The financial realities of taking cost out of healthcare
By Mike Wokasch

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What's the first thing businesses do when they have to reduce costs? They manage headcount down and look for ways to reduce wages and benefits. From the auto and airline industries to big pharmaceutical companies, if you want to take out cost, you have to look at payroll expenses. This is especially true in any service intensive industry like healthcare where people are at the core of your success but are also a major factor in the cost of operations. This is the elephant in the room when people discuss reducing healthcare costs and finding ways to "bend the cost curve."


Which will save the most money in our healthcare system?
  • 1. Reduction in staff/wages/benefits
  • 2. Cheaper treatments/drugs
  • 3. Administrative efficiencies
  • 4. Elimination of fraud

To take meaningful costs out of the healthcare system, people will have to lose their jobs and the highest paid providers — e.g., specialists and administrative executives — will have to make less money. This is not a good or bad thing but merely a reality. Having to take jobs away is also the primary reason taking costs out of such a complex system as healthcare will be nearly impossible without acknowledging this constraint.

Administrative efficiencies (the promises of electronic medical records), preventive medicine, treatment guidelines, generic drugs and even elimination of fraud can help reduce healthcare costs. None of these will have the cost-reducing impact of being able to deliver high-quality healthcare with fewer people at lower wages and fewer benefits.

To effectively reduce costs without compromising care means executive and highly paid specialist compensations must be addressed. Again, this will be met with considerable resistance. However, when you put it into the context of two to three nursing staff additions for each $100,000 reduction in executive or specialist compensation, you can quickly see the magnitude of cost reduction achievable without compromising care.

Most people don't realize how many people are employed in the sphere of healthcare costs. Let's just say you no longer need some of the unnecessary products and services routinely used today. That means you don't need all the people employed along the entire supply chain — from people who manufacture and support the unnecessary products to those who are no longer needed to run the tests or delivered the related unnecessary care.

Even the elimination of fraud results in the loss of jobs. Sure, those caught committing the fraud are out of work (at least temporarily) but the negative financial impact could also mean fewer people needed to manufacture and distribute as many of the legitimate products or provide the services to unknowingly support the fraudulent activities.

The converse is also true. If you add more products and services (think new technologies) to delivering healthcare, you need more people along the entire supply chain. Moreover, when was the last time new technology was introduced to replace an established more expensive option? I can't think of very many. You might think generic drugs. But, then again, consider the incremental number of employees added to the healthcare system to support the generic drug market and the number of pharmacists employed to just to manage generic drug acquisition and distribution. And you don't really eliminate the resources in place to support the brand products.

The challenge is there just aren't enough financial incentives in place to eliminate the jobs and reduce wages and benefits to a point where it will have any meaningful reduction in costs across a national healthcare system, like that in the United States. In fact, the financial incentives favor delivering more services (which requires more people), at higher prices to cover higher wages.

Assuming you can define the products and services required to deliver high-quality healthcare, it comes down to the number of people (and their associated wages and benefits) needed to deliver those services. Any appreciable reduction in cost across a service-oriented system will not happen without addressing headcount, wages and benefits.

Mike Wokasch, a pharmacist by training, is a 30-year pharmaceutical industry veteran, having held a number of positions of increasing responsibility at several large pharmaceutical companies including Merck, Abbott, Chiron, Bayer and Covance. Wokasch was also an executive at several technology-based companies including Promega, PanVera and Aurora Biosciences. He is the author of the book, "Pharmaplasia," which explores the changes needed in the pharmaceutical industry as it adapts to healthcare reform.