To Your Health: The State of American Healthcare

First of a Four-Part Interview with Dr. Alfred Knight

From Fall 2005 Quarterly

In all its layers and angles, its complexities and ramifications, healthcare remains a central focus of the emerging century. In the spirit of their forward-looking forebears who created Scott & White early in the past century, some of the nation’s most accomplished physician-scientists who practice here every day are in the thick of the national discussion. Their contributions will become clear in future issues.

First, however, some background information may assist in framing the discussion. Dr. Alfred B. Knight, Scott & White president and CEO, shares his analysis on the state of American healthcare in this report, the first of a four-part series, “To Your Health.”

"The challenge right now is how to provide the highest-quality service at a reasonable price, whoever pays for it."   - Dr. Alfred B. Knight, President and CEO, Scott & White

Healthcare institutions face rapidly changing practices, priorities and economic pressures that befuddle a lot of us. How will we address and prepare for these changes, Dr. Knight? As background, could you briefly describe the state of today’s healthcare industry?
Knight: “The perfect storm”? It’s an analogy that is probably overused. It’s the coming together of challenges that are more than additive. Healthcare is in that kind of state right now. Look at the three major stresses on the system.

First, cost. We continue to have an inflation rate three times that of the general consumer price index. That has been unchanged for many years.

Second, we have what the payers—the federal government, the individual or the insurance company—want to pay for those services. We know that the price paid for healthcare is very expensive for the health outcomes we receive.

Third, what does our society expect from its healthcare system? We want everything for everybody, but the costs of such a system would be prohibitive. So we have society wanting more than it can provide.

So that “perfect storm” is out there. Everyone knows it, but no one, including the federal government, is willing to take it on.

Are there trends in healthcare we should know about?
Knight: It’s a gigantic industry with many trends. It’s 17 percent of the gross domestic product. But it is still a cottage industry because it is not coordinated; it has no system linkage, which creates a redundancy of services.

The biggest trend for us, and a huge change, is that insurers, including the federal government, are backing off what they will pay for. In years past, the individual actually paid a greater part of the bill for healthcare. Thirty years ago, individuals paid 50 to 60 percent of the bill. Slowly, the insurers began taking bigger and bigger parts of the pie—up to 80, 90 or 100 percent of the healthcare bill. Over the last two years, individuals have begun to again assume an increasing part of the costs, and that is a profound change.

This transformation is “consumer driven healthcare.” The patient will decide what he or she wants and what is affordable. That is a gigantic shift since we used to rely on third-party payers, when very little came out of the individual patient’s pocket.

What is the biggest challenge facing healthcare today?
Knight: The lack of coordination of healthcare, which creates redundancy and extra cost. The challenge right now is how to provide the highest-quality service at a reasonable price, whoever pays for it.

Is this lack of coordination a new problem?
Knight: No. It’s actually been with us for a while. We in the industry know it, the payers know it, the federal government knows it, but since it is such a politically sensitive issue, the challenge just hasn’t been addressed.

Are costs only part of the problem?
Knight: Costs have risen because we have been willing to pay them. It is a result of our expectations for the care, technology and services. So society looks around for what can be cut. For instance, half of the Medicare dollars—about $1 trillion per year—is spent for the last six months of an individual’s life. That is a societal expectation right now. Simply examining our individual expectations as to how that money should be spent would tremendously alter the cost factor.

Another cost factor is technology. Where do we start drawing the line between technological development and clearly identified benefits? Not all new technology creates better outcomes, but our society is enamored with the newest gadget, treatment, or research, whether it is proven effective or not. Costs are a result of our expectations.

Costs comprise many specific areas. Is any one area responsible for this rise?
Knight: You can’t focus on only one piece of the industry. In fact, it has been said that an organization (or industry) is perfectly designed for the product it produces. Fifteen years ago, the legislature and healthcare pundits decided that we had too many hospital beds, too many physicians and, particularly, too many specialist physicians. Many of us didn’t see it that way, but that was society’s consensus. As a result, we didn’t increase the number of physicians or specialists, we focused on primary care, and hospitals stopped building.

We were wrong.

Now we have to increase the number of medical students and residents and spend a tremendous amount of money to upgrade all of our facilities to build during the next 10 years what we should have been building the past 15 years.

The prescription drug issue is a real challenge. Many new drugs add no real value over generic products. But generic drug sales do not provide enough profit margin to allow companies to invest in new drug research and development. The cycle of new drugs and the direct advertisement to consumers accelerate the marginal profit, but there is no money in promoting generic products. Because of the patent issue, there is only money in developing new products.

