LDI Health Policy SeminarLDI Health Policy Seminar

“Will Health Costs Bury “Will Health Costs Bury American Manufacturing?” American Manufacturing?”

A View from DetroitA View from Detroit

Mark A. Kelley, M.D.Mark A. Kelley, M.D.

CEO Henry Ford Medical GroupCEO Henry Ford Medical Group

Henry Ford and Detroit - 1915Henry Ford and Detroit - 1915

Henry Ford and Detroit - 1915Henry Ford and Detroit - 1915• Explosive growth in auto Explosive growth in auto

production 1913-15production 1913-15

• 300,000 cars annually = 1/3 300,000 cars annually = 1/3 of the world’s productionof the world’s production

• Recruited employees from Recruited employees from immigrants and the Southimmigrants and the South

• Large new plant on outskirts Large new plant on outskirts of town Highland Park – first of town Highland Park – first major assembly linemajor assembly line

Henry Ford’s “Industrial Approach” Henry Ford’s “Industrial Approach” to Health Careto Health Care

• Employed full-time Employed full-time physicians, some recruited physicians, some recruited from the Eastfrom the East

• Full hospital care for fixed Full hospital care for fixed price ($5/day = daily wage); price ($5/day = daily wage); no insuranceno insurance

• Latest technology – hospital Latest technology – hospital designed by Ford engineersdesigned by Ford engineers

The Auto Industry Labor Movement The Auto Industry Labor Movement Brief HistoryBrief History

1930-19401930-1940• UAW founded in 1930s UAW founded in 1930s

by Walter Reutherby Walter Reuther

• After civil unrest, labor After civil unrest, labor organized in Big Three organized in Big Three (Ford last in 1941)(Ford last in 1941)

• Major issues; working Major issues; working conditions, hourly conditions, hourly wageswages

The Auto Industry Labor Movement The Auto Industry Labor Movement Brief HistoryBrief History

1941-19501941-1950• Post war boom, Post war boom,

suburban expansion, suburban expansion, national highway national highway systemsystem

• American auto American auto reigned supreme; reigned supreme; suburban livingsuburban living

The 1950’s – Labor’s HeydayThe 1950’s – Labor’s Heyday

• 19501950: GM grants : GM grants pensions and automatic pensions and automatic wage adjustmentswage adjustments

• 19551955: Ford agrees to : Ford agrees to unemployment benefitsunemployment benefits

• 19561956: UAW creates : UAW creates health insurance health insurance company – Health company – Health Alliance Plan (HAP)Alliance Plan (HAP)

• Mid 1950sMid 1950s: Major : Major strikes in steel, coal strikes in steel, coal industryindustry

Henry Ford Hospital – 1950sHenry Ford Hospital – 1950s

• Regional academic Regional academic medical center, support medical center, support of Ford familyof Ford family

• Ranked #6 hospital in Ranked #6 hospital in the nationthe nation

• Major national training Major national training centercenter

• ““Go-To” place in Go-To” place in MichiganMichigan

Troubles in the Motor CityTroubles in the Motor City1965-19751965-1975

• Urban riots cripple Urban riots cripple Detroit Detroit

• Invincible image of Invincible image of auto industry auto industry damageddamaged

• Racial polarizationRacial polarization• Massive population Massive population

shift to suburbsshift to suburbs• ““Athens of the Athens of the

Midwest” shatteredMidwest” shattered

Troubles in the Motor City Troubles in the Motor City 1965-19751965-1975

• 1973: Oil crisis 1973: Oil crisis demands fuel demands fuel efficient carsefficient cars

• 1970s: American 1970s: American auto quality faltersauto quality falters

• Honda, Toyota gain Honda, Toyota gain market foothold, via market foothold, via cost and qualitycost and quality

Henry Ford Hospital Henry Ford Hospital Becomes a SystemBecomes a System

• ““White flight” to White flight” to suburbs fractures the suburbs fractures the city infrastructurecity infrastructure

