Michael W. Bender and Steven J. Van Kuiken
Web exclusive, December 2005
The United States spends billions of dollars on health care, and costs continue to rise. What's more, employers shoulder a growing part of the burden—a sobering reality for companies already facing a tough economic climate and ongoing margin pressures. And, unfortunately, higher costs don't imply higher quality. A lack of established best practices results in wide variations in care from region to region and even from hospital to hospital.
As the debate about how to "fix" the health care system continues, the problem's complexity means that there will be no easy solutions. But one thing is clear: information technology will play a critical role in the industry's eventual transformation.
Leonard D. Schaeffer, the chairman and former CEO of WellPoint, the largest publicly traded US health benefits company, with more than 26 million members, is uniquely well positioned to address the challenges facing the health care industry—and the likely solutions. Under his leadership, WellPoint has been honored by Fortune magazine as the "most admired health care company" in the United States for an unprecedented six consecutive years. Earlier, as CEO of Blue Cross of California (WellPoint's predecessor), he led the company back from the brink of bankruptcy.
Schaeffer shared his vision for the future of health care with Michael Bender, a director in McKinsey's Chicago office, and Steve Van Kuiken, a principal in the New Jersey office.
The Quarterly: What are some of the key challenges facing WellPoint and other insurers in the health care industry, and how can IT help address those challenges?
Leonard Schaeffer: Our issues at WellPoint are those of the health care industry as a whole. Health care consumes 15 percent of the country's gross domestic product, and the costs keep rising. But research shows that we don't know what we're getting for our money. There are enormous variations in care and in the cost of that care. And we don't have information on outcomes—on what works and what doesn't. The doctors, nurses, and other people in the field have no way to track their own behavior or to compare themselves with anyone else. Information technology can play a huge role in making better information available to all the players so that we can begin to address these problems.
Another key issue in the US health care system is the number of people with chronic diseases, which are exceedingly expensive and complex to treat because of the multiple problems that accompany them. Many of these problems are not a function of anything that doctors can do but of how people lead their lives. So wellness and prevention become very important. Information technology can help us to identify people with emerging problems and to reach out to those people. We can communicate with them over the Internet, monitor their lifestyle changes, and give them positive feedback when they do the right things—or let them know when they don't.
The Internet makes it possible to converse with our customers and patients in new ways and to access more and better information. So for the first time, we can have both informed caregivers and informed consumers. That gives us an opportunity to truly transform the health care system.
The Quarterly: How can better information help health insurers?
Leonard Schaeffer: As insurers, we want to cover things that work, that have clinical efficacy, based on concrete evidence. In other words, we want a pay-for-performance system. What we don't want is to pay for things that don't work. But today we have a reimbursement system: we pay doctors to do whatever they think they need to do for their patients. It's the only part of the US economy where the source of supply determines demand. We all know that some physicians are better than others at keeping up with known best practices and delivering that care, so what we need is more and better information about which practices lead to better outcomes.
According to a recent RAND Corporation study, when you go to the doctor, you get evidence-based medicine only about 55percent of the time. That means you're not getting generally accepted best practices 45 percent of the time; 11 percent of the time the care you get actually hurts you. No other aspect of US business has that kind of defect ratio—you couldn't get away with it.
The notion of a "standard of care" in this country is artificial. The level of variation in our health care system is unbelievable. You could be hospitalized for nine days in New York and for three days in California with the same diagnosis—and those differences would have no impact on outcomes. There is no other industry in the world that uses so many different approaches to the same thing and in which these differences don't relate to better results. More care and higher spending don't result in better outcomes. In fact, independent research done at Dartmouth clearly shows that higher costs equal lower quality.
The Quarterly: What's the solution?
Leonard Schaeffer: Doctors need to know how wide the variation is and where their practice patterns fit into the universe of behavior. Then they need to understand the connection between practice patterns and outcomes or between practice patterns and patient satisfaction. You can't put a pay-for-performance system in place until doctors clearly see the link between best practices and better outcomes, and IT helps to do that.
Doctors are very data oriented. They'll change their behavior if they have information that shows them a better way to do what they do. But it has to be information that they consider accurate, timely, and unbiased. Unfortunately, insurance companies aren't seen as sources of accurate, timely, and unbiased information, so most likely we'll see third-party "infomediaries" emerging that will gather and correlate industry data.
