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Will the Boom Bust Healthcare?

By Barry Calogero, with Anne Marie Halfmann

Executive Summary

The U.S. healthcare system is in turmoil. Wait times for service continue to mount, quality issues are

increasing, and the number of insured Americans is shrinking. On top of these trends, the first baby

boomers are reaching retirement age, which will add over 70 million Americans over the age of 65 to

the healthcare system by 2030. As a result, the current healthcare expenditures of $2 Trillion, 16% of

GDP, will double to just over $4.3 Trillion, nearly 20% of GDP, unless focused, significant actions are

taken. As these retiring baby boomers experience three times as many hospital days per thousand and

over half of these patients have at least one chronic health condition, the stress on the healthcare

system will become chronic unless changes are implemented.

Currently, there are significant impacts to cost, quality, and access, with baby boomers poised to

exacerbate this situation. The number of community hospitals in the United States decreased from

5,384 in 1990 to 4,915 in 2000. At the same time, the number of beds per 1,000 population also

declined, from 4.2 to 3.0 between 1990 and 2000. At the same time, the U.S. is in the middle of the

biggest hospital-construction boom in more than 50 years, a trend that likely will increase use of high-

tech medicine and add fuel to rising healthcare costs. In addition to the access and cost crunch, the U.S.

healthcare system is beset with significant quality challenges. Researchers estimate that roughly half of

American patients never get the most basic recommended treatments — like an aspirin after a heart

attack, for example, or antibiotics before hip surgery. The wide variation in treatments can translate to

big differences in death rates and surgical complications. In Pennsylvania alone, the mortality rate

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during a hospital stay for heart surgery varies from zero in the best-performing hospitals to nearly 10

percent at the worst performer.

To improve this situation, three fundamental building blocks are required:

Implement Tort Reform – By removing the threat of litigation, defensive medicine and

unnecessary procedures will be eliminated. Through the implementation of Health Courts

instead, egregious behavior will still be monitored and controlled, while freeing up significant

resources. This will result in the elimination of up to $300B/year in costs.

Mandate Best Practices – Reimbursement systems pay for volume of procedures, with virtually

no correlation to quality of care. In fact, rework results in increased revenue for physicians and

hospitals. Creating industry best practices and holding doctors and hospitals to meeting

benchmark performance levels will reduce variation in healthcare, as high as 4:1 variation in

caregiving, resulting in higher quality and lower cost. For example, national cesarean birth rates

are climbing unabated and are almost 50% higher than medically necessary. These changes will

reduce the cost of healthcare between $200B to $500B/year.

Drive Systematic Process Improvement – The best performing industries in the U.S. have

eliminated waste and reduced process variation. The U.S. healthcare system is weighed down

with these issues. For example, typical nurses spend 25% of their time providing care in

patients’ room as the care giving processes inhibit nurses from providing patient care. Supply

chain costs are higher than necessary, with demand simplification and standardization

attainable to reduce costs by 10%. In addition, scheduling opportunities to increase equipment

and room utilization are abundant. Overall, these changes will eliminate between $200B to

$400B/year.

While many political initiatives are being discussed, they fail to solve the root causes of the challenges in

healthcare. Improving insurance coverage and preventative medicine are great ideas, they fail to

address the underlying causes of the cost, quality, and access challenges that exist today. Only through

freeing up critical resources, reducing process variation, and implementing process improvements can

the U.S. healthcare system cope with the coming demand from the aging baby boomer population.

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Background

Every day that passes, another story is reported about the critical situation that exists in the U.S.

healthcare system. Significant capacity issues, manifesting in long wait times for care in Emergency

Departments, abound throughout the country. Cost increases are seemingly out of control, with the

cost of healthcare rising at a pace 2 to 3 times higher than inflation and real wages. Quality challenges,

with the U.S. ranked last out of 19 industrialized countries for preventable deaths, question the efficacy

of the system. However, this overburdened healthcare system is about to be hit with a tsunami of epic

proportions: aging Baby Boomers.

