George Halvorson Speaks Out About the Epidemic of Care

Healthcare is 14 percent of the U.S. gross domestic product and is expected to reach 20 percent within five years. More than 42 million Americans lack health insurance. The percentage of obese Americans has risen from 14.4 percent in 1982 to 26.7 percent in 1999. Twenty-five percent of all dollars spent by Medicare is on diabetics.

Scary, isn’t it? And if those statistics aren’t enough to get your teeth chattering, try these:

  • There are over 8,000 billing codes for various units of care, yet not a single one for the prevention of disease.
  • In 2002 the average American worker’s salary increase was completely wiped out by an increase in healthcare premiums.
  • It is estimated that 48,000 to 98,000 Americans die every year due to hospital accidents.

George Halvorson and George Isham’s recently released book, Epidemic of Care: A Call for Safer, Better and More Accountable Health Care (copyright © 2003, Josey-Bass), is full of facts about the dark side of this country’s healthcare system. However, the book provides more than a litany of woes. Instead, “It describes why healthcare costs are going up, who is accountable for those cost increases, and what can be done to make care significantly better,” to use the authors’ own words.

To be sure, if anyone is qualified to assess our healthcare system and suggest reform, it is these two. Halvorson is chairman and CEO of Kaiser Permanente, America’s largest integrated healthcare organization. Prior to that, he was president and CEO of HealthPartners in Minneapolis. Isham (an M.D.) is medical director and chief health officer for HealthPartners and a founding board member of the Institute for Clinical Systems Improvement in Minnesota.

The cost overruns and inefficiency of the U.S. healthcare system, which the two identify in the book, are disturbing enough. But even more troubling is their contention that the greatest enemies of patient safety are not the nasty HMOs or stingy government agencies, but rather, the ones whom patients trust most- their physicians.

“Millions of people die, are maimed or are placed in jeopardy of being damaged every year across this country because our overall system is non-consistent, non-systematic and even idiosyncratic in the delivery of care,” they write.

How does the contracting arena contribute to our current troubles, and how can it help solve them?

It is estimated that 40 percent of a health system’s budget is used on supply and service procurement; and that an estimated 60 percent to 80 percent of those purchases are conducted through local, national or GPO contracting. So contracting does, indeed, seem to have a role to play.

The Journal of Healthcare Contracting explored with George Halvorson how the stakeholders in the contracting arena can contribute, detract and otherwise participate in the call for a safer, better and more accountable national healthcare delivery system.

JHC: When did you join Kaiser Permanente?

Halvorson: I joined Kaiser Permanente (the Kaiser Foundation Health Plan, Inc., Kaiser Foundation Hospitals and subsidiaries or KFHP/H) in 2002 after serving as CEO of Health Partners in Minneapolis. I came from a vertically integrated care system linked directly to a financing system (Health Partners), so I had a pretty good sense of what KP was all about and had admired it for some time from afar. That’s one reason why I endorse the KP model so completely. I know that when we perform at our full capability, no one can come close to us in performance.

JHC: What percentage of Kaiser Permanente’s purchases of products and services go through a GOP contract?

Halvorson: About 80 percent of our medical, surgical and business product purchases go through our contract with Broadlane. However, we handle all our pharmaceutical and most of our IT contracting internally.

JHC: In December 2000 Kaiser joined Broadlane with the intention of saving $50m to $100m per year. Has that been realized?

Halvorson: Actually, we didn’t join Broadlane until February of 2001. But, yes, we have more than realized the expected benefits. The business case that was presented to the Board was that Kaiser would realize a benefit of $75 million by year three. And we have exceeded that thanks to price savings on products we purchase; to lower administrative costs because of reduced overhead; and thanks to the administrative fee revenue we negotiated with Broadlane.

JHC: As the CEO and Board Chairman, what metrics do you use to evaluate your contracting initiative system-wide and/or by facility for supplies and services? How important is it to the success of KaiserPermanente?

Halvorson: How we do our contracting is very important in how we approach the challenges before us. But it also provides an essential insight into Kaiser Permanente. KP is a clinician-driven system of care, so our system for selecting products and services at Kaiser is also clinician-driven. The actual system itself is a very sophisticated integration of sourcing and standards teams. There are over 60 teams that work at making goods and services selections for the whole of KP. They look at a variety of factors comprising quality, service and best price. These metrics are then tracked at a variety of levels but ultimately involving quality, service and savings. All of this is done against a measure of what is best for our members and patients.

JHC: In the introduction of your book it states, “Our healthcare delivery system in the United States is really a non-system with millions of independent, uncoordinated, separately motivated moving parts, each with its own economic priorities and self-focused financial goals.” Where do you see IDNs contributing to this non-system adversely? What motivations and priorities do IDNs have that distract them from performing the best they can for their patients and community?