• Hospital remembered Hospital remembered as staging area for as staging area for National GuardNational Guard

• Launches first Launches first “satellite” to attract “satellite” to attract suburban patientssuburban patients

The 1980s: Save the Industry!The 1980s: Save the Industry!• Federal bailout of Chrysler CorporationFederal bailout of Chrysler Corporation

• Focus on quality (“Job #1” at Ford)Focus on quality (“Job #1” at Ford)

• Young and frightened workforce Young and frightened workforce (“baby boomers”)(“baby boomers”)

• More partnering with labor and More partnering with labor and managementmanagement

Big Three Approach to Big Three Approach to Health Care – 1980-90sHealth Care – 1980-90s

• Predictable costs without labor strifePredictable costs without labor strife• HMO prepayment attractive for:HMO prepayment attractive for:

Population-based preventionPopulation-based prevention Community-based premiumCommunity-based premium Little cost to employeesLittle cost to employees

• Arms length relationship with health care, Arms length relationship with health care, except in the workplaceexcept in the workplace

This strategy, fueled by managed This strategy, fueled by managed competition paradigm, worked well—for a competition paradigm, worked well—for a whilewhile

HFHS Response 1980-99HFHS Response 1980-99

• Suburban competitionSuburban competition

• HMO (HAP) purchased for HMO (HAP) purchased for access to UAWaccess to UAW

• System grows suburban System grows suburban primary care and acquires primary care and acquires regional hospitalsregional hospitals

• Integrated delivery system Integrated delivery system as survival strategyas survival strategy

OOPS!! Health Costs Are Out of OOPS!! Health Costs Are Out of Control (Again)Control (Again)

GDP per Capita to % GDP Spent on GDP per Capita to % GDP Spent on Health Care: OECD CountriesHealth Care: OECD Countries

Source: Anderson, Health Affairs 22:2003Source: Anderson, Health Affairs 22:2003

0

2

4

6

8

10

12

14

$0 $10,000 $20,000 $30,000 $40,000

Failure of Employer-Based Failure of Employer-Based Health InsuranceHealth Insurance

• Demand for choice defeated HMO Demand for choice defeated HMO strategystrategy

• Cannot limit provider selection; health Cannot limit provider selection; health care delivery fragmentedcare delivery fragmented

• Liability risk of restricting accessLiability risk of restricting access• Populations do not cost $$; high risk Populations do not cost $$; high risk

patients account for 80% of costspatients account for 80% of costs• Inability to curb technology growthInability to curb technology growth

Source: Enthoven, Health Affairs, Spring 2003Source: Enthoven, Health Affairs, Spring 2003

The Big Three’s Health Crisis The Big Three’s Health Crisis in 2003in 2003

• Flat HMO premiums in 1990s spurred Flat HMO premiums in 1990s spurred temporary profits temporary profits

• Rebound of double digit premium inflationRebound of double digit premium inflation• Unique problems:Unique problems:

Aging workforce (average age 45)Aging workforce (average age 45) Lifetime health coverage beyond MedicareLifetime health coverage beyond Medicare Higher actuarial risk workforceHigher actuarial risk workforce

None of these problems are shared by None of these problems are shared by international competitors!international competitors!

11.7%

18.2%17.7%

13.2%

10.4%

8.1%

6.5%

-0.4%-0.5%

2.1%3.2%

5.7%

9.0%

11.0%

13.5%14.0%

12.0%

10.0%

8.0%

-2.0%

3.0%

8.0%

13.0%

18.0%

1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

2001E

2002E2003E

2004E

2005E2006E

Annualpremiumincreases

Source: Salomon Smith Barney Research estimates based on data from CMS, Milliman USA, AAHP, KPMG.