With the current process under siege, how can the U.S. healthcare system deal with the burden of

caring for the addition of this aging population? If nothing changes, healthcare threatens to swamp our

tenuous economy. Tefen USA has performed an in-depth analysis of the drivers of the current

healthcare system, along with the major contributors of escalating cost and degrading quality. While

the situation looks bleak, there is indisputable evidence that all the major stakeholders can enact

process and structural changes to allow the U.S. healthcare system regain its reputation as the most

effective model for patient care.

Current proposals set forth in the political debate have centered on increasing access to care through

universal insurance coverage, healthcare information technology implementation, increased insurance

competition, and improved preventative care. The reality is that the U.S. healthcare system still has not

undergone the fundamental shift in process excellence that competitive industries in the U.S. have

experienced. Therefore, the building blocks necessary to realize the benefits of these political initiatives

are not in place. The challenge is to make the necessary changes to the root causes of the cost, quality,

and access issues to enable the healthcare system to absorb the certain increase in demand due to the

enormous increase in elderly baby boomers.

This article serves to answer the following questions:

What are the drivers of the growing crisis in the healthcare system?

What does the future hold without change?

How will the aging baby boomer population impact the U.S. healthcare system?

How can we preserve the foundation of the U.S. healthcare system while adapting to the

economic, medical, and political realities today?

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Pressure is Building

Our healthcare system leads the world in creating new therapies, defeating disease and curing

previously fatal illness at a record pace. Our devotion to research and natural American competiveness

serves the global community in driving our scientific commitment to disease management. At the same

time, the economic realities of the healthcare system result in the United States rating last out of

nineteen industrial countries in preventable deaths with over 100,000 unnecessary American deaths per

year.i How is this paradox possible, given the overall wealth in America?

The free market system underpins the business of healthcare. In a free market system, the forces of

supply and demand, coupled with the power of competition, regulates prices along with access. The

free market system then is regulated by the tort system to ensure that failings in the efficacy of drugs,

medical devices, and medical services are adequately penalized. However, the free market system is

only partially in play, resulting in an imbalance that cannot be corrected without structural changes.

Currently, 45 cents of every dollar of healthcare reimbursement comes from government entities. In

addition, governments control the establishment of capacity, placing another non-market restriction on

the ability of hospitals to respond to changes in the demand for healthcare. Therefore, the underlying

tenants of competition and demand management are regulated and fixed outside of the market itself.

As a result, providers of healthcare have virtually no ability to manage prices. As a result, profit margins

are negligible for most hospitals, with the average net income rates in the 2%-4% range and many urban

institutions either closing or in financial distress.

The trend in healthcare facilities demonstrates this issue. The number of community hospitals in the

United States decreased from 5,384 in 1990 to 4,915 in 2000. At the same time, the number of beds per

1,000 population also declined, from 4.2 to 3.0 between 1990 and 2000. ii While this reduction of in-

patient beds is partially related to an evolution of increasing out-patient surgery, the physical reduction

of beds is particularly troublesome in urban areas across the country. Clearly, access is being stressed

throughout the industry.

At the same time, the U.S. is in the middle of the biggest hospital-construction boom in more than 50

years, a trend that likely will increase use of high-tech medicine and add fuel to rising healthcare costs.

The hospital industry has spent almost $100 billion in inflation-adjusted dollars in the past five years on

new facilities, a 47% increase from the previous five years, with spending likely to reach a record $23.7

billion in 2005, according to the Census Bureau. Rick Wade, senior vice president of the American

Hospital Association, said that he expects the hospital-construction boom to continue until 2010.iii

Much of this investment is replacing or improving outdated physical facilities throughout the country.

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While replacing semi-private rooms with private rooms is an industry best practice and is appreciated by

patients, the number of inpatient beds is growing at a slow pace. Therefore, while overall capacity is

being reduced, the industry is in the middle of a major infrastructure commitment that will not be

accompanied by any incremental increase in revenue. Who is going to pay for this infrastructure?

The rate of growth in the cost of healthcare is staggering. According to the National Coalition on Health

Care, $2 trillion was spent on Healthcare in 2005 ($6700 per person), which is 16% of GDP. These total

national health expenditures rose by 6.9% -- two times the rate of inflation. At the same time, 47 million

Americans are not covered by any health insurance. This number is likely to increase as costs rise

further.iv This dramatic increase, unabated, will result in more patients arriving at a healthcare facility

with no means to pay for treatment. The lack of insurance has been cited as a contributing factor in the

preventable death rate. With no insurance, patients have no access to basic medical care, prevention,

and early diagnosis of disease.

