Healthcare costs too much, and we don’t get enough of the healthcare that we need. This is our core problem in one word: “productivity.”

The obvious difficulties of healthcare in the U.S., where we can’t seem to take care of everyone, millions are saddled with coverage that is too expensive for them to really use, Medicaid is straining state budgets, people are still being bankrupted by healthcare at an alarming rate—the whole rambling disjointed Rube Goldbergian mess we call a system—all add up to this: We are not producing the value people need at a cost they can afford.
It’s confusing. It’s a conundrum.

There famously are claims that greater productivity is not possible in healthcare by its very nature. Yet the healthcare economy is obviously hollow. With order-of-magnitude price spreads, one-third or more of every dollar needlessly spent and widespread overtreatment of anyone with the right coverage, across the field we are doing many things that don’t need to be done at all, or doing things that must be done but do not contribute to value for the customer, all while charging much higher prices than other high-cost healthcare economies.

There must be a way out of this.

Let’s look at this from three angles: How we are doing, the nature of the problem and sources of solutions.

How are we doing?

We seem to have turned some kind of corner. We have “bent the cost curve.” Since 2008, increases in national medical expenditures have been nearly flat, matching or below increases in the economy as a whole—over a period in which tens of millions have newly gained healthcare coverage. It’s a pretty astonishing result.

The big question is why. Especially at first, many commentators said this Great Flattening was obviously a blip, a result of the Great Recession that began in late 2008. Later, as it continued, Obamacare supporters took credit for it: “See? It’s working!” Meanwhile, I and some others have suspected all along that there is a strong structural factor, neither recession nor Obamacare, but a result of growth in alternative value-based payment systems that erode the traditional code-driven fee-for-service system.

The cause of this flattening changes how we see the future. Whatever was due to the Great Recession evaporates as the economy resumes its growth. Whatever is due to Obamacare will last as long as Obamacare lasts—but Obamacare’s effects, where they exist, are relatively weak and will not puncture the hollow healthcare economy.

Changes in the ways we are paid, though, can puncture that economy. As these changes broaden across the healthcare economy, through private insurance and new Medicaid systems, and through direct payment from customers (including employers, pension plans and other big payers), they have the power to drive the cost curve negative and eventually bring us to a general cost level far lower than today’s. These structural payment shifts are much more powerful levers of change than any other trend in healthcare today.

How important is each of these causes?

The timing gives us some clues. The Great Flattening seemed to appear the moment that Barack Obama was elected president. Yet the notable lack of a magic wand in any photo of him indicates that this is probably a coincidence.

That was also the moment the Great Recession seemed to reach its deepest point. Yet shifts in national medical expenditures historically tend to lag recessions by a year or two. So the fact that the Great Recession and the Great Flattening came at the same moment with little lag suggests that there at least were other factors in play.

Obamacare, of course, was not enacted until early 2010. The provisions of the Affordable Care Act that were intended to lead to “affordable” care—such as the introduction of value-based payment systems through Medicare, the formation of accountable care organizations, and increased competition among insurers to offer lower premiums, leading to greater pushback on providers for lower costs—all would play out over years.

Meanwhile, offering real coverage to young people, to people with pre-existing conditions and eventually to the tens of millions of uninsured, would certainly add immediate costs. There was indeed an uptick in the healthcare cost curve in 2014, the year the ACA was fully implemented. Many speculated that the Great Flattening was over, and blamed Obamacare: “See? ‘Affordable’? Hah!”

But then something curious happened: After the uptick in 2014, costs in 2015 reverted to the previous very moderate pattern. The Great Flattening is continuing. Even as the turmoil in the health insurance markets are driving up health insurance premiums, the flattening of the actual cost of healthcare is continuing.

We have history on this

After the Clinton health plan (“Hillarycare”) failed to become law in the 1990s, I predicted that we would revisit the question in a big way in the 2008 or 2012 elections, for the simple reason that the first baby boomers would turn 65 in 2011. And we did: Health care reform was not a campaign issue in any presidential election from 1996 to 2004. Then suddenly even Rudy Giuliani had to have a plan.

By 2009, growing costs had caused the emergence of the skin-in-the-game consumer in private markets. Some more vigorous self-funded employers, pension plans and unions grew eager to try new models such as competitive bundled pricing, reference prices, medical tourism and onsite and near-site clinics, all of which routed around the code-driven fee-for-service model in one way or another. These collided with the sudden recession to flatten health care expenditures. As the economy slowly worked its way out of recession, the new payment models strengthened and spread, joined by newly vigorous Centers for Medicare & Medicaid Services value-based payment schemes, the new rules on hospital readmissions, and the growth of accountable care organizations and similar structures attempting to provide seamless end-to-end care, along with alternative unbundled access to primary services in expanding retail and urgent care models.

What does this all mean? It means we can expect the constriction of healthcare resources to continue. In fact, since these underlying shifts in payment structures genuinely have the capacity to puncture the hollow healthcare economy with its rampant inefficiency and high prices, we can expect that constriction to grow. Seriously higher productivity is mandatory: We simply must do more for less.

The nature of the problem

Productivity = output/input. We are looking for greater output per unit of input. But we have to define both elements of that ratio carefully.

Output must be closely defined as what the customer finds valuable, useful or helpful. An extra test or unhelpful procedure that doesn’t “add value” lowers productivity, no matter how efficiently you do it.