Halvorson: Healthcare costs are exploding and there are about a dozen cost drivers. Some of them are obvious – prescription drug costs are going up, the cost of new medical “miracles” are going up, and there’s a shortage of healthcare workers. But there is no single culprit. There’s a whole series of causes. In a time of healthcare explosion, most of the U.S. insurance marketplace is moving in two directions: either cost shifting or cost management (through care improvements). Some health plans, unfortunately, are responding to public unhappiness by reducing their cost controls. As an industry, the more innovative and competent HMOs will probably do well in the next few years because the cost pressures in today’s healthcare economy will force buyers to use every available mechanism. But those of us who know what incredible success can be achieved with an integrated delivery system will continue to promote systematic best care, outcomes measurement, patient-focused chronic care, and increased individual involvement in care decisions. As for Kaiser Permanente, we are committed to providing our physicians, care-givers and our other cost care professionals with the right tools to make it easy for them to do the right thing.

JHC: The point is made that there are over 8,000 billing codes for various units of care, yet there isn’t a single code set up for prevention of disease. How do you suggest motivating or compensating physicians, healthcare facilities and IDNs to drive disease management and prevention today?

Halvorson: The key to making disease management a major market force is to have buyers use that purchasing power to select and use organizations that manage disease. We’re counting on that happening. We’re focusing our resources on Kaiser Permanente HealthConnect, our new electronic care support information system. KP HealthConnect may well be the most important clinical tool we’ve ever implemented. It will set a new world standard for physician support tools. It will replace our paper-based medical records with electronic medical records, thereby improving the quality of our care, providing consistent and better coordination of care, and increasing our research capabilities. It literally will transform how we deliver care, and take our already efficient, integrated delivery system and put us miles ahead of our competitors. Disease management for us will be a winning strategy – supported by the computer to a remarkable degree.

JHC: The book makes the resounding point that new technologies add tremendous cost to healthcare in the United States. Examples of a few newer technologies that greatly enhance and save lives include coronary stents, neurostimulator devices, organ transplants and ventricular assist devices. As the book states, “we perform miracles, and we expect them to be covered by our insurer.” What do you see as a greater threat to the escalating costs of healthcare in the United States: the cost of the “miracles” made available by new technologies, or the increasing number of uninsured Americans?

Halvorson: Anyone who looks at medical science can predict that we as a society will see huge additional cost pressure resulting from medical technology and pharmaceutical science. When those miracles happen and they work, we all will pay. Miracles cost money. It’s both sad and discouraging that today in America we can spend $4,930 per citizen on healthcare and still have as many as 43 million Americans uninsured. Many of these Americans will get sick, or sicker, without access to appropriate healthcare. As they become, inevitably, chronically ill, they create an even greater treatment (and financial) burden for all Americans. Scientific progress is wonderful – and expensive. But there’s no excuse for the number of uninsured in America.

JHC: What suggestions do you have for IDNs in adapting best practices for implementation of new technologies?

Halvorson: An automated medical record.

JHC: While at Kaiser Permanente or HealthPartners, what have you found to be the biggest challenge to dealing with new technologies? Is it physician buy-in? Patient-community education? Policy development? Payer coverage? Other? Why?

Halvorson: A key element is to get physician buy-in by inviting them to shape the effort. It’s essential to have physicians intimately involved in the process. And it’s important for everyone to understand that we view these tools as an extension, an enabler, of the physician. I think that message has gotten across. We have a really solid partnership with our colleagues in the Permanente medical groups, and we’re particularly fortunate to have Dr. Jay Crosson as the Federation leader. Jay’s vision of the future of healthcare is unparalled.

JHC: Patient safety is also an important topic explored in your book. As you and Dr. Isham point out, between 44,000 and 98,000 people die every year in hospital accidents, and the likelihood of being injured by negligence during a hospital stay is nearly 40 percent greater than the likelihood of an airline mishandling your luggage. Have you seen improvement in this area over the last five, 10, 20 years? Or do you believe it is as bad as ever? Why? What have you seen done at an IDN level to reduce this danger? Why is there such complacency about patient safety?

Halvorson: I think that the complacency is eroding away. Partly because of exploding health costs. And partly because there’s a growing critical mass of important information that is creating a new focus on quality. Just look at the Institute of Medicine’s recent report on healthcare inconsistencies. Or the wonderful study done by RAND that found only 55 percent of Americans were getting appropriate care. Or [the fact that] two thirds of diabetics get inadequate care. Yet another telling indication that consumers are moving away from complacency, on the policy front, is that Congress is beginning to get involved. As more and more get involved and educated about the problems surrounding the American healthcare industry, we think the answer will be obvious: that healthcare needs to be re-engineered. Once that conclusion has been reached, the next step in the process will be to computerize the entire system, providing complete and timely information, and making the system interactive for both doctors and patients. That’s why Kaiser is excited about our pioneering effort (more than $2 billion over the next three plus years) to implement a total computerized physician tool kit – built around an automated medical record for every patient -available to every doctor. It is a system that will give the patient state-of-the-art information about their own health and help clinicians more effectively provide care to those patients. Of course, we’re not waiting for, or depending solely on, this tool to make a difference. The difference at KP will always be in its people and their commitment to giving our members the best care available – whether it’s our physicians, our labor partners or anybody else. And it’s reflected in the numerous awards for clinical excellence we’ve won throughout the KP system.