In addition to the access and cost crunch, the U.S. healthcare system is beset with significant quality

challenges. Researchers estimate that roughly half of American patients never get the most basic

recommended treatments — like an aspirin after a heart attack, for example, or antibiotics before hip

surgery. The wide variation in treatments can translate to big differences in death rates and surgical

complications. In Pennsylvania alone, the mortality rate during a hospital stay for heart surgery varies

from zero in the best-performing hospitals to nearly 10 percent at the worst performer, according to the

Pennsylvania Health Care Cost Containment Council, a state agency.v Academic medical centers vary in

how they care for patients. Patients at New York University Hospital had 76 doctor visits per person in

the last six months of life, while those at the Mayo Clinic in Rochester, Minn., had 24.vi

While the Center for Medicare Services (CMS) has adopted some rudimentary penalties for non-

compliance with basic best practices, the practice that dominates the regulation of quality practices is

the tort system. Every day, doctors, hospitals, pharmaceutical companies, and medical device firms are

sued by tort lawyers. The cost of defensive medicine is staggering: Ten percent of every dollar spent on

healthcare is attributed to the costs of liability and defensive medicine.vii Doctors routinely adopt

practices that have developed “out of fear of being sued or losing a lawsuit… 79 percent of doctors said

that there have been times when they have ordered more tests than was medically necessary.”viii The

Chief of Emergency Medicine of one of the busiest Emergency Departments in Maryland recently

estimated that 50% of all tests performed in his unit are unnecessary.ix

With a doubt, cost, quality, and access are being impacted simultaneously. So what happens when baby

boomers get added to this equation?

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Stretched to the Breaking Point

During the years of 1946-1964, the Baby Boomer period resulted in a bubble of growth to the US

population. Today, there are an estimated 76 million baby boomers born between during these years.

Older Americans (65 and older) currently make up about 12 percent of the U.S. populationx. By 2030,

once this group retires, the number of Americans aged 65 and older will more than double to 71 million

older Americans. Older Americans will constitute roughly 20 percent of the U.S. population.xi This

growth to the senior population will have a devastating impact on the consumption of healthcare

services.

In 1999, people over the age of 65 years experienced nearly three times as many hospital days per

thousand than the general population. This ratio goes up to nearly four times for people over the age of

75.xii Acquisition of Medicare coverage increases the use of preventive services such as cholesterol

testing, mammography, prostate examinations, and medical visits dealing with arthritis.xiii Sixty-two

percent of 50-to-64-year-olds in working households reported they had at least one of six chronic

conditions, such as:

Arthritis

High cholesterol

Cancer

Diabetes

Heart Disease

Hypertension

As evidenced by the graphs in Appendix A, the use of healthcare services by the aged climbs rapidly.xiv

Paradoxically, it is the advancements in therapeutic discoveries that are helping Americans live longer,

only to result in these same Americans becoming a greater burden on the healthcare system long-term.

What does this mean from a cost standpoint? At the current pace, healthcare spending will double in 10

years, rising to over $4 trillion by 2017. This means healthcare costs will then be 20% of gross domestic

product (GDP).xv Medicare and Social Security will nearly double as a share of the economy by 2035 (7

percent of the U.S. GDP today to almost 13 percent of GDP by 2030 and to more than 15 percent of the

nation's output by 2050).xvi As these costs grow, the problem of uninsured Americans also becomes

more severe. Today, employers are aggressively working to rid themselves of the burden of retiree

healthcare coverage. At the same time, employers are reducing their contribution to healthcare

premiums, while others have begun eliminating the healthcare benefit. The growing number of

uninsured is exacerbating the gap between the cost growth and diminishing reimbursement by

hospitals.

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As depicted in Figure 1, the slope of this growth portends potential disaster for the US economy. At this

pace, if healthcare spending continues on its same trajectory, the United States will reach the point —

probably several decades from now — where every penny of the annual increase in gross domestic

product would have to go for healthcare. There would be less and less money for other things, like

education, environmental protection, scientific research and national security, that may be equally or

more important to the well-being of society. Governmental budgets will face the crisis even sooner.

