There’s cause for optimism about the future of health care, according to panelists who discussed the topic at the Wharton Economic Summit 2013, held in New York City on March 7. While each panelist agreed on the enormity of the challenges posed by rising health care costs, increased demand and the need to rein in spending while still being patient-centric, all believed that the outlook for health care would be better by the end of the decade.

Moderator Ezekiel Emanuel, professor of health care management at Wharton, laid out just how large the challenge is by putting in context the $2.87 trillion spent in the U.S. on health care in 2012: That figure is larger than the entire French economy and is just behind the German economy. The long-term health of a country is inextricably tied to the status of health care and what a country does to control inflation and health care spending, argued Emanuel. “If we don’t control health care inflation and health care spending, deficits will go on forever, and we will probably torpedo the economy,” he said.

There are numerous paradoxes to health care, which were pointed out by panelist Uwe Reinhardt, professor of economics and public affairs at Princeton University. One is that it is among the highest-value sectors, yet it is also riddled with waste. According to Reinhardt, economists contend that what is spent on health care yields benefits far in excess of the expenditures. But the same economists estimate waste at between 27% and 50%. “If you have a very nonlinear input/output function where input is health care and output is the benefits we derive from it, it can very easily be true that on average we get our money’s worth, but the increments buy less and less value,” he said.

Another paradox is how health care is an engine of the U.S. economy, responsible for approximately 18% of the 27 million jobs that were added between 1990 and 2008. Yet it has also become what Reinhardt called the “Pac-man of the economy — chewing up everything … eating up American workers’ paychecks.”

It has also been eating up the budgets of state governments, with many of them taking money away from education. “The gross value added by the American health care system is enormous and stunning. But if you subtract from it the opportunity costs of not educating our kids, etc … then that is dubious,” he said. “We have to address the waste.”

Creating Incentives

Gary Gottlieb, president and CEO of Partners HealthCare, provided a broad perspective on how providers can influence health care costs. Partners is the parent company of multiple hospitals in the Boston area as well as a half-dozen community hospitals, a network of some 6,000 physicians, an in-home service provider and an insurance company.  

Partners has taken a multi-pronged approach: It has reopened its contracts with commercial payers, taken lower increases in rates than were promised and moved fee for service payments to its primary care doctors. “We want everybody to essentially have some skin in the game and be able to redesign care and make it more effective and efficient, so we’re holding the risk at the institutional level and creating incentives,” Gottlieb said. “Some of those incentives are around the way that we use resources, but others are around quality of care, patient communications, a set of strategic components to use IT and other elements of telemedicine, and other components that we see as greater efficiencies.”  

Alex Gorsky, CEO of Johnson & Johnson, spoke about the challenges posed by the demographics, the need for continued innovation in understanding and managing various diseases, and how to apply innovation going forward.

He noted that since 1950, the average American’s life span has been extended by approximately two decades. “The good news is we’re living longer lives … and the challenge is that we’re living longer lives and there’s a heck of a lot more of us,” he said. More good news from Gorsky: the ability to control such conditions as cholesterol and cardiovascular disease, and that AIDS is no longer a death sentence but a chronic disease.

The outlook for other widespread diseases, such as Alzheimer’s and Type 2 diabetes, is less encouraging, he admitted. “While we’re making some progress, we have got a tremendous amount of work to do. Hence, we need to continue to innovate to understand [these diseases] because likely one of the biggest dents that we can make in health care costs would be a vaccine for Alzheimer’s or a way of treating it better.” That would improve not only the patient’s quality of life, but increase the productivity of caregivers.

There is great potential for innovation in targeted, personalized therapies, Gorsky believes. “This is where innovation is going to change pretty dramatically. …How do we bend these diagnostics to predict who’s going to respond, and who’s not going to respond?” Doing so would increase efficacy rates and make treatment both more efficient and effective.

Simplicity is also something the industry must strive for, he stated. “How can we take a knee, or hip, or shoulder replacement or procedure and rather than somebody having to be out for two to three weeks, how can we get them up and moving even faster?”

Finally, the industry must find innovative ways to help people change to healthier behaviors to prevent disease and stay well longer. “It’s going to be incumbent upon all of us to figure it out,” he said. “It’s going to take a lot of new kinds of partnering.”

Pressure to Reorganize

Bob Kocher, a partner at Venrock, says from the investing perspective, the outlook for health care is promising. “We’re very excited about health care because we think it will continue to change even faster than it has in the last couple of years.” The change will be driven by three factors: public policy, such as the affordable care act; increased demand; and cost pressure.

“My job is to make health care better sooner, and it’s through objective imagination, speed, urgency, disruption — to nudge, to prod and to help people actually think about how to reorganize the market,” Kocher said. He noted that in every part of health care that Venrock studies, they find markets that are extremely asymmetric. “In every city in the country, for every procedure that you can get, prices will vary by more than 100% within a small circle.” Kocher added that there is often little correlation between price and value, and consumers usually have no way of judging value. Giving patients more information and transparency about value will help drive better choices, he believes.

Demand, the second element of change, is being driven by demographics and disease: There are more people in the age group that consumes the most health care — seniors — and more of them need treatment or management for diseases.

Cost pressure may be the biggest factor driving change. Kocher pointed out that the $20,000 a year spent on health care by the average American family is the most expensive thing they will buy — and there is no participant in the health care ecosystem that can absorb higher costs. “In a world where states can’t pay more, the federal government can’t pay more and an employer actually can’t pay more … that’s going to put a lot of pressure on the system to reorganize itself and actually meet that demand in ways that make more value.”

According to Kocher, having better control over the administrative area is essential for lowering costs and boosting productivity. “For every doctor, there are 15 people behind them in the health care system — six of them who have critical roles, and the other nine are administrators.”

The final area for improvement, Kocher noted, is in clinical optimization. “I think that we’ll actually get more benefit from redesigning how we use the therapies we have today instead of buying new ones over the next decade,” he said.    “Care has gotten really complicated. We treat everything as if it was cancer. And while that seems great at first … nobody is managing the outcome that matters or the risk.”

Innovation is ‘Critical’

Reinhardt asked Gorsky about his belief in the need for continued innovation in light of Kocher’s statement about better use of current therapies. One doesn’t rule out the other, according to Mr. Gorsky.

“I would agree that’s absolutely an essential part — making sure that the current things that we have in place are used the right way,” he said. “We can do a better job of having a checklist approach, a best practices approach in many of these areas, and let’s go there first before necessarily looking to the more expensive, perhaps marginally better alternative.” Yet that approach is not sufficient, he believes. “I think — for a lot of the reasons that I mentioned — that if we don’t continue to innovate in these other areas, the cost curve is going to continue to go up. … Innovation may look different than we traditionally thought about it, but it’s going to be critical for our success.”

Another area where new thinking is needed is personalized medicine, according to Gottlieb, responding to Kocher’s questions about its cost-effectiveness. While it is not a panacea, Gottlieb described it as an “opportunity; one of a number of opportunities. It is an important area to pursue. It’s an opportunity to think about medicine in a different way, and the way we’ve been thinking about it is severely inefficient.”

Gorsky spoke of the potential dangers of over-managing outcomes and relying on impersonal data in response to a question from the moderator. Emanuel asked Gorsky his opinion of the Patient Center Outcome Research Institute (PCORI), which does comparative effectiveness research on various interventions.

“At the end of the day, we realize that it’s in everyone’s best interest to make sure that we’re getting the best treatments to the people who are going to be needing them,” said Gorsky. “It’s the unintended consequences that we have to be very leery of. Someone made the comment earlier that we’re all for a decrease in health care cost until it gets to our mother. We have to be very thoughtful and very deliberate that … we remain patient centric … in everything that we’re doing.”