“Savings illusion” can become savings reality in the long haul: baby boomers to the rescue


A recent article in the NEJM argues that cost savings from
quality improvements are illusory because of the lumpy nature of healthcare
capacity.  Quality’s impact on
utilization is just too small to be captured in a heavily fixed cost
environment.  Any reduction in utilization results in a
trivial savings of direct costs and, more importantly, unchanged fixed costs simply
being reallocated across the smaller volume.
Cost reduction in a high overhead environment is indeed
difficult (ask any of the big process consulting houses).   It can
be done, though it will often require some fundamental rethinking of operating
models (e.g. outsourcing or selling services, new organizational combinations, alliances or shared services models to ensure the minimally efficient volume for lumpy high
cost operations, innovative operational strategies to reduce lumpiness/increase
flexibility or break down silos).  Certainly all of these approaches have precedents among providers.  Given the complex
array of stakeholders, processes, reimbursement rules and the high risk nature
of much patient care, it has historically been easier for providers to muscle
up on negotiating leverage than undertake these kinds of initiatives.  And there has been no real Schumpeterian “Implacable Competitor Business Model of Doom” (comparable,
say, to outsourced manufacturing to China, Dell vs. other PC manufacturers, Toyota
vs. GM – for a while anyway, web vs. print newspapers, Wal-Mart vs. neighborhood
retailers) to drive the provider system to decisive action.
There are, however, multiple reasons to be optimistic in the
Incentives are changing. 
Reimbursement models that break down silos and share savings with the providers create real
incentives to find ways to realize the savings across a system.  Very different than models where downstream
providers (say hospitals) are forced to weather the impacts of upstream initiatives
(say higher quality care at the primary care office) without reward or
Volume will flow to winners: 
ACOs, narrow networks and providers/insurer combinations will ensure
that sufficient volume flows to efficiently fill downstream capacity.  Some provider capacity may end up being left out
of these flows and will end up facing a mini-version of the Implacable Business
Model of Doom.  They may get a reprieve
however because of the following:
Baby boomer volume coming on line.  An important fact which the NEJM
article doesn’t consider is the dynamic nature of healthcare.  Baby boomers are starting to age-in to
Medicare and with that start facing all the medical issues that affect seniors. Their
care could readily take up incremental capacity freed as a result of quality improvement
/ shared savings programs.  Indeed, the
incremental nature of quality-driven utilization reduction fits very well with
the gradual – but sustained – impact baby boomer seniors will have on
healthcare utilization.  Through clever management of the transition period from FFS to risk models, from paper to EMRs,
from reputational quality to measured quality – and provided everyone plays nicely
(e.g. doesn’t build huge new wings of capacity to take advantage of
preferential patient flows) – we could achieve a “soft landing”.  It may be that not everyone is going to play nicely, but that’s a different question that whether quality can pay off in cost savings.