States are already complaining that they have to crimp other vital activities, like education, to meet

soaring Medicaid costs. And federal spending on Medicare and Medicaid is surging upward at rates that

will cause the deficit to soar. That means politicians will have to raise taxes, severely cut a wide range of

other governmental programs, or chop back the health programs themselves.xvii

Figure 1xviii

So what can be done to reverse this trend and make high quality healthcare affordable for all

Americans?

Restoring the Mantle of World-Class Healthcare

The US is now confronted with two fundamental choices: replace our system with a single-payer system

or make structural and process changes to the system. While the single-payer system, a.k.a., Socialized

Medicine, has some advantages from an access standpoint, there would be direct, negative impacts to

the development of new therapies. It is not possible to replace one major aspect of the current

healthcare system without unintended consequences. A system operates like a series of interconnected

-500.0

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US Healthcare Expenditures1993-2017

Projected with Baby Boomer Impact

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gears – replace one and the system fundamentally may cease to function. While single-payer may seem

fairer, it does not address the cost and quality issues.

Therefore, we propose that the following changes be put in place:

Implement Tort Reforms

Mandate Use of Best Practices

Drive Systematic Process Improvement

Implement Tort Reforms

The current form of regulating quality of care through threat of lawsuit is not effective today. The

purpose of regulating quality is to identify procedural problems, make them visible, and punish the

offender so that the faulty service is not repeated again. In the current system, however, that is not the

case. Rather than exposing poor quality and driving root cause analysis, care givers hide problems and

engage in unnecessary procedures to avoid potential negative occurrences.

Industrial sectors around the world learned that, to eliminate future occurrences of quality problems, it

is necessary to make them visible and confront them. In the Toyota Production System, employees are

required to identify errors, document them, and put preventative actions in place to eliminate the

source of variation. The Toyota Production System was created by Taiichi Ohno of Toyota, perfected in

the 1970’s and subsequently applied to multiple industries around the globe. One of the basic tenets of

the system is a relentless focus on the elimination of waste. Every occurrence of quality variation and

waste must be confronted, analyzed, and the source of the waste or variation eliminated through

improved process design. This system has resulted in enormous improvements in productivity in many

industries and the rise of Toyota as the global leader in high quality automobiles.

This is not the case in healthcare. If a care giver documents a mistake, they are immediately exposed to

litigation. Obfuscation and secrecy become the standard practice when confronted with errors.

Therefore, rather than making quality issues visible, knowledge is suppressed and mistakes will

invariably be replicated. Not only is learning suppressed within one healthcare institutions, other

hospitals do not benefit from the learning from other hospitals.

Since the tort system is not improving quality, it is only serving to provide monetary rewards for

plaintiff’s attorneys and the patients who experienced this quality variation. In 2004, tort costs totaled

$28.7B with no correlation to improved quality. While these awards have succeeded in providing Tort

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Attorneys with a lucrative living and victims of mistakes with some cash rewards, they have not made

healthcare safer. A much more effective mechanism for overseeing quality is the use of Health Courts.

They would be made up of peer reviews and independent analysis of procedural errors. Damages would

be reasonable to the mistake and would differentiate between human error and negligence.

What is proposed in Health Courts: A Better Approach to Malpractice Reform, is a new system with

trained judges who have expertise in healthcare. These judges would rely on neutral outside experts to

help them make decisions about the standard of care in malpractice cases. Noneconomic damages

would be awarded in accordance with a schedule of benefits that would provide for predetermined

amounts for specific types of injuries.

The concept of having particular disputes resolved in special courts is not new. Special courts exist today

for workers' compensation, tax and patent disputes, vaccine liability, and in other areas where complex

subject matter demands special expertise for dispute resolution. In addition, mental health courts have

been established to improve the response of the criminal justice system to people with mental illness.

The critical issue in most medical malpractice cases is whether or not the doctor complied with the

appropriate standard of care. Juries make these decisions in our existing system, even though they

generally are poorly equipped for this responsibility since trial judges have little or no health care

expertise to instruct them in their deliberations. As a consequence, it is hardly surprising that jurors

often reach different decisions based on similar fact patterns. The unreliability of justice that this creates

puts providers in the difficult position of not knowing what it will take to avoid a lawsuit.