'The IT guys like EHR, but physicians and the people who run hospitals are not convinced'
As a health insurer, if you start by telling doctors, "We know what's best; we'll pay you for it," you violate the fundamental principle that doctors want to exercise their own discretion. That's what killed HMOs—telling the doctors what to do. Doctors don't like to follow cookbooks, but, clearly, evidence-based medicine would work better for patients.
The Quarterly: WellPoint invested $40 million to encourage its in-network physicians to start using IT and to begin "e-prescribing." What results have you seen?
Leonard Schaeffer: If you believe in an IT-enabled, evidence-based health care system—which I do—you've got to get IT into doctors' offices. So we offered our in-network doctors, for free, either a desktop or a state-of-the-art "e-prescribing" unit for connecting to the Internet. Our theory was that if we could get a certain number of docs online, we could revisit them later and get rid of paper, which would benefit the physicians and us. That was the theory. But to get doctors to trust us, we had to say "no strings attached." We had to contact 26,000 doctors to get 19,500 to accept the free gift. Of these 19,500 doctors, 2,700 accepted the e-prescribing package. Unfortunately, only about 150 physicians are using this technology consistently. I was very disappointed that we only moved the needle that much.
Harvey Fineberg, the president of the Institute of Medicine, explained why thedoctors were so recalcitrant: "When you're in private practice, 'free' is not cheap enough." In other words, the doctor thinks,"You're giving me what looks like a free gift, but you're really requiring a change in how I work, which costs more and gives me little benefit. So I'm not changing my work process."
It was a real lesson in life. We were trying to change fundamental behavior, and the doctors don't want to change unless they see a significant benefit for their patients or themselves.
The Quarterly: Electronic health records—EHR—seem to hold a lot of promise for improving care and cutting costs.1 What are your thoughts?
Leonard Schaeffer: What's in it for the industry players? They'll want to know how it benefits them. Tell me why, if I'm a hospital, I should put a half billion dollars into EHR when instead I can buy three machines that'll improve diagnosis and two machines that'll improve treatment. The IT guys like EHR, but physicians and the people who run hospitals are not convinced that there is a return on the investment.
Even if we cleared that hurdle, then we'd have to agree on standards. What if I'm a world-class liver surgeon and I like red sutures? What if a world-class hand surgeon likes flesh-colored sutures? But the standard is going to be, say, white sutures. What's in it for doctors to agree on a standard coding, description, or whatever?
The Mayo Clinic, in Minnesota, sets its own standards: you don't go home at night unless your notes are complete. The doctors have to write up their notes using the format set up by the Mayo brothers. That's what it takes to have standards. You need to say that everybody in a hospital is going to maintain a medical record that looks a certain way, and it's going to be legible, and everybody's going to put in the same data, and so forth.
EHR is a great idea, but you've got to prove to each of the players that it has benefits for them. We also need consistent standards—and that should be done by the federal government. Then the payoff will go not just to one hospital or one hospital system but to the health care system as a whole.
The Quarterly: Has IT ever given you a competitive advantage—helped you to stay ahead of the other players?
Leonard Schaeffer: For a long time, health insurance companies were measured on the cost, timeliness, and accuracy of their claims processing. Blue Cross of California, using its old systems, was the timeliest, the most accurate, and had the lowest costs. For those reasons, the agents, customers, and employers liked us a lot, and that gave us a competitive edge for a long time. WellPoint, overall, has relatively low administrative costs and labor content for the number of members we serve, and that's because we've automated things.
But today the most important thing for us is our actuarial data, which helps us price our premiums. As you might guess, pricing is critical. Our analysis showed that the so-called cycle in health insurance—three good years, three bad years—is simply a function of pricing discipline and pricing mistakes. There isn't any doubt that the companies with the best pricing are less cyclical. In our case, we have no cycles at all.
We found that the most critical information for good pricing wasn't how many contracts we had but how many people we had—who they were, their age, their gender, and where they lived. Together with regional and local differences in illness types and doctors' behavior, these characteristics determined what the costs would be. So we gathered more information than anybody else about those things, and this was a huge competitive advantage. Now almost everybody does things that way.
We also make a point of processing claims quickly because we found that faster processing gives you a better idea of your costs and early knowledge about how trends are changing. By monitoring the landscape, we were able to raise or lower our prices before anyone else, which is really important in this business. You never want to sell an underpriced policy.
I told our IT guys that I'm not interested in data; I'm interested in translating data into information for decision making. Information that doesn't help us make decisions isn't valuable. So you take data, you turn it into information, you apply it, and you make better decisions because you know more than anybody else. I think that's real power—and that was our hidden advantage for years.