The “customer” must be defined as well. When you shift your image of who your customer is, the definition of your output changes.

When you are getting paid the old-fashioned way, fee-for-service with no consumer “skin in the game,” your true customer is the health plans and the government, and they are paying you more for more services. When the payment model shifts, your real customers increasingly become the consumers themselves and the employers who are paying in their stead. It’s the value that matters to these customers, never the volume. And the value that matters to them is often quite different from what might matter to a health plan or CMS; they’re uninterested in anything that fails to give them value.

On the “input” side we can’t just measure output per worker-hour, or even per dollar of labor costs. Especially in healthcare, the only useful measure captures all the input costs to achieve a given output (a birthed baby, a stabilized case of diabetes, a properly set broken leg).

Mining for productivity

We are moving to much more diverse types of payment, all of which in one way or another demand much greater levels of productivity: More for less. Where do we find it in healthcare?

Change the metric: First, change your productivity metric to match the changed payment structures. Harvard Business School’s Michael Porter describes the new “value equation” of healthcare as “health outcomes that matter to the patient divided by cost,” in which the outcomes are the total outcomes, the successful endpoint, the long-term relief of back pain rather than a well-performed kyphoplasty.

The cost is the cost to the actual customer—either the patient or a purchaser working with its own money on behalf of the patient, such as a self-funded employer.

Matching the metric to the payment model makes productivity much easier to spot. If you shift your spine-and-pain clinic from a fee-for-service model to a per-employee-per-month contract for a warehousing company, it becomes starkly obvious that the policy of doing an MRI on every customer who comes in the door lowers productivity, raises costs and delays treatment for most patients.

Move to new payment structures: Embrace payment structures that pay you for efficient outcomes. In a fee-for-service world, you are stuck making tweaks to workflows, since you get paid for everything you do. You can remove cost bit by bit through Lean manufacturing methods, but you will never be able to get the wholesale jumps in productivity that you can get by being paid for producing the efficient outcome. If the outcome is a properly done screening colonoscopy, and you can get paid for the added cost of an attending anesthesiologist, you will continue the practice until you stop getting paid for it. If the outcome you are effectively getting paid for is preventing colon cancer, you can eliminate the entire procedure and replace it with much cheaper first-line screening practices.

This is the rubric: Stop getting paid for doing things that are actually waste, then stop doing them.

Technology and workflow

Having changed how we are getting paid and therefore what we do, we then need to search for greater productivity in the clinical and administrative workflow itself, especially with the smart use of new technologies.

Rebuild EHRs: Few of today’s electronic health records are truly built around clinician workflow, patient needs and real communication between the clinician and the patient. Vast amounts of latent productivity are buried in the poor structure and poor interface design of these systems.

Rebuild whole data systems: Getting paid for total outcomes automatically demands fluid interorganizational seamlessness—which means maximum transparency and interoperability throughout your data environment, including EHR, picture archive and communication systems, orders and pharmaceuticals, right through to coding and billing. The rarity of this seamlessness is a direct marker of how hard it will be to find true productivity gains.

Artificial intelligence, automation, robotics, augmented reality: These emerging technologies could help or hurt productivity. Slathered mindlessly over everything we do, they can impede productivity by forcing everyone in the clinical workflow to adapt to the technology rather than the other way around. Employed intelligently, they can cut through tangles, reduce mistakes and remove drudgery tasks from highly paid humans. Examples we have grown used to are automated labs with zero human handling for most samples, robot messengers, robotic pharmacies and IBM Watson and the University of Texas MD Anderson Cancer Center’s Oncology Expert Advisor.

Extraneous costs

Finally, to increase their own productivity, healthcare providers must begin vigorous campaigns to change the regulations and extraneous costs that the field labors under.

Regulations: Regulations have so ballooned in number, complexity and contradictory information mandates that healthcare providers struggle to be fully compliant—and none of the cost of that struggle helps deliver value to the customer. Through major lobbying and organizing efforts, the healthcare sector must persuade various federal and state agencies, the Joint Commission, insurers and other rating agencies to take the information that they need from a standardized data set derived directly from the institutions’ own electronic records.

Pharmaceuticals: Pharmaceutical costs are growing faster than anything else in healthcare, they are opaque to all buyers and unsupported by sufficient cost data, and they lead to enormous suffering, unnecessary deaths and bankruptcies. They not only greatly reduce the productivity of healthcare institutions, they also in many cases present the patient with a true “your money or your life” choice.

Healthcare organizations should be leading voices in a campaign to reform the pharmaceutical cost structure. There are viable models for doing this rationally for the national good without destroying a for-profit industry.

Malpractice: Bad things happen. The current malpractice system, legal, adversarial, winner-take-all, deals with adverse events in the most inefficient way possible, bringing the least compensation and help to patients at the highest cost—helping the fewest people while doing little in the process to reduce harm in the system. In recent years, some healthcare organizations have pioneered new methods of dealing with adverse events that change the focus to just compensation and help for the injured on the one hand and organizational learning on the other. In the process, they have often lowered their malpractice costs. As a sector, we need to move strongly in this direction.

Mandatory productivity

Increasing productivity is a survival skill in healthcare today. We will not find the huge increases in productivity that we need by doing what we do now but just doing it incrementally more efficiently. We have to find productivity in a changed payment system that allows us to drop wasteful practices and streamline the workflows that are left.


First published November 1, 2016 in the American Hospital Association’s Hospitals & Health Networks Daily.