In a health court system, judges would make rulings about the standard of care as a matter of law. Of

course, determining the standard of care can be a complex undertaking, given that there may be several

reasonable courses of treatment in a particular circumstance. To help health court judges reach

consistent decisions from case to case, judges would consider clinical practice guidelines based on

evidence-based practice standards.xix

The key advantage is, without the encumbrances of expensive lawsuits, the cost of insurance, lawsuits,

and defensive medicine could be minimized. Using conservative data, we have estimated that we could

eliminate 15% of the total cost of healthcare today. At the same time, a reporting system would be put

into place to make quality issues visible so they could be eliminated in the future. Therefore, based on

2005 spending data, this change would eliminate up to $300B of the cost of healthcare, while

simultaneously improving the quality of care delivered.

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Mandate Use of Best Practices

As previously noted, a significant percentage of healthcare costs are paid for at fixed prices by a

government entity. Many have suggested increased competition and access to pricing information will

serve to support free market pressures, resulting in patient choice using cost as a major criteria. These

forces would, theoretically, align all healthcare providers to provide comparable care at better prices.

However, these theories are completely divergent from the reality of patient choice and practice

utilization today.

Today, insurance companies negotiate prices with doctors and hospitals, resulting in a uniformity of

pricing across the industry. Governmental prices serve as a benchmark and keep prices fairly consistent.

Therefore, a physician and hospital can only optimize revenue through increasing the utilization of

procedures. Typical medical reimbursement system in this country-doctors and hospitals are paid

mainly for delivering more care — not necessarily better care. Under the typical system, missing an

antibiotic or giving poor instructions when a patient is released from the hospital results in a perverse

reward: the chance to bill the patient again if more treatment is necessary. As a result, doctors and

hospitals have little incentive to ensure they consistently provide the treatments that medical research

has shown to produce the best results. xx

The reimbursement system also results in widely divergent results on a regional basis in the US. If all

hospitals were as efficient as the best low-cost areas, researchers say, spending on hospitals and

physicians could fall by about 30% a year. Pioneering studies by researchers at Dartmouth have shown

enormous disparities in expenditures on healthcare from one region to another with no discernible

difference in health outcomes. Doctors in high-cost areas use hospitals, costly technology and platoons

of consulting physicians a lot more often than doctors in low-cost areas, yet their patients, on average,

fare no better. There are hints that they may even do worse because they pick up infections in the

hospital and because having a horde of doctors can mean no one is in charge. Prices charged by

hospitals are just a small part of total spending: Chronically ill patients in high-spending areas get more

physician visits, hospitalizations and diagnostic tests, driving up spending. Even so, patients in high-

spending areas have slightly shorter life spans and are less satisfied with their care.xxi "The problem is

waste and over-use in high-rate states, regions and hospitals — not under-use and healthcare rationing

in low-rate areas and institutions.xxii

Therefore, creating more insight to what a hospital’s commercial list prices are for a procedure is

meaningless. Patients with insurance are not paying these prices and the uninsured generally are

getting services for free using whatever government or hospital subsidies are available. Patients do not

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make decisions on price for this reason. Competition is not an effective mechanism for regulating prices

in industries with substantial price controls.

However, what is effective is to define a series of quality and access standards and holding caregivers

accountable for delivering healthcare using best known practices and protocols. Tefen USA has

conducted extensive studies and found dramatic variation among physicians within the same hospital,

with even greater variation between institutions. When we evaluated a number of factors in Emergency

Departments, including ancillary service utilization, length of stay, billing practices, and treatment

patterns, we found a variation of up to 4:1 between individual physicians (See Figure 2). Since all

physicians had a large patient population to normalize for acuity between patient groups, these results

were startling. Similar patterns exist in many specialties, e.g., Obstetrics, where length of stay, cesarean

delivery rate, and induction rate vary drastically.

Figure 2xxiii

These variations in practices are the result of allowing each physician to determine what he/she feels is

medically necessary. As with any population, there is a normal distribution of skills and capabilities

between individual physicians. The variation that we found is actually predictable. It is not because

physicians are not interested in providing the best possible care that these conditions exist. It is because

the art of medical care encourages variation.