Premium Inflation is SignificantPremium Inflation is SignificantPremium Inflation is SignificantPremium Inflation is Significant

MD

I/P

Rx

HMO Premium vs. HMO Cost Increases 1988 - 2006

Big Three Pays $900 More for Health Big Three Pays $900 More for Health Care per VehicleCare per Vehicle

Reasons:Reasons:• Rich post-retirement Rich post-retirement

benefits for aging benefits for aging workforceworkforce

• Workers retire well Workers retire well before age 65before age 65

• First $ coverage for First $ coverage for most hourly workersmost hourly workers

• No national policy on No national policy on technology or drugstechnology or drugs

Big Three’s Challenges Reflect Big Three’s Challenges Reflect Those of the NationThose of the Nation

Big Three could Big Three could notnot predict or control: predict or control:• improved life expectancyimproved life expectancy

• technology and pharmacy proliferationtechnology and pharmacy proliferation

• American health care consumerismAmerican health care consumerism

Big Three Big Three shouldshould have predicted effects of: have predicted effects of:• the baby boomer workforcethe baby boomer workforce

• life time health care benefitslife time health care benefits

• rich pharmacy benefitsrich pharmacy benefits

These are the very same issues facing Medicare!These are the very same issues facing Medicare!

The Auto Industry’s Position on The Auto Industry’s Position on Health Care - 2003Health Care - 2003

1.1. The business case for quality worked well The business case for quality worked well for the Big Three manufacturers – health for the Big Three manufacturers – health care should follow!care should follow!

Facts:Facts:• There There isis waste in health care, uneven quality, waste in health care, uneven quality,

little standardizationlittle standardization• Health care Health care notnot organized for quality and cost organized for quality and cost• Health care is delivered Health care is delivered locallylocally as a cottage as a cottage

industryindustry• Human behavior is not easily engineeredHuman behavior is not easily engineered

USA Health Expenditures USA Health Expenditures Annual Percentage GrowthAnnual Percentage Growth

Source: Levit, Health Affairs 21:2002Source: Levit, Health Affairs 21:2002

0

5

10

15

20

25

1988 1993 1997 1998 1999 2000

NHE

Hosp

MDs

Products

Drugs

Hospital Days/Capita 2000Hospital Days/Capita 2000

00.20.40.60.8

11.21.41.61.8

2

CAN GER NETH UK USA

MD Visits/Capita 2000MD Visits/Capita 2000

4.8

5

5.2

5.4

5.6

5.8

6

6.2

6.4

6.6

Canada NETH AUST UK USA

CT Scanners per Million Pop., 2000CT Scanners per Million Pop., 2000

0

2

4

6

8

10

12

14

16

18

CAN GER SWE UK USA

Angioplasties/100,000Angioplasties/100,00019991999

0

50

100

150

200

250

300

350

400

450

CAN GER AUS UK USA

Pharmaceutical Costs per Capita-2000Pharmaceutical Costs per Capita-2000Source: Anderson, Health Affairs 22:2003Source: Anderson, Health Affairs 22:2003

$0

$100

$200

$300

$400

$500

$600

Canada GER Japan UK USA

2. 2. Health care costs too much Health care costs too much and providers drive the and providers drive the inflationinflation

Facts:Facts:• UAW contracts are too richUAW contracts are too rich• Hospital and pharmacy costs have Hospital and pharmacy costs have

dominated inflationdominated inflation• U.S. doctors earn relatively the same U.S. doctors earn relatively the same

western counterpartswestern counterparts• Utilization of health services same as Utilization of health services same as

other western nationsother western nations

UAW Public Position on Health CareUAW Public Position on Health Care• Etiology of problem:Etiology of problem:

Administrative costs of private Administrative costs of private insurance insurance

For profit components of the For profit components of the industryindustry

““Medical arms race”Medical arms race”• Solution: National health insurance Solution: National health insurance

and policyand policy• Positions:Positions:

