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Cover Story November 12, 2009, 5:00PM EST

10 Ways to Cut Health-Care Costs Right Now

Employers and hospitals don't have to wait for Congress to address inefficiencies and waste

By Catherine Arnst

Seven hundred billion dollars. That's a ballpark estimate of how much money is wasted in the U.S. medical system every single year, according to a new Thomson Reuters (TRI) report. A sum equal to roughly one-third of the nation's total health-care spending is flushed away on unnecessary treatments, redundant tests, fraud, errors, and myriad other monetary sinkholes that do nothing to improve the nation's health. Cut that figure by half, and there would be more than enough money to offer top-notch care to every one of America's 46 million uninsured.

None of the health-care reform bills on the table in Washington do anything meaningful to address that wasted $700 billion. Nor do they call for changes in the underlying flaw that drives much of the waste—the fee-for-service system that pays doctors and hospitals for the amount of medical care delivered rather than for its quality. Under fee-for-service there is no financial incentive for doctors to eliminate waste, since they wouldn't pocket any of the resulting savings. They would just earn less.

By leaving this perverse reward system in place, Congress is virtually guaranteeing that health-care reform legislation, if passed, will do nothing to "bend the curve" of rising health-care costs, as President Barack Obama originally set out to do. Even the few cost-cutting efforts that the bills do include won't go into effect until at least 2013. As a result, U.S. health spending is on track to double over the next 10 years, to $5.2 trillion, about 21% of the gross domestic product.

Or possibly not. Politicians may be reluctant to rein in the medical-industrial complex, but the private sector is forging ahead. Faced with health-care costs that keep rising 6% to 7% every year—even during this year of negative overall inflation—plenty of insurers, hospitals, employers, and communities are figuring out how to offer better care for less money. They are willing to take experimental leaps in an attempt to solve some of the health system's most intractable problems.

A BIG STEP FORWARD

BusinessWeek has looked at 10 such attempts to lower health-care costs and improve patient care. These innovations cannot have the same impact as a comprehensive federal bill. Nor are the gains from private efforts assured. Paul B. Ginsburg, president of the nonprofit Center for Studying Health System Change, cautions that "there are a lot of things we know can improve health, such as wellness programs. But we don't know if they can save money on a large scale."

Still, companies and hospitals are taking the initiative, and some results are in plain view. "Three years ago, professional medical organizations were very reluctant to talk about inappropriate treatments, but I already see that changing," says Robert Kelley, vice-president for health-care analytics at Thomson Reuters. He points out that the American College of Cardiology recently published several standards of care for angioplasty and other common treatments, aimed at preventing unnecessary and costly interventions. Given that about one in six U.S. health-care dollars is currently spent on cardiovascular procedures, "that's a big step forward," says Kelly. Here are some others.

1. CRACK DOWN ON FRAUD AND ABUSE

Crime pays big when it comes to health care. This huge industry is run pretty much on the honor system. As law enforcement agencies have cracked down harder on illegal drugs, organized crime has diverted resources into multimillion-dollar medical scams, where there is less chance for detection. The FBI figures that fraudulent billings to Medicare, Medicaid, and private insurers account for 3% to 10% of total health spending, and the bureau concedes its estimates may be low. "Everywhere we look, we see evidence of fraud," says Lewis Morris, chief counsel for the Office of the Inspector General at the U.S. Health & Human Services Dept.

Medical fraud can range from fake claims to kickbacks to doctors to rigged payment schemes spanning several states. For years private insurers relied on law enforcement to chase down scams, with little effect. Now the industry is seizing the initiative. The Blue Cross & Blue Shield Assn. reports that its antifraud efforts resulted in savings of $350 million last year, a 43% increase from 2007. "Previously we had claims people investigate fraud," says Lee S. Arian, head of WellPoint's (WLP) antifraud unit and a former federal prosecutor. "Now we hire law enforcement professionals with experience investigating crime."

Insurers are also trying to stop crime before it starts. Anthem Blue Cross of California came up with a strategy designed to identify so-called phantom providers of medical equipment, phony companies set up to file fake reimbursement claims. Working with federal files on fraudsters, Anthem fingered 10% of 500 newly registered companies as fakes. An added bonus: News coverage of the effort caused requests at Anthem for new provider ID numbers to drop dramatically.

2. DEVELOP A HEALTHY WORKFORCE

When Johnson & Johnson (JNJ) CEO William C. Weldon met with President Obama over the summer, he communicated a key message: Prevention pays. Weldon knows, because J&J has been offering comprehensive wellness programs to its 100,000 employees since 1995. Internal studies found that in the four years ended in 2002, those efforts saved $225 per employee per year.

J&J's experience proves wrong the conventional medical wisdom that it takes decades before efforts to help people develop healthier lifestyles can produce savings. Although many workplace wellness programs are little more than window dressing, serious efforts can yield important reductions.

J&J offers a huge array of programs, including free smoking cessation classes, online tools for weight and stress management, and 30 on-site fitness centers. Employees who enroll get a $500 discount on their insurance premiums. About 85% of employees participate as a result. "Seventy percent of health-care costs could be prevented through lifestyle modification," says Dr. Fikry W. Isaac, J&J's executive director of global health services.

3. COORDINATE CARE THROUGH FAMILY DOCTORS

A patient suffering from one or more chronic diseases may depend on several doctors, and rarely do they communicate with one another. This lack of care coordination means it's nearly impossible to arrange complementary treatments, cross-check prescriptions, and avoid ordering the same diagnostic tests over and over. The resulting duplications and follow-up care cost the nation $25 billion to $50 billion a year.

A solution is emerging from the medical trenches in the form of the "patient-centered medical home." Under this model, a primary-care doctor is the point person for all of a patient's medical needs, organizing care with specialists, pharmacists, and physical therapists and sharing electronic medical records with all. A 2004 study estimated the U.S. health-care bill could fall by 5.6% if every patient had a medical home.

North Carolina is already reaping savings. In 1998 the state set up Community Care of North Carolina (CCNC), a partnership between the state and some 4,000 primary-care doctors. Enrolled in the program are 870,000 Medicaid recipients and 97,000 children. CCNC pays doctors Medicare rates plus a monthly fee of $2.50 per enrollee to cover the extra time the doctors need to manage overall care. A Mercer study found that the program saved the state $161 million on health-care costs in 2006 alone.

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