It is important to begin to change this approach. Professional organizations, including American College

of Emergency Physicians (ACEP) and American College of Obstetrics and Gynecology (ACOG), have the

ability to define standard protocols and metrics for performance. Hospitals and doctors can then have

Average Duration (min), In Room to Departure

5/1/06 to 8/30/06

Providers with > 500 Visits

0

100

200

300

400

500

600

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

490 min.

302 min.

Physicians PA NP

95 min.

Practice Pattern Variation

Exam Duration for Abdominal Strain Patients

>500 Patients/Physician

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revenue & compensation tied to achieving these metrics. With potential rewards and penalties for

improving practice patterns, tied to medical outcomes, it is viable for insurance companies to change

their role in ensuring more consistent medical practices and outcomes. Women or physicians who elect

a cesarean birth because it is more convenient would find this practice a thing of the past. From an

industry standpoint, this result is advantageous.

The evidence is clear that the use of best practices holds great promise. Aetna said its billing records

showed that 77 percent of colonoscopy patients in the New York metropolitan area were receiving an

anesthetic, compared with 10 percent or less in other regions. No data has surfaced linking such regional

practice differences to better outcomes. All three major medical associations for specialists who

perform colonoscopies have published guidance statements saying the anesthetic was not needed for

routine proceduresxxiv, yet there exists no mechanism to support compliance with broad-based

guidance.

In institutions with strong medical leadership, it is possible to gain a glimpse of what is possible. The

least-expensive hospital in the nation's least-expensive state was the 25-bed Cassia Regional Medical

Center in rural Burley, Idaho, owned by Intermountain Health Care. Ken Harman, CEO at Cassia, credits it

to his medical staff and paying attention to the latest evidence on what treatments work and what may

be unnecessary care.xxv

The evidence from many other businesses, from automotive companies to financial services firms, is

that variation reduction can have massive impacts. GE’s Six Sigma program, widely heralded as a major

force in improving the firm’s products and services, is an excellent model for consideration in

healthcare. We estimate that the use of best practices in healthcare can result in a reduction in

healthcare spending of between 10% - 25%, an overall major improvement in quality, with a dramatic

reduction to the preventable death rate. These savings, estimated at between $200 billion to $500

billion, will be enabled by tort reform and the transformation of the role of insurance companies.

Likewise, it will require physicians to work together in teams to implement these changes in their

institutions and their practices. While some will argue this means acceding control, the result is quite

the opposite. When doctors take away decisions about the norm, they can focus more attention on the

exceptions, knowing they are always using the best medical procedures possible.

Drive Systematic Process Improvement

The best way to describe the state of care giving in the US is that it functions similarly to the way

artisans or craftsmen perform their art. While there are similarities in style and substance from one

piece of art to the next, they essentially treat each project uniquely. The same is true in healthcare.

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Each patient receives specifically tailored care, with widely different methods for treating the same

symptoms. The care giving process is highly variable with an enormous amount of waste built in. This

waste manifests itself in excessive wait times for patients, extended length of stay, inefficient use of

nurse capacity, and high supply cost.

The combination of an increase in older Americans, coupled with an increase in capacity utilization, has

resulted in the built-in waste in healthcare becoming untenable any longer. Cost pressures, combined

with nursing shortages, are placing severe strain on the system. According to a report released by the

American Hospital Association in April 2006, U.S. hospitals need approximately 118,000 RNs to fill vacant

positions nationwide. This translates into a national RN vacancy rate of 8.5%.xxvi Based on finding from

the Nursing Management Aging Workforce Survey released in July 2006, it is estimated that the U.S.

shortage of registered nurses (RNs) will increase to 340,000 by the year 2020.

When compared to other industries in the US, healthcare remains as the single largest sub optimized

industry in the US economy today. Tefen USA has found rampant opportunities to transform processes

from serial to parallel, eliminating wait times, while at the same time eliminating unnecessary activities

in the care giving process. A recent study performed by Tefen USA on nurse time found that roughly

25% of a nurse’s time at a major academic medical center was actually care giving in a patient’s room.

