It’s been said many times over that the U.S. healthcare industry is a sick patient in search of a cure. The metaphor is a grim reflection of how the country is coping with an aging population, rising costs and an inefficient healthcare delivery system.

At a recent Milken Institute conference in Los Angeles, in which Wharton was a participant, a number of industry notables from both the buy-side and sell-side of the market crossed swords over the hurdles that the industry currently faces and disagreed about where responsibility lies for some of the problems. But they were in broad agreement about what should be done to combat rising healthcare costs and improve the quality of medical treatment that patients receive.

At the top of the list of industry improvements is the importance of evidence-based medicine as a tool to help rein in costs and provide more reliable medical treatment. Also on the list: greater transparency about individual physician and hospital performance; education that can help consumers make smarter, safer and more cost-effective decisions about their own care, and access to healthcare for those who are not covered.

According to Leslie Michelson, panel moderator and CEO of CaP CURE, the largest private charity that supports prostate cancer research, the changes that have occurred in the healthcare system over the last 50 years are trivial compared with what will take place in the next decade.

Healthcare spending currently accounts for 14.3% of GDP and is projected to rise to 17%, or $2.7 trillion, by 2011. How the healthcare system is revised and refurbished, he said, is “one of the most important issues our society is confronting in terms of politics, economics, philosophy and ethics.”

Rules of Evidence

Evidence-based medicine, a discipline that has been around for a little more than a decade, is the use of best evidence – up-to-date, valid, clinically important research – to make decisions about the medical care that individual patients receive. With physicians unable to keep abreast of hundreds of clinical studies, make sense of conflicting findings, and sift through available research for the most reliable and useful treatment conclusions, it is difficult to ensure that they provide the best care to patients.

Evidence-based medicine and evidence-based-medicine guidelines provide a counterweight, said Arnold Milstein, medical director of the Pacific Business Group on Health, the largest coalition of healthcare purchasers in the United States, and a consultant for Mercer Human Resource Consulting.

Milstein’s clients are Fortune 500 companies and consumer organizations such as the AARP and large labor union groups. Over the last few years, he said, these entities have begun to focus on costs and reliability in the healthcare system as a result of three forces: rising insurance premiums during a bear market, research about how the healthcare system is functioning, and a number of critical reports from the National Academy of Sciences about how well the U.S. healthcare system distributes biomedical technology.

RAND Corp., the Santa Monica, Calif.-based think tank, has estimated that people get the care they need and only the care they need just 50% of time, said Milstein. Research from Dartmouth has also explored the degree to which high variation in healthcare spending in specific regions of the country resulted in better patient health. There is accumulating evidence, said Milstein, that “excess quantity of care in the U.S. is actually overdosing the population with respect to their health outcomes.” Evidence-based medicine can help redress this problem by guiding appropriate treatment.

Bill Bracciodieta, a regional chief medical officer for Health Net Inc., a health insurance provider, agreed. Where there are more cardiac surgeons, for example, there is greater utilization of their services, creating a “misuse problem,” he said. There is also an “under-use problem” in which physicians do not treat medical ailments as aggressively as best practices recommend. Individuals suffering myocardial infarctions, for instance, are reportedly put on beta blockers only 50% of the time. The use of evidence-based medicine can reduce this variation on the supply side.

Physician, Heal Thyself

The panelists also agreed that there is a need for performance standards to be developed and disseminated for individual physicians.

Physicians turn to many different technologies to provide care to their patients. However, this variation isn’t always justified. In addition to a call for greater transparency about how effective physicians are at treating patients, there is a concomitant drive to develop clinical information-technology databases, disease registries and other processes that can help clinicians make responsible decisions about treatment.

Physicians are beset by a “Lake Wobegon effect,” said Milstein. They typically see no need to alter the way they make decisions and provide care for their patients. According to RAND, he noted, “physicians are on the evidence-based track about half the time.”