We have a terrible misalignment throughout the system, which creates and perpetuates the cost. We are ill-prepared, for example, to address the demand for services as the baby boomers age. The first of us will be 60-years-old next year. The demand for services is about to explode. Plus, the most rapidly growing age group in hospital admissions is the over-100 group. We’re now living into our 90s and 100s, and we are going to continue to need care.

Several trends have developed with employer sponsored insurance changes. The insured person often faces higher deductibles, tiered drug co-pays and many changes in benefit design. Has there been a backlash? How do the HMOs and PPOs fit into the picture?
Knight: A decade ago, HMOs were a target because they were seen as limiting or rationing care. The Scott & White Health Plan, interestingly, never got targeted because on a whole, the concept of who provides the care and who manages it is physician-driven. The Scott & White Health Plan coordinates all the medical care efforts through the physician.

What we are seeing now in the market is not a backlash against the HMO but rather a recognition that the HMO was not too bad. And that maybe, because it provides comprehensive care and is cost effective, it actually works. HMOs reduce the cost of care over time. There is actually increasing interest in that model of care.

Do I hear you saying that we need to adjust our healthcare expectations?
Knight: The most challenging part of our industry right now is trying to move society in a way that appropriately uses healthcare. As a reminder, we in the United States spend 50 percent more per person than any other country in the world. And yet we have 45 million people who are completely uninsured and a large percentage underinsured.

With that challenge, we still have conflicts developing among the physician, the hospital, the patient and the insurance company. There’s a lot of finger-pointing going on—“It’s someone else’s fault.”

The fundamental issue that must be resolved at the federal level is whether healthcare is a right. Should we guarantee all citizens a certain basic level of healthcare? This is an expensive concept but one that many, many other countries have accepted. Most Americans feel that a certain level of care should be a right for all citizens, but we certainly don’t act that way, and we don’t spend our money that way.

Are we knocking on the door of socialized medicine?
Knight: If employers stop paying for insurance, if costs continue to escalate, and if society demands healthcare as a right, the only solution is to have a single payer—the federal government. Most of us don’t want that. We see tremendous problems with what would be a Medicare-like model. As it is currently structured, it is not the solution. But if we as an industry and as a society don’t solve this problem, there will be a tremendous push for the federal-pay system.

Who should pay for the uninsured, for trauma and experimental medicines and research?
Knight: Another tremendous challenge. Commercial insurers have been paying the bill for the uninsured, underinsured and for trauma care almost from its inception. When a patient who has commercial insurance comes into the hospital or goes to see a doctor, the patient or insurance company pays at a rate higher than the cost of providing that care. The difference between what it costs and what the insurer pays provides the resources for the rest of the care provided by the institutions. But the payers don’t want to do that anymore; they are cutting health premiums down and decreasing what they are willing to pay. They contend that the government should pay for the uninsured and all other services.

For us in the middle, the healthcare providers—the doctors and the hospitals— we are getting squeezed from both sides. Insurance companies want to pay less, and we understand that. But the city, state and federal governments aren’t stepping up to pay the other side, so we are getting squeezed. That is not a long-term strategy for success.

But we patients get squeezed too. In this environment, how can the majority of Americans afford healthcare?
Knight: Well, we have got to rethink our own responsibility as opposed to expecting the system to take on everything. Society will have to change in that respect, and the government is going to have to take greater responsibility as well.

We could increase the general level of health in this country by focusing on nutrition, physical activity and smoking cessation. Those three things, which are based on personal responsibility, could transform the healthcare industry. Obesity, smoking-related illnesses, and lack of physical exercise are overwhelming the healthcare system.

Are you optimistic that we can solve these problems?
Knight: The future is positive because we have capabilities to do much more with current knowledge. We can cure some diseases. We managed to do that with smallpox. Others will follow if we have the will to focus attention and resources.

Cancer cures, diagnostic tests that anticipate disease, genetically based manipulations to prevent the devastation of conditions like Alzheimer’s—all are on the horizon. Less than 1 percent of Americans need those breakthroughs, but when they need them, they’ll be here.

Any final thoughts?
Knight: It’s an exciting time to be in healthcare. We are doing many, many things right. We have challenges as an industry, but Scott & White is taking the lead in many of these areas. As an academic medical center, we are positioned to contribute to medical science even as we focus on unparalleled patient care. Yes, it’s an exciting time.

Other "To Your Health" Interviews

Part 2 - Who Benefits? Who Pays? and Who Decides?
Part 3 - Finding a Perfect Balance

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