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This chapter is from the book

The Cost of Healthcare and Six Sigma

The cost of healthcare is a reflection of a number of phenomenon, including a cost-shifting effect from uninsured and "underpayers" (governmental payers such as Medicaid and Medicare that pay essentially cost), increases in infrastructure and medication costs, as well as increased labor and supplies. But all things remaining equal (everyone has to pay higher prices for fuel, for example), the increased costs for healthcare boil down to a few significant issues—a downward spiral, if you will, of healthcare quality erosion (see Figure 1.1).

Figure 1.1

Figure 1.1 The cost spiral in healthcare.

The components of the spiral start with the uninsured and governmental programs that pay less than the cost of healthcare. This forces the shifting of cost and those who pay, including private payers and insurance plans. During the 1990s, in an effort to control costs the system created managed care. The bottom line in managed care is for an insurance company to contract with a healthcare provider to provide care for a fixed cost. This arrangement effectively removes one source of cost shifting—meaning, traditional health insurance plans and private payers were absorbing increasing costs. At the same time, federal and state governments found that budgets were increasingly running at deficits. Cost-cutting measures by those governments in many cases went to social programs such as Medicaid and Medicare. This reduction put more pressure on insurers and private payers, which continued the spiral.

Today, major employers throughout the United States blame the cost of healthcare for losing a competitive edge in world markets. In fact, many employers have moved operations to places such as Canada, where healthcare is provided by the government. Some estimates in the car industry place the cost of healthcare at 15 percent of the price of a new automobile. Faced with global competition and an ever-frustrated electorate, politicians are beginning to act. Unfortunately, most of the action is not related to increasing the quality of healthcare but to reducing the cost. The understanding that high quality is actually cheaper than low quality has not been recognized. These concepts—reduce costs and improve quality from a Six Sigma perspective—are complementary, not competing. Increased quality leads to lower costs—most importantly in healthcare—and improved experience and outcome for the patient.

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