Support pharmacy benefitSupport pharmacy benefit Oppose health vouchers/defined Oppose health vouchers/defined

contributionscontributions Support strong CON processSupport strong CON process

Source: UAW website 2003Source: UAW website 2003

You be the Quarterback #1You be the Quarterback #1

What would be your immediate What would be your immediate health care strategy if you were:health care strategy if you were:

– The UAWThe UAW

– the Big Threethe Big Three

Features of 2003 UAW ContractFeatures of 2003 UAW Contract

UAW Gains:UAW Gains:

• 2-3% wage increase 2-3% wage increase (beyond COLA) last two (beyond COLA) last two years of contractyears of contract

• Expanded medical Expanded medical coverage; retirees coverage; retirees protectedprotected

• Pension increases for Pension increases for futurefuture retirees retirees

• Unionize suppliersUnionize suppliers

Features of 2003 UAW ContractFeatures of 2003 UAW Contract

Company Gains:Company Gains:• Bonuses instead of wage Bonuses instead of wage

increases (preserves the increases (preserves the base)base)

• No increases for current No increases for current retireesretirees

• Permission to sell/close Permission to sell/close plantsplants

• Tighter prescription Tighter prescription controlcontrol

UAW Medical Benefits – UAW Medical Benefits – Contract HistoryContract History

• 1993:1993: Fully paid benefits, no new co-pays Fully paid benefits, no new co-pays • 1996:1996: Drug co-pay up from $3 to $5. new Drug co-pay up from $3 to $5. new

members must enroll in HMO for two yearsmembers must enroll in HMO for two years• 1999:1999: Expanded preventive care; mandatory Expanded preventive care; mandatory

HMO enrollment for four yearsHMO enrollment for four years• 2003:2003: Expanded preventive care; three tier drug Expanded preventive care; three tier drug

co-pay; $10 office co-pay; HMO requirement co-pay; $10 office co-pay; HMO requirement droppeddropped

Source: Detroit Free Press 9/19/2003Source: Detroit Free Press 9/19/2003

Henry Ford Health System’s Henry Ford Health System’s PerspectivePerspective

• FinancialFinancial Crisis 1998-2001 because of capitation and flat Crisis 1998-2001 because of capitation and flat

premiumspremiums Stability with double digit premium riseStability with double digit premium rise Dilemma of owning an HMODilemma of owning an HMO Autos want to beat health inflation (somehow)Autos want to beat health inflation (somehow)

• Changing Delivery TacticsChanging Delivery Tactics HMO paradigm forced Kaiser mentalityHMO paradigm forced Kaiser mentality Move to PPO allows balance of AMC and delivery Move to PPO allows balance of AMC and delivery

systemsystem AMC cannot survive on capitation – no marginAMC cannot survive on capitation – no margin

Henry Ford Health System’s Henry Ford Health System’s PerspectivePerspective

• PoliticsPoliticsUnderfunded, poorly managed MedicaidUnderfunded, poorly managed MedicaidFailing safety net in DetroitFailing safety net in DetroitAuto industry controls technology via Auto industry controls technology via

CONCONRecent legislation for HFHS suburban Recent legislation for HFHS suburban

hospitalhospital

Henry Ford Health System’s Henry Ford Health System’s PerspectivePerspective

• PatientsPatients Clueless about benefits (except pharmacy)Clueless about benefits (except pharmacy) Insurance coverage constantly shiftingInsurance coverage constantly shifting Two incomes commonTwo incomes common

• QualityQuality No progress in paying for quality (despite No progress in paying for quality (despite

Leapfrog)Leapfrog) Early discussions about chronic disease Early discussions about chronic disease

managementmanagement Autos view health care as an HR issueAutos view health care as an HR issue

You be the Quarterback #2You be the Quarterback #2

As the auto company exec in As the auto company exec in charge of health care, what is charge of health care, what is your long-term strategy to your long-term strategy to solve the health care problem?solve the health care problem?

What are the Options for the Big Three?What are the Options for the Big Three?

