Dr. William Winkenwerder Jr., Highmark CEO

At Highmark, we probably spend in the range of $25–30 billion a year in paying claims. That’s a lot of money, and we take the responsibility seriously to try to help organize a system that spends that money wisely—because ultimately that’s all of our money.

So, why is healthcare broken? What’s going on? Let me give you some facts about spending. It’s a topic I’ve been fascinated with my entire career. I was there back in the early ’80s when the picture was very different. Today we spend nearly 18 percent of our gross national product on healthcare—nearly one in five of every dollar that is spent has something to do with the healthcare system. That is the most of any country in the world by a factor of 50 percent. In the ’80s, we were only spending about 9 percent. So it doubled as a share of the economy.

My first job out of business school was to work in Washington. I didn’t plan on it; I intended to go into medical practice even though I had a business degree. But I had an opportunity to work for the Medicare program that finances healthcare for seniors and oversees the Medicaid program. And at the time, the whole budget for Medicare and the federal portion of Medicaid was about $110 billion. Today, those two programs consume almost a trillion dollars.

The federal government is spending roughly 25 percent of every federal dollar on healthcare. I know people wonder, “Well, isn’t the Defense Department spending a lot of money and shouldn’t we be cutting back on defense?” I worked in the Defense Department, and I know a little bit about that budget as well. Defense now spends a little over half as much money as we spend in healthcare. So, healthcare at the federal level is spending almost twice as much money as the Defense Department, and defense spending is going down while healthcare spending continues to go up. And—surprise, surprise—within that defense budget, healthcare is almost 10 percent—roughly $50 billion today. Between the Defense Department and Veterans Affairs, it’s over $100 billion.

It’s a lot of money, and it’s got to come from somewhere, right? So we have the Affordable Care Act, which was intended to make healthcare more affordable. I don’t think I know anybody who thinks it will. And that includes people from both sides of the aisle and all parts of the spectrum. It is intended to extend coverage to more people—and that’s a good thing—anywhere from 37–47 million people who don’t have health insurance, depending upon how the numbers are counted. Some choose not to have healthcare and can afford it; some can’t afford it, and that’s an issue.

Well, we’ve been spending more and more money on healthcare for decades, but why is that? As a former practitioner, what I saw among my colleagues (and of course I was never guilty of this myself…) was doctors who tended to order and do more. I initially practiced in a prepaid system where you got a lump sum of money, and it went to the medical institution. You worked within a budget, and we got paid salaries. But in most of medicine today, the more the doctor and the hospital do, the more money comes in. So there’s really not much of a brake on the system of spending more and more.

The second cost driver is that, when it gets down to it, nobody—or very few people, including physicians themselves—knows what things cost. When I was involved in cost management and working with a large practice, even our own physicians didn’t know the cost of what they were doing. That’s where data could help to show them, “Here is your ordering pattern. You’re ordering all of these tests on this patient, and your colleague down the hallway has got a very different ordering pattern, and they’re spending roughly half or two-thirds of the amount of money you are.”

In most health insurance coverage plans, you don’t pay very much of the total cost—insurance covers most of that. Typically, people are only paying about 10-15 percent in aggregate of the cost of their total care. But that’s beginning to change, and we’re seeing the introduction of more plans where people pay significant dollars—like the first $1,000–$5,000 before insurance kicks in. And we’re starting to see some real changes in behavior because people are interested in what the care costs.

The third cost factor is our tax code, which subsidizes employers; employers are able to take a deduction for paying for health insurance. No matter how much more that health insurance costs, the deduction keeps going up. The amount of the subsidy is about $250 billion a year. That’s one of the things that they try to address—and they do a little—with the Affordable Care Act. Most health plans are somewhere between $12,000–$15,000 a year for a family. But for benefit-rich plans that cost above $20,000 a year, the tax deduction will go away in 2018. People say it’s a new tax, but it’s really the removal of a tax break.

So if the federal government didn’t subsidize employer-sponsored insurance, they would be able to cut the deficit by about $250 billion a year—one of the single biggest things that could be done to reduce the deficit. But if they did that, it would make health insurance so much more expensive. You’d see the real cost of it, and that cost would get passed on to you and me.

The fourth driver of increased costs is the government policies of the Medicare and Medicaid programs and how they decide what things get covered and how they are paid. We tend to pay for things in Medicare at the same rate, year after year, even though a new technology might be able to do it for a whole lot less. The payment rate doesn’t go down. There’s no other area of the economy where you could do something at one price and expect to continue to get paid the same for it year after year, even though there’s something cheaper and better that might do it for less. There’s hope for changing that as well.

There’s one other cost issue that we really have to deal with—the lifestyles of the American people. The Centers for Disease Control say that about 75 percent of our healthcare costs are driven by chronic disease caused by unhealthy behaviors. Not all of that is preventable, but a lot of it is. Now, we all can’t behave perfectly, but, if we weighed less, didn’t use tobacco, and other things we all know we’re not supposed to do, we could save a ton of money.

OK, so enough of this shock treatment about what the problem is. Here are five things that we can do to improve things—things we’re working on at Highmark. First, we need to make costs more transparent. Medical costs have been hidden for decades. As benefit designs have been changing, people want to know what things cost. It’s good that they demand the information, and it’s good that they want to be able to compare and get the information. One of the things we’ve done at Highmark just this year is introduce online tools where people can compare how much we’re paying this provider for a certain procedure or service versus another provider. We’re hearing that people love it.