The rest of the time was consumed with paperwork, ordering/gathering supplies, consulting with others,

and motion. While nurse shortages abound, the current processes in place are taking nurses away from

patients rather than placing them in a patient’s room. If wasteful processes could be optimized and

value-added time increased for nurses, the gap anticipated by the shortage of nurses would be much

smaller and manageable by the industry. Otherwise, draconian measures would need to be

implemented, including significantly higher pay to attract new nurses or reductions in care levels for

patients.

Analysis of operational processes has shown that great opportunities exist to change this paradigm. By

removing redundant tasks, streamlining communication and reporting processes, and eliminating supply

management tasks, we have demonstrated the ability to more than double the time nurses spend in

care giving, with the attendant improvements in quality of care. We see these same opportunities in

ancillary services, e.g., labs, radiology, and pharmacy, to increase the productivity of the staff and

improve utilization of equipment. Typically, a laboratory is able to increase the number of tests

performed by at least 20%, often with fewer resources.

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Supply chains have shown to be rich areas for eliminating waste. Strategic sourcing has saved many

hospitals 10% on their annual spend. In addition, formularies, substitution, and standardization have

proven to eliminate unnecessary, duplicate, and expensive supplies. These help to reduce obsolescence

and significant inventory reductions. Also, implementation of a visual card/bin system, aka, a Kanban

system for material management where material replenishment is done without nurse ordering, has

eliminated clinical personnel from supply ordering, while improving the validity and availability of

material. All of these have made major improvements in procedures and patient care, while freeing up

critical clinical resources.

Scheduling is another area teeming in opportunity in healthcare. In Surgical Suites, the standard

practice has been Block Scheduling of OR time for groups or individual physicians. Unfortunately, when

physicians do not utilize this time, valuable surgical capacity goes unused while surgical support staff sits

idle. We have now reached the point where new demand-based scheduling methods are necessary to

gain better use of this valuable capacity. This not only improves utilization of scarce resources, but it

also affords hospitals to smooth out variation in patient census to improve consistency of care and

people management. The cost to add a new operating room is roughly $1.5M, which is a percentage of

the overall cost to staff and operate a surgical suite. Leveraging existing capacity better will be crucial to

support the surge of Baby Boomers and free up critical capital to develop the facilities necessary to meet

the needs of the growing aging population.

Lastly, resource scheduling practices in healthcare are just not effective. Twelve hour shifts for nurses

and some support personnel, which may be convenient for some, are not closely aligned enough to

patient demand patterns. In hospitals where we plot demand patterns, Tefen USA has seen a wide

discrepancy between patient arrival patterns and nurse staffing by time of day and day of week. We

have demonstrated a reduction of nurse hours required between 8% - 20%. This reduction is generally

realized by reduction of overtime and better utilization of existing nurse staff. As we cope with a nurse

shortage, this technique will be critical for providing high quality care for patients.

If all hospitals across the US were to undergo an intense focus on Operations Excellence, the cost

benefits would reach a range of 10%-15% of the total cost of healthcare, or $200B to $400B per year.

While it would take several years to realize this total benefit, the improvements in quality and access

would result in the elimination of thousands of hours of patient wait times with improved clinical

outcomes.

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Summary

The US healthcare system is beset with significant structural and process challenges. With the onslaught

of Baby Boomers, there is a high probability that the system will break under the weight of this

challenge. Since the cost of providing healthcare for an older American is three to five times greater

than the cost for someone younger than 65,xxvii there is a moral, social, and economic imperative to

transform the healthcare system. As depicted in Figure 3, it is possible to maintain the core components

of the system while making it an efficient and effective delivery mechanism. Ultimately, the healthcare

system can be robust and healthy – eliminating up to 50% of wasted resources. With the slope of the

line returned to the level of economic growth, the US economy can absorb and support the healthcare

system and reap the benefits of improved quality and access.

Figure 3

Many proposals exist to modify healthcare in the US. They range from universal access to insurance

coverage, implementing healthcare Information Technology, and increasing competition to drive down

costs. While they may be politically correct or popular, they fail to address the causes of the problems

in the system. Giving insurance coverage to an overtaxed system does nothing to improve the function

of the system. Automating inefficient processes results in an inefficient automated process. And

competition only works in a free market system, not a government regulated system.

