”
to
make
investments
that
will
translate
in
lasting
competitive
advantage.
The
US
has
experienced
more
than
6.93%
annualized
healthcare
inflation1
over
a
30-­‐year
period.
The
profits
of
the
S&P,
by
comparison
have
risen
by
5.9%
over
that
same
period.
The
1.03%
gap
compounds
dramatically
to
change
the
competitive
position
of
American
employers,
[$1
at
1.03%
for
30
years
grows
to
$2.427],
threatening
sustainability.
Another
fact
is
that
we
live
longer.
But
perhaps
the
most
significant
reasons
for
the
increase
in
healthcare
costs
in
the
US
is
that
we
have
very
“inefficient”
price
discovery
mechanisms
for
healthcare
procedures.
Change
in
S&P
500
earnings
vs
change
in
US
Healthcare
cost
Index
PPP,
[source
OECD
S&P].
0.6
0.5
0.4
0.3
0.2
0.1
0
-­‐0.1
Year
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
-­‐0.2
-­‐0.3
-­‐0.4
US
Earnings
Chg
in
S&P
500
OECD
Index
of
US
US
per
capita
Healthcare
1
Healthcare
costs
expressed
as
an
index
in
PPP
terms

3.
The
most
innovative
insurer
in
the
industry,
United
Healthcare
has
made
huge
investments
in
the
capture
of
data
for
different
types
of
procedures.
In
fact
the
whole
philosophy
behind
ACA
is
to
bring
more
price
discovery
to
employers.
What
we
will
discuss
in
this
paper
is
the
ways
in
which
investments
in
“healthcare
price”
discovery
will
generate
outsize
profits
for
those
industry
actors
who
invest
to
“change”
the
current
business
model.
The
data
shows
that
the
rate
of
change
of
healthcare
inflation
is
decreasing.
The
fastest
decline
as
can
be
seen
in
the
chart
above,
has
been
in
the
Medicare
index,
which
as
we
can
see
is
now
approaching
1%
yearly
change.
The
commercial
index
is
the
one
which
has
remained
stubbornly
above
5%.
The
“commercial
index”
developed
with
Milliman
and
S&P
is
an
average
of
commercial
hospital
insurance
and
commercial
professional
services
insurance.
The
methodology
of
how
this
information
is
gathered
is
important
because
as
we
will
show,
the
best
way
in
which
to
reduce
overall
costs
in
the
industry
is
through
improved
access
to
price
discovery.
As
with
all
price
information
exchanges,
there
will
be
an
inevitable
move
towards
a
centralized
inventory
and
price
database,
which
will
allow
for
better
price
discovery.

4.
The
current
way
that
the
index
data
is
collected
is
as
follows:
Clearly
if
we
can
discern
a
more
efficient
way
for
the
industry
to
be
organized,
those
who
will
change
and
be
able
to
restructure
their
costs,
so
as
to
engage
in
a
more
compelling
way
with
the
buyers
“value
chain”,
then
the
“economic
value”
added
will
accrue
most
to
the
first
movers,
as
we
have
seen
time
and
again
from
Amazon.com
to
Google.
As
we
know,
we
are
overwhelmed
with
data
and
information.
The
key
strategic
advantage
is
therefore
the
organizing
of
data
in
a
way
that
can
provide
empirical
insights
into
how
best
to
“disrupt”
existing
business
model
for
greatest
change.

5.
CURRENT
HEATHCARE
INDUSTRY
STRUCTURE:
The current system has insurers at the center of the system. It is the insurer who contracts
on a group basis with the employer, on the basis of actuarial risks of the employers
insured population. The insurance industry claims that it has grown premiums in
response to its own regular underwriting cycle, and the major increases from 2000 were,
the insurers claim, a s result of managed care to catch up from the mid 1990’s.
However, more recently we have witnessed extensive consolidation and concentration of
market power in insurance industry majors, with increased profit margins and a huge
outperformance of insurers relative to the S&P 500 index. This cycle peaked in 2006.
Another important aspect of the US Healthcare industry is the percentage of National
Healthcare Expenditures spent on administration as a percentage of GDP. The US still
has the highest ratio at 7.3% in 2003 vs. the next highest, Germany at 5.3%. Most
analysts think that the streamlining of the many diverse administration systems may save
between $32 to $46 billion per annum. These are not insignificant figures.
At Gnostam Consulting, [http://www.gnostamconsulting.com] we are devising ways in
which we can assist the large-scale hospitals who are the biggest $ consumers of the US
healthcare budget on ways to achieve savings and efficiency. This is important because
the first mover will go well beyond a “one-time-savings” improvement, and in our view
help develop a long term investment which will yield very significant net gains in
economic value.

6. One time savings include:
• Reduction of inappropriate care;
• Changing incentive system, “fee for service” to one which rewards clinical value
of cost effectiveness;
• Use price discovery methods to ensure that market power of insurers, other
provider and pharma providers is blunted;
• Higher ratio of primary care to specialty care physicians;
• Lower barriers to preventative care, that reduce need for ER and complications of
chronic disease;
• Reduction in duplication, conflicting care;
• Improve healthcare delivery systems with access to price discovery;
• Reduction in burden of overhead expenses.
Long Term value generating strategies:
• New IT data driven, empirical price discovery information data bases which
compare cost and clinical outcomes;
• Comparison of wage and prices for common purchases;
• Strategies to deal with chronic diseases and expenditures associated with treating
the symptom not the cause.
© Gnostam Consulting 2013
BELOW
ARE
DIAGRAMS
OF
PROPOSED
ORGANIZATION
OF
MANDATED
STATE
EXCHANGE
FUNDTIONS

8. DIAGRAM
OF
STRUCTURE
OF
US
HEALTHCARE
INDUSTRY: