Cost Reduction of U.S. Healthcare

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Memorandum
To: Dr. Robert I. Grossman, CEO NYU Langone
Date: November 7, 2012
Re: Restructuring Health Care Payment and Improving Quality
The U.S. devotes a much larger share of its national income to health care than any other country in the world. However, the gross over-spending has not yielded the healthiest population (OECD Health data, 2009). Our economy is continually growing at a lesser rate than healthcare spending. The need to restrain this unsustainable growth in health care costs is often overlooked in favor of reform focused on expanding access to care. Attention must be focused on restructuring the payment process with the goal of reducing costs without sacrificing quality. With an aging population comes chronic conditions that require efficiently coordinated care. About 10 million Americans require long term care, 42% of which are under 65 with disabilities or chronic illness (Rowland, 2009). It is also not uncommon for chronic patients to receive duplicate testing, conflicting treatment advice, and expensive prescriptions from multiple practitioners. The Medicare system was a fee-for service payment plan, until a prospective payment was introduced. A contributing factor to the problem has been the trending of hospitals and insurers to better cover acute episodes rather than preventative or ongoing care. For example, the average length of stay is down from less than 8 days in the 1970s to 4.6 days in late 2000’s. In a similar trend, gross outpatient revenues as a percentage of all hospital revenues was 37% in the mid-2000’s as compared to 16% in the 1980’s (HPAM-GP 1830, 2012).

Currently the health care system’s financial incentives are not structured to reward effective and efficient care. Payment systems pay doctors, hospitals and providers for services (fee for service). Oddly, when care is efficient, the savings go back to the payer, insurance companies or the federal government rather than the hospital. These factors, in...
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