Wendy Everett, president of the New England Healthcare Institute, a non-profit health policy group, noted that there are not “six magical ways” to change physician behavior. But one barrier to physicians using evidence-based medicine, she said, is how physicians are trained. They’re taught to work alone rather than in teams, and they do not always see the outcome of their medical behavior. The industry must measure the outcome of what physicians do in the long term, it must develop metrics, and it must provide incentives to physicians to use treatments that are known to improve patients’ health, she said.

Health Net’s Bracciodieta took direct aim at physicians. “Physicians control 80% of healthcare costs with this little instrument,” he said, holding up a pen. “You get the behavior you incentivize.”

He pointed out that when he began practicing medicine in California in 1975, during what he described as the “golden age of medicine,” medical treatment was rarely questioned by health insurance providers. Two social contracts were put in place back then, he said. The first was that healthcare began to be seen as an employee entitlement. The second was that physicians began to see themselves as authority figures whose medical decisions should never be questioned or constrained by third parties.

Over the years, as the economy boomed and costs rose, employers swallowed premium increases of 6%, 7% and 8%, he said. The backlash against those cost increases did not occur until the last few years, when the economy worsened. Employers then began demanding more stringent “healthcare utilization management” and lower-cost premiums.

Higher Education

The panelists also uniformly agreed that consumer education about medical choices has been inadequate and must be improved. Andy Slavitt, president and CEO of HealthAllies, a health benefits provider based in Glendale, Calif., noted that consumers need access to better information about healthcare quality and outcomes so they “can begin to make real choices and can tell the difference between going to one hospital versus the other.” At the same time, health providers must be given incentives to share information about their practices, outcomes and medical error rates. All of this will drive people to become better consumers, he said.

Judith Bello, a senior adviser to Pharmaceutical Research and Manufacturers of America (PhRMA), a trade association of research-oriented pharmaceutical companies, emphasized the importance of public attitudes toward healthcare. Public education must “inculcate more personal responsibility for one’s health,” she said. Adults must model better behavior for their children.

While Americans have a high tolerance for automobile accidents, they have a low tolerance for risk in healthcare, Bello said. They expect to get better fast, they don’t want to have any side effects from medical drugs, and they don’t read label warnings and drug information inserts.

Milstein added that healthcare consumers must also begin to look not only at medical outcomes but at the cost-effectiveness of medical decisions. Those who spend the most money are essentially performance-blind, he said. They don’t make decisions based on the efficiency or quality reliability of individual doctors and hospitals; moreover, “pocket-protection” as a result of health insurance coverage makes the heaviest users price-insensitive.

No Free Lunch

Annual healthcare spending increases that are some multiple of inflation should be expected, given the aging of the population and the demand for expensive new technologies, said Slavitt of HealthAllies. But healthcare costs that are increasing annually at 15% put too great a strain on the system. To cope with this in the short term, large corporations are passing more of these costs to their employees, jacking up their premiums, increasing co-pays and trimming retiree benefits.

In 1999, he noted, General Electric Co. spent $900 million on healthcare for employees and retirees; last year it spent $1.6 billion, and in 2007 it is scheduled to spend $3.6 billion. Between now and a few years down the road, when the healthcare funding problem will be acute across the corporate landscape, something must change, he said.

What must change, agreed the panelists, is that the uninsured need to be covered. With 42 million people uninsured – 82% of whom are working – their healthcare costs are driving up overall costs. It is imperative to “make those hidden costs more visible,” said Slavitt.

Thomas Priselac, president and CEO of Cedars-Sinai Health System, the largest nonprofit hospital in the western United States, agreed that to manage escalating costs, providing access to healthcare for people who are not covered must be high on the list. Currently, their costs – as well as some of the costs of treating Medicare and Medicaid patients – are borne by others in the system.

Studies indicate that 25% of the increase in commercial insurance premiums reflect efforts on the provider side to make up for structural underfunding of what it costs to take care of patients covered by Medicare and Medicaid, said Priselac. He added that there’s a belief “out there” that “somehow we’re not paying for that [although we are].”