The second area is what we call pay for value. It may come as a surprise, but not all doctors practice the same way. There is significant variation in practice patterns despite all of the education and training we receive. Not that it’s terrible, but it may be an over-utilizing pattern that provides care unnecessarily, or it doesn’t provide certain services that you ought to have on a preventtive basis. With pay for value, we try to determine with the providers what are the good outcomes, good practices and patterns we should be paying for. And then we audit and collect data and pay for achievement of certain of those results. So we have a program with the hospitals called the Blue Distinction Program, which relates to hospital care and the difference in payment based on achievement of quality outcomes. That’s exciting stuff, and we’re seeing some good results.

There’s also a new model of paying for primary care, in which we pay the primary care doctor for some services and nurses or nurse practitioners, for instance, to keep track of people with chronic diseases. We have over 1,000 physicians under this payment system, and last year, we saw about a 2 percent cost reduction.

That’s encouraging. It’s not a lot, but at least it’s going in the right direction, and it shows that these programs work.

The third thing we can do has to do with wellness and prevention. We know that health and wellness programs can make a difference, and we have a program with our own employees in which they agree to get certain screening tests and follow up on those as appropriate. It lowers the contribution that they have to make by $1,200 a year. That’s significant money, and it gets people’s attention. We’re into the second year of this program, and we think it’s having a very real and significant effect. There is a 90 percent participation rate. It helps educate people. They might not have gone to the doctor for a few years and their blood pressure or their weight is up. So they know they need to lose 10–15 pounds. And the encouragement does make a difference.

Some of these programs are far more sophisticated and far more targeted than I’ve described. We have different levels of ability to work with an employer to design a program that will work for their employees. I think this early detection and primary prevention is going to be a big part of healthcare going forward—actually incentivizing people with dollars to do certain things or make them pay more if they don’t.

The fourth thing happening across the country and here with Highmark is the integration of the insurance side with the delivery side. That was a big part of what led us to invest a lot of money to create the Allegheny Health Network. We wanted to provide another option, another choice, so that there wouldn’t be so much market pricing power with just one provider. And another element was the idea that, if we work together closely with these 1,000-plus physicians in the Allegheny Health Network and the hospital administrations to design some of these programs, we can actually create a lower cost of care. Our goal is to have a lower cost per product or offering by as much as 25–30 percent.

Others have done similar things, and they’re not easy to achieve. But the concept is embedded in the Affordable Care Act. The act creates incentives for what are called ACOs—accountable care organizations—and that’s what we’ve already established. So we will be creating the right incentives and measures and metrics to look at the outcomes in a more aggregate way.

The fifth thing is that there was just a bill that was introduced in Harrisburg that basically says that, if you have this integrated delivery and financing system like we have, like UPMC has, it’s important to keep the delivery system open so that you don’t close off competition and have what I’ve called a cartel-like situation. So people can have open choice and can take their insurance from one place to another. You have transparent pricing and let people choose and decide on the basis of cost and quality, not in terms of who owns a certain set of assets. It’s a better way to compete, in my opinion, and something we’re willing to hold ourselves accountable to at Highmark.

Let me finish up with the last element, which is really an exciting area. It’s one of the areas I’ve been most involved with—the area of technology, data, informatics and electronic information and records. Financial markets need information to move. You couldn’t have a market in the business world if you didn’t have information. In healthcare we don’t have that yet; we need it. We’re making baby steps, but we need to make the information move. The information needs to go with the patient wherever he or she goes and not just be sitting in a repository with one provider.

It’s a whole new concept. When I came out of training, the idea was that medical records belonged to the doctor. Now I think we’re moving to a better place where the medical information belongs to the patient because it’s the patient’s information. It should move with the patient. That came home to me in the military health system. We had people going all over the world, and in the days of paper records, records got lost. There’s no way to track them with people all over the world and moving every year or two to a new location. It was very apparent that the only way to deal with this problem is to be able to move the information electronically around the world, and that’s exactly what we did. We created one of the first large-scale electronic health record systems in the world. It was clunky by today’s standards, but it got the job done. The technology and the software are better today, and that is the direction that we need to move. One of the big challenges is moving the information with confidentiality and security. I think it can be done, and it is being done.

They say sunshine is the best disinfectant, and I think that’s particularly true in healthcare. If you want to know what’s going on, get the data out there. We’re seeing already some real changes in behavior because now the information on hospital readmission rates is public. More information is public about infection rates. Wouldn’t you like to know, if you’re going in to have your knee done, whether it was a half percent or 5 percent of people who got infected out of that hospital? That information could and should be public, and we’re seeing more of that, so it’s literally a disinfectant in more than one way.

Finally, a really exciting idea is that care could be anywhere if it is enabled with data and personalized communications. So think about it. If the information is there for a physician, you can see the patient over something that is better than Skype. Doctors can see and communicate with the patient. And another person is there, and it doesn’t need to be a physician—it can be a nurse or an assistant. You can get a lot of care done that way, and that is happening more and more. And the tendency is for that care to be at a much lower price; many times, it’s half or a third of the price of an office visit. So in the same way that the Internet dis-intermediated the retail sector, we’ll begin to see that in healthcare. You don’t see people building malls today because of Amazon and other Internet retailers. I think we’re going to see some movement in that direction in healthcare, so that the visit might be a virtual visit in the future.

To do all of these things is a great challenge, and it’s a lot of fun. It keeps me going 24 hours a day, but I really enjoy it.

The bottom line is: There are solutions to our problems of cost, quality and access. We at Highmark want to be part of the solution and not part of the problem. Our system can improve, but at the end of the day, Congress does have a lot to do and say about how the tax code, Medicare and Medicaid interact. Over 50 percent of healthcare is funded by the government. So the thoughtful people in Washington are going to have to lead and listen and be courageous to do some things that, initially, may not look to be popular but are the right things to do to help bring about cost control, access to care, and quality healthcare for everybody.

Dr. William Winkenwerder Jr. is CEO of Highmark.