1.1. Reduce Health Care CostsReduce Health Care Costs• Curb health care technology proliferationCurb health care technology proliferation

Local: CON, HMOs as stall tacticsLocal: CON, HMOs as stall tactics National: No traction except in MedicareNational: No traction except in Medicare

• Push more cost decisions to employeesPush more cost decisions to employees PPO’s vs closed networkPPO’s vs closed network Higher co-pays (ERs)Higher co-pays (ERs) Tiered pharmacy benefitsTiered pharmacy benefits

• Other moves – difficult with national platformOther moves – difficult with national platform Reduce administrative costs/wasteReduce administrative costs/waste Chronic disease managementChronic disease management May see major employers alignMay see major employers align

Health Care’s “Closed Box”Health Care’s “Closed Box”

..

Health $$

Employee

Company

Govt

Health Providers

What are the Options for the Big Three?What are the Options for the Big Three?

2.2. Lobby for National Health Lobby for National Health System/More Medicare BenefitsSystem/More Medicare Benefits• Strong emphasis on prescriptionsStrong emphasis on prescriptions• Aggressive approach limited by:Aggressive approach limited by:

Lack of political will in WashingtonLack of political will in Washington Threat of increased taxesThreat of increased taxes

3.3. Other Tactics:Other Tactics:• Leverage local providers– only works in Leverage local providers– only works in

one industry townone industry town• Hit UAW contract harderHit UAW contract harder• Restrict future benefitsRestrict future benefits

What are the Options for the What are the Options for the Big Three?Big Three?

4.4. Doomsday Scenario: Doomsday Scenario: Move manufacturing off-Move manufacturing off-shoreshore• Developing countries have Developing countries have

lower costs (for everything)lower costs (for everything)• American demand for low American demand for low

price favors off-shoreprice favors off-shore• Detroit faces same crisis as Detroit faces same crisis as

Boston and NYC did in 1900sBoston and NYC did in 1900s

Irony: For Toyota, “offshore” is American South

HFHS Long Range TacticsHFHS Long Range Tactics

1.1. Work to Curbs Costs when PossibleWork to Curbs Costs when Possible• Chronic disease management (maybe)Chronic disease management (maybe)• Educate patients about purchasing Educate patients about purchasing

choiceschoices• Re-engineer practice (like manufacturing)Re-engineer practice (like manufacturing)

To improve accessTo improve access Reduce rework (quality and communication)Reduce rework (quality and communication) Use alternative methods (open access, e-mail, Use alternative methods (open access, e-mail,

group visits)group visits)

• Maximize leverage of a closed systemMaximize leverage of a closed system

HFHS Long Range TacticsHFHS Long Range Tactics

2.2. Diversify the Local Diversify the Local EconomyEconomy• Strong regional Strong regional

expertise in expertise in engineering, tooling, engineering, tooling, process improvementprocess improvement

• All these skills are All these skills are applicable to health applicable to health carecare

• Could Detroit have as Could Detroit have as much influence on much influence on health care as it did health care as it did on manufacturing?on manufacturing?

Will Health Care Costs Bury Will Health Care Costs Bury American Manufacturing?American Manufacturing?

YES – If current status YES – If current status quo prevails!quo prevails!– Auto industry will fail Auto industry will fail

but federal government but federal government will intervenewill intervene

– U.S. automakers are the U.S. automakers are the icons of American icons of American manufacturingmanufacturing

– Intervention: Fund Intervention: Fund current entitlements, current entitlements, recast the contractsrecast the contracts

Will Health Care Costs Bury Will Health Care Costs Bury American Manufacturing?American Manufacturing?

NO – Under several scenarios:NO – Under several scenarios:1.1. National health insurance National health insurance

paid by new taxes (levels the paid by new taxes (levels the playing field with other playing field with other countries)countries)

2.2. National Medicare policy is National Medicare policy is clear and provides:clear and provides:

a.a. MoreMore benefits (gets autos benefits (gets autos off the hook long-term)off the hook long-term)

b.b. LessLess benefits – will result benefits – will result in national brake on in national brake on drug/technology drug/technology proliferationproliferation

Will Health Care Costs Bury Will Health Care Costs Bury American Manufacturing?American Manufacturing?