The Quarterly: Where has WellPoint been investing its IT dollars over the past few years?
Leonard Schaeffer: One important area is systems architecture in an environment of consolidation. We had these old legacy systems that worked just fine. But as we began to acquire other companies, we could see the complexity ahead and the need to build new capabilities for the future. A few years ago, we rearchitected our systems so that we could build new capabilities, like customer claims data access, for the whole enterprise—without having to discard the legacy systems.
'We need to make processing a claim or getting health care information as easy as buying a book on Amazon'
Security and confidentiality are other big issues, but they're enormously expensive to put in place, and they've made the systems much more complicated than necessary. For instance, to protect the confidentiality of our members, we went from Social Security ID numbers to unique numbers, using middleware to change everything across the corporation. The project is finished, and we had no problems, but it did cost a huge amount of time, money, and effort—and for what? There is zero utility to the health insurer, but in theory confidentiality will be maintained, which is good.
Security is another area we've invested in. We need to be prepared in the event of a terrorist threat, an earthquake, or a power outage. These preparations are critical because the more you rely on information technology, the more vulnerable you become.
The Quarterly: Where is health care insurance heading? What innovations do you see on the horizon?
Leonard Schaeffer: Americans are reaching a point where they'll no longer compare health insurance providers with other health insurance providers; they'll compare them with the likes of Yahoo! and Amazon. And that's where we have to go. The issue is no longer how accurate you are—we need to make processing a claim or getting health care information as easy as buying a book on Amazon.
As an example, take Netflix, the company that lets you rent DVDs online and sends them to you in the mail. It's a brilliant business model—high-tech front end, antique back end—and it works perfectly. We need that kind of innovation in health care, but it's very hard to come by because it's so complicated in our current environment.
The Quarterly: It sounds as though health care CEOs and CIOs should be looking to other industries for inspiration.
Leonard Schaeffer: Yes, we need to look outside, not inside. Simply building on what we have won't get us where we need to be. But this environment is so complex that if you don't have the technical knowledge, you're dead in the water.
I believe that smart third parties from outside the industry will take away a lot of the IT stuff from health insurers, hospitals, and doctors—and will do a better job of it. Some clever people will pull the pieces together and have it all make sense. You know, Amazon's business model isn't brilliant, but its service is exceptional. My wife likes Amazon because it's easy and it speaks to her. It tells her about new books and greets her by name. Why isn't there a medical system that says, "Hello, Mr. Schaeffer"? We need the opposite of "You've got high blood pressure; lose 30 pounds." That just isn't very friendly or persuasive. There must be some way to say,"We understand your problem. We want to help you. How can we do so?" The models will change; there will be new opportunities in wellness and preventive care for us and the other players. The challenge for current health care providers is to get there before an outside third party does.
It's the same for all of the administrative stuff: someone smart will come in with better processes. For example, "one-write" systems—take the patient's name once and never ask for it again. Every time I go to the doctor, I have to write down everything all over again, even though nothing's changed. I've got my insurance card in my wallet; it's got my name, address, and telephone number. I have to pull the card out to find the ID number the doctor's office wants me to write down. Then, after I'm done, they ask me for the card and they photocopy it!
If you have a health savings account, you ought to have a credit or debit card linked to it so you can pay directly for health services. Real-time bill resolution, no accounts receivables—the kinds of things that are already routine in many other industries—should be routine in health care. And they'll need to be packaged in a nonthreatening, user-friendly way.
We insurers can see the opportunities, but when we offer solutions we're at a disadvantage relative to some third parties. For one thing, many doctors don't trust us. Then there's the simple matter of expertise. If you have a health savings account with $5,000 of your own money, do you want Blue Cross of California or Fidelity to manage it?
The future opportunities are huge. By combining smarter, IT-literate consumers and doctors with new, aggregated information, we have the potential to make a real improvement in health status and health care in the United States. I just hope that those of us in the insurance and provider worlds can retool our systems and processes to beat outsiders to the punch.
About the Authors
Michael Bender is a director and leads McKinsey's banking technology practice. He specializes in health care and financial services and is based in Chicago. Steve Van Kuiken is a principal and leads McKinsey's global health care IT practice. He is based in New Jersey.
This article was first published in the Winter 2005 issue of McKinsey IT.
Notes
1 See "What's holding back online medical data," The McKinsey Quarterly, Web exclusive, December 2005.