0.0

500.0

1,000.0

1,500.0

2,000.0

2,500.0

3,000.0

3,500.0

4,000.0

4,500.0

5,000.0

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01

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US Healthcare Expenditures1993-2017

Projected "As Is"

16

The measures proposed herein will take significant change management and stakeholder support to

implement. Changes of this magnitude will face enormous resistance. Those who stand to lose will use

fear and intimidation to attempt to defeat these modifications. However, the alternative to these

measures will result in an increase in sentinel events, a continued degradation in the quality of care for

the poor in this country that will begin to migrate upwards in the economic stratus of the country. It is a

solid public policy approach to making sure all Americans have insurance coverage to improve access to

preventative care.

Providing universal insurance coverage is important; providing universal, cost effective high quality of

care is an imperative.

17

Appendix A

Medical Procedures on Patients and the Impact of Aging

18

19

i Measuring the Health of Nations: Updating an Earlier Analysis conducted by the London School of Hygiene and Tropical Medicine, 2007. ii Holton , Lisa. “Hospital expansion trend brings challenges, opportunities”. ACP Hospitalist. March 2007

iii “USA Today Examines Recent U.S. Hospital Construction Boom”. Medical News Today. 4 January 2006

iv “Health Insurance Cost.” The National Coalition on Health Care

v Francis, David. “Healthcare Costs are Up. Here are the Culprits.” The Christian Science Monitor. 15 December

2004. vi Appleby, Julie. “Spending on health care varies widely by state, hospitals.” USA Today. 16 May 2006.

vii “Healthcare Under Attack.” sickoflawsuits.org.

viii “Are Frivolous Lawsuits Driving Up Healthcare Costs?” About.com. 22 November 2003.

ix Interview by Barry Calogero, President Tefen USA, 24 September 2007.

x “Baby Boomers: Will We Treat Future Generations Fairly?” e Max Health.

xi “The State of Aging and Health in America 2007 Report.” Department of Health and Human Services-Centers for

Disease Control and Prevention. xii

“USA Today Examines Recent U.S. Hospital Construction Boom”. Medical News Today. 4 January 2006. xiii

“Growing Older in America-The Health and Retirement Study” National Institute on Aging, National Institutes of Health-U.S. Department of Health and Human Services. xiv

Collins, Sara, Ph.D., Davis, Karen, Ph.D, Schoen, Cathy, M.S., Doty, Michelle M. Ph.D., and Kriss, Jennifer L. “Health Coverage for Aging Baby Boomers: Findings from The Commonwealth Fund Survey of Older Adults”. The Commonwealth Fund. 20 January 2006. xv

“Health Insurance Cost.” The National Coalition on Health Care. xvi

“Baby Boomers: Will We Treat Future Generations Fairly?” e Max Health. xvii

Editorial. “The High Cost of Health Care.” The New York Times. 25 November 2007. xviii

U.S. Department of Health and Human Services, Centers for Medicare and Medicaid Services, “National Health Expenditure Projections 2007-2017,” February 2007. xix

Health Courts: A Better Approach to Malpractice Reform, Paul Barringer, BNA Health Law Reporter, June 23, 2005. BNA's Health Law Reporter, Vol. 14, No. 25 (June 23, 2005). xx

Francis, David. “Healthcare Costs are Up. Here are the Culprits.” The Christian Science Monitor. 15 December 2004. xxi

Editorial. “The High Cost of Health Care.” The New York Times. 25 November 2007. xxii

Appleby, Julie. “Spending on health care varies widely by state, hospitals.” USA Today. 16 May 2006. xxiii

Tefen Emergency Department Diagnostic, Boston, MA 2007 xxiv

Feder, Barnaby J. “Aetna to End Payment for a Drug in Colonoscopies.” The New York Times. 28 December 2007. xxv

Appleby, Julie. “Spending on health care varies widely by state, hospitals.” USA Today. 16 May 2006. xxvi

“Nursing Shortage.” American Association of Colleges of Nursing. October 2007. xxvii

“The State of Aging and Health in America 2007 Report.” Department of Health and Human Services-Centers for Disease Control and Prevention.

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