Follow the Money

Everett, the New England Healthcare Institute president, pointed out that the industry must also focus on where money is spent. She noted that according to studies, 50% of health status – what makes people ill or well – is determined by health behavior, such as whether or not a person smokes or wears a motorcycle helmet. Another 20% of health status is attributable to environmental factors such as living in an area with clean air and clean drinking water, 20% to genetics and 10% to access to the healthcare delivery system.

Of the $1.4 trillion spent annually on healthcare, she said, 80% is devoted to that final 10% that determines people’s health status; only about 4% is devoted to educating people about how to improve their health behavior. With $150 billion spent annually to treat smokers and $117 billion to treat obesity, she said, increasing the money spent educating people about how their behavior affects their health is a far more cost-effective use of dollars.

In the future the emphasis must be shifted upstream from managing diseases to preventing them. In addition, low-tech systems that can be used to help manage diseases without visits to the doctor’s office should get wider distribution, she said. A technology such as the Alere scale, which transmits a patient’s weight and other symptoms from the patient’s home via telephone to a clinician’s office, where a nurse can monitor the patient’s condition and respond to significant changes without delay, should be used more widely. This technology can keep patients in better health and can help avoid repeated, costly visits to the doctor’s office.

The problem, however, is that the incentives in place are sometimes misaligned, making it difficult for new technologies to get accepted. While a new drug or technology might produce better outcomes than an existing treatment, there can be built-in resistance to its adoption. An example is the recent introduction of Gleevec, a drug produced by Novartis Pharmaceuticals Corp. to fight chronic myeloid leukemia. While it is expensive – about $25,000 per year – it can obviate the need for a $200,000 bone marrow transplant from the Dana-Farber Cancer Center, said Everett. The drug is potentially beneficial to patients, but causes another part of the healthcare industry “to want to act differently,” she added.

Policy Choices

Some of the changes in the healthcare industry can’t be instituted by healthcare providers working with physicians and consumer advocacy groups. Instead, they involve shifts in policy. Priselac, the head of Cedars-Sinai Health System, argued that healthcare is heading into a blind alley because of problems resulting from the lack of a policy framework. His controversial suggestion is that emergency and trauma centers be financed the way the police and fire services are – that is, outside the traditional-care delivery system.

His hospital is a Level One Trauma Center in Los Angeles. Four years ago its emergency department handled 50,000 visits per year; now the figure tops 70,000 visits annually. Not looking at how the healthcare delivery system is financed is “leading us to something no one will ultimately be happy with,” he said.

Slavitt, the HealthAllies CEO, suggested that health insurance should function like a homeowner’s policy – basic insurance should be cheap, while more comprehensive coverage should be more expensive. That would ensure that everyone gets the basic care they need, while the rest would be rationed.

PhRMA’s Bello focused on the U.S. legal system and policy choices. Patients need to be aware there are “difficult tradeoffs called policy choices,” she said. The cost of medical malpractice, for instance, has driven ob/gyn specialists out of certain geographic areas. Medical devices are pricier in the United States than they are elsewhere. All this, she argued, is the result of the nation’s tort system. With more decisions in U.S. courtrooms made by juries than by judges, more class-action lawsuits, and contingency fees for trial lawyers, she continued, “we’ve made choices about our legal system that have ramifications in our healthcare system, and we need to address them.”

Bello added that while people run in marathons to help raise money for cancer and drug research, “patents aren’t very popular and neither are pharmaceutical prices.” People must “recognize [that] if we want to reap the fruits of innovation, we must support the policies that encourage investment in this very high-risk area where it costs on average $800 million to discover a drug, over 10-15 years, with a high failure rate,” she said.

She also pointed out that Washington must find a way to escape silo budgets. “Spending more for a particular therapy isn’t necessarily a bad thing if it’s the most cost-effective expenditure that yields better healthcare,” she said. Today spending on diabetes is 400% of what it was in 1992 because better medicines and better guidelines exist, and because the healthcare industry is trying to do a better job at disease management.

In the end, despite their differences, the most pressing thing that all the panelists agreed on is that the time to make changes in the healthcare system is now.