NO – NO –

3.3. “Near Death” for “Near Death” for industry (like airlines) industry (like airlines) leads to union leads to union concessions (as in concessions (as in 2003 contract)2003 contract)

Will Health Costs Bury American Will Health Costs Bury American Manufacturing? -- ForecastManufacturing? -- Forecast

• ““Near Death” scenario Near Death” scenario has already begun (2003 has already begun (2003 contracts)contracts)

• Health care will be major Health care will be major agenda in 2008-12 agenda in 2008-12 elections, promoted by elections, promoted by auto industryauto industry

• Auto industry will try to Auto industry will try to catch the wave of catch the wave of disenfranchised retireesdisenfranchised retirees

Will Health Costs Bury American Will Health Costs Bury American Manufacturing? -- ForecastManufacturing? -- Forecast

Don’t Underestimate Don’t Underestimate the Power of the the Power of the

Baby Boomers!Baby Boomers!

– They make your carsThey make your cars– They stopped a warThey stopped a war– They toppled NixonThey toppled Nixon

WHEN PROVOKED,WHEN PROVOKED,

THEY VOTE!!THEY VOTE!!

Health Care in 1915Health Care in 1915

• Organized training only in Organized training only in the East – especially Johns the East – especially Johns HopkinsHopkins

• Standardized care in group Standardized care in group practice (Mayo Clinic, practice (Mayo Clinic, Cleveland Clinic)Cleveland Clinic)

• Advances in surgery and Advances in surgery and radiology, infectious radiology, infectious diseasedisease

• Life expectancy age 45; TB Life expectancy age 45; TB major cause of deathmajor cause of death

Big Three Big Three Health Strategy - 1990sHealth Strategy - 1990s

• Treat health care industry like another Treat health care industry like another supplier, focusing on quality and costsupplier, focusing on quality and cost

• Keep immediate costs down (wages) as Keep immediate costs down (wages) as trade-off for unknown future costs trade-off for unknown future costs (health and retirement)(health and retirement)

• Keep workers healthy to promote Keep workers healthy to promote productivityproductivity

Acces

sibili

ty &

Consu

mer

ism

Demogra

phics

– Agin

g Popula

tion

The National Health Care Cost DilemmaThe National Health Care Cost DilemmaHOW WILL COSTS BE

“CONTROLLED”2.64

Tri

llio

ns

of

Do

lla

rs

1.54

2002 2010

Health Data Collection and AnalysisSource: US Census and Centers

for Medicare and Medicaid Services

Man

aged

Car

e –

No Futu

re S

avin

gs

Med

ical

& P

harm

aceu

tical

Tec

hnology

US Population 2002

•280 Million•61.4 Million > 55•$5805 per capita

US Population 2010

•299 Million•75.1 Million > 55•$8708 per capita

•Return to Work Outcomes

•Chronic Disease Mgt

•Effectiveness Analysis

•Outcomes Analysis

•Cost/Quality Benchmarks

•Consumer Choice

Health

Car

e Cost

Michigan Manufacturers Survey 2003Michigan Manufacturers Survey 2003

• 80% of companies experienced double digit 80% of companies experienced double digit inflation health premiums in past yearinflation health premiums in past year

• 72% ranked health care first as most 72% ranked health care first as most important company issueimportant company issue

• Top reasons cited for rising costs: Top reasons cited for rising costs: prescription drugs, medical liability, prescription drugs, medical liability, inefficient health care, new technologiesinefficient health care, new technologies

• Health care top issue in employee relationsHealth care top issue in employee relations

Source: MMA website - mma-net.org 2002Source: MMA website - mma-net.org 2002