JHC: In your book, you point out that “medical consistency” is first and foremost a patient safety issue. It is, however, also a significant – even major – cost issue…30 percent of all healthcare dollars were spent on inappropriate care.” What challenges do IDNs face in delivering consistent, best-practice-based care? In your opinion who should take the lead in driving patient safety initiatives? Patients, physicians, hospitals, IDNs? Why?

Halvorson: Hardly anyone does a good job of tracking outcomes of care – the health care industry generally does not have good information about what really works. Without good data, the quality marketplace is limited to using rough surrogates of process measurement – usually not at consumer-useful levels. With good, solid computerized medical data, buyers and consumers will finally be able to make quality-based purchases of care. For example, you’d be able to buy knee surgery from the practitioners with the best success rate in getting patients back on their feet. Moreover, the healthcare industry will have the kind of data-driven confirmation they need to confirm what some of us already take as self-evident: that good care costs less than bad care. The lack of real-time research is also an issue. It took a team of two-dozen nurses working for three years to put together the RAND study of 20,000 people. Again, with a really good automated medical record, this kind of research effort could be done on a weekly basis rather than a period of two years. It’s time for an Industrial Revolution for healthcare. We’re the only industry that attempts to improve quality by micro-managing various pieces of the process entirely out of context with the others. That’s why an automated medical record is critically important to create a true quality-based marketplace. At the same time, it will be only as helpful as the people who use it.

JHC: As a nation, where are we in terms of implementing AMRs? When do you think AMRs will be fully implemented and become a standard – if ever? On what business processes are you expecting AMRs to have the most impact from a cost-savings point of view?

Halvorson: One of the primary drivers of higher costs that we can do something about is chronic conditions. About 1 percent of our population accounts for 30 percent of the costs. The AMR, as we intend to use it, makes our integrated system of care even more efficient and more successful by enhancing the coordination of our care management programs, so that we can take better care of our members with chronic conditions. Moreover, it helps us manage our non-chronic populations, so that we keep them from getter sicker (and moving into the “chronic” category). Those populations get better care, while reducing the costs to the rest of our members. In addition to providing better care, our new system, KP HealthConnect, will allow us to streamline our administrative processes, so that we can use our staff and resources more efficiently. Almost every other aspect of the economy has used computers to significantly supplement and enhance performance. I can tell you from multiple direct contacts that major purchasers and key healthcare leaders, including [Secretary of Health and Human Services] Tommy Thompson, love the fact that we’re pioneering the application of systems supporting quality improvement in healthcare. Part of our agenda with the electronic physician support tools is to show the economic benefit of quality. And, when we show that in a really persuasive way, then the rest of the industry that isn’t already following in this path will follow. They won’t be able to afford not to – not in terms of care, of measurable quality nor in cost.

JHC: It seems like there is often news in the mainstream media about discontent with HMOs, particularly with their profitability, over-paid executives or medical necessity challenges. The book makes a case that there are numerous misconceptions about HMOs. What are some of those misconceptions and which one is the most frustrating to you?

Halvorson: Just as there are a number of cost drivers in health care, there are a number of reasons for consumer unhappiness with health care. Perhaps the most frustrating for me, as a leader in the not-for-profit health care area, is the misconception about our costs and what we do with our profits. In fact, HMO profits historically range from losses of a few percent to gains of up to 5 or 6 percent. And HMO administrative costs usually range from 3 to 20 percent of the premium, with the average number closer to 12 percent. Whether or not a 3 percent profit makes sense, it’s pretty clear that a 3 percent profit is not causing today’s 20 percent annualized increases in healthcare costs. Do the math. It isn’t complicated. Being a not-for-profit also isn’t about making or losing money: It’s about how Kaiser puts the money back to work. As a not-for-profit, our operating income is reinvested back into the core delivery capability of the organization instead of going to stockholders. So our money is reinvested back into KP in terms of tangible tools that we can all use to better serve our members and our communities – tools such KP HealthConnect, new facilities and enhanced community benefit programs.

JHC: In the Epidemic of Care, you and Dr. Isham detail a seven-initiative plan to fix the overall American care delivery system. Please touch on how you think the IDN/GPO contracting arena might evolve as these initiatives are tackled. And how will the GPO/IDN contracting arena assist the progress of healthcare’s transformation?

Halvorson: The biggest overarching problem we face is that the nation has never taken a systematic approach to healthcare. So the first step has got to be asking the question: Where are we going? Only then can we ask where does the IDN/GPO contracting arena fit in to a systematic health care approach? As you know from reading the book, Dr. Isham and I believe there are a number of places where systematic initiatives can have real impact. For example: Can the IDN/GPO system contribute to simplifying the system? That’s one of the key areas we emphasize. Speaking for Kaiser, our experience certainly has been successful. Another key element is whether the contracting arena can help us deliver healthcare at an affordable price? Again, we’ve had a good experience. Similar questions need to be asked and answered with regard to other key areas such as the need to enhance local accountability; the importance of supporting an adequate supply of care givers; improving the market model; and creating a workable framework for dealing with the uninsured. We all will have our roles and you can count on Kaiser Permanente to do its part.

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