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Do the Math: The Medical Industry Plan to Cut $2-Trillion is a Gambit to Save Their Bacon PDF Print E-mail
Written by John Weeks   

Do the Math: The Medical Industry Plan to Cut $2-Trillion is a Gambit to Save Their Bacon

Summary: In mid-May, the private-sector powers-that-be in US healthcare announced that they had a plan to cut $2-trillion from US medical expenses over a 10 year period. The much-publicized offer from the American Medical Association plus American Hospital Association plus insurers plus pharmaceutical industry (with a token union thrown in) was characterized as "unlikely bedfellows" by an AMA spokesperson. Sounds like a lot of money to give back, doesn't it? Never mind for a moment that when Obama asked them for details, they only found $1.7-trillion. But some simple mathematics, informed by thinking from the Institute of Medicine (IOM), suggests that this target is not only extremely unambitious, it may be a largely self protective gambit. The differential between what the ruling stakeholders in US medicine are willing to consider ceding back to the public and what they ought to be ceding based on an IOM-based projection for a rational, non-wasteful, less harmful system, is between $633-billion and $1.15 trillion per year. Rather than unlikely bedfellows, we seem to be seeing here the circling of the wagons by medicine's economic oligarchy to hold onto the profits from waste.
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Former US Senate Majority Leader Everett Dirksen (D, Illinois) was reported to have said of some budget-related legislation, a billion here, a billion there, pretty soon we’re talking about real money.

ImageHad Dirksen been referring to the medical reform debate of 2009, he would have been missing a few zeroes. We’re talking trillions here. In fact, in mid-May, a set of industry groups announced that they could come up with a plan to cut $2 trillion from US healthcare costs over 10 years.
The group included the American Medical Association, the Pharmaceutical Research and Manufacturers of America, the American Hospital Association, America's Health Insurance Plans, and, for a token purchaser, the Service Employees International Union.

Pressed by President Barack Obama for details, the group had a hard time reaching their target.
In early June, they sent the White House a letter, together with a series of cost-savings proposals that, they said, could total $1 trillion-$1.7 trillion in savings over a decade. They identified $150 billion to $180 billion as coming from more-efficient use of healthcare services, $350 billion to $850 billion from better managing chronic diseases, and $500 billion to $700 billion through administrative and business improvements such as standardizing claim forms.

Senator Dirksen would agree that this is real money, especially since it would appear to be coming out of their own hide. Still, it is p
erhaps as much as 50% off the originally proffered $2 trillion. What happened? Regardless, the group was self-congratulatory about their work: "What you've seen is the coming together of some really unlikely bedfellows and it really is very important," said Nancy Nielsen, MD, president of the American Medical Association. "This is a very serious collaborative effort."

The differential between what
the ruling interests in US medicine
willing to consider ceding back
to the public and what they
ought to be ceding, were we to
have a rational, non-wasteful,
less harmful system aligned with
IOM projections, may be as
high as $1.15 trillion each year.
When I heard of this problem-solving initiative from this set of powerful, ruling interests in US medicine, I was immediately cautious. Just last year the American Hospital Association sent out a press release talking about the tremendous contributions to local economies hospitals represent. I questioned this in "Should the Military and Hospitals Celebrate Their Economic Contributions." Shouldn't they be congratulating themselves when fewer doctors and hospitals and staffers are needed? They weren't too interested in cost-cutting in that self-aggrandizing moment. With the exception of the union, the individuals behind the entities creating this cost-cutting plan have accumulated tremendous wealth as medical expenditures in the United States soared over the last 4 decades to the estimated $2.5 trillion for 2009.

Can these foxes of industry (and engines of employment) be the trusted architects of the scaled back hen-house of a reformed health care? I was immediately compelled to do a couple pieces of simple mathematics:

  • Math Exercise #1  If you divide the industry group’s $1-trillion to $1.7-trillion by the 10 years in which the savings would take place, that’s between $100-billion and $170 billion per year in projected savings. This is out of $2.5 trillion per year of expenditures. The "savings" that they have carved represent between 4% and 6.8% of the total.

Next, I recalled the statement by a group of writers from the Institute of Medicine, published in the Journal of the American Medical Association in February 2008, that between 33% and 50% of what we do in US healthcare is waste. Perhaps more important, the IOM considers it not only waste, but also likely harmful. This is from the organization considered the brains of US medicine.

If we take the liberty for a moment of assuming that the financial impacts for all of that waste and harm line up as percentages of total expenditures, we can engage a second piece of rudimentary mathematics:

  • Math Exercise #2.  According to the IOM's projection, removing such waste would lead to savings each year between $833-billion (33%) and $1.25 trillion (50%) of the $2.5-trillion. Notably, if we cut the amounts based on the projections derived from the IOM statement on waste, the outrageous costs of health care in the United States immediately fall in line with those of other nations.

Finally, if we then compare the results of the "serious collaboration" between our industry group with what the IOM projects that we should save, we find the differentials in the table below.


Differentials in Projected Savings
Between the Industry Collaboration and an IOM Assumption

All figures are per year

IOM's projected savings*
 $833-billion  50%  $1.25-trilliion
Industry's plan for savings
 $170-billion  4% $100-billion


more savings
via IOM
 46% $1.15-trillion
more savings
via IOM


In 2001, another influential report from the IOM, guided us on how to "cross the quality chasm" in U.S. medicine. These pieces of simple mathematics may give us a quantifiable look at just how awfully deep that chasm presently is.
In short, what medicine's ruling interests are willing to consider ceding back to the public and what they ought to be ceding, were we to have a rational, non-wasteful, less harmful system, is quite likely in the range of $1-trillion each year.

The kicker is that in the IOM's view, many of these wastefully spent dollars are also creating harm in patients. We would likely save more than anticipated, even by the IOM, were we not generating harm through all this profit-taking. What if we practiced proactive, clinical prevention?

Framed this way, the collaboration of these interests (and I include the nominally not-for-profit hospitals whose specialists and administrators are among the best paid individuals in US business) may be viewed not as “unlikely bedfellows” but rather as an obvious set of partners colluding to hold onto what has enriched them. 

The $100-billion to $170-billion that their plan for us is willing to ante up each year may best be viewed as a kind of a loss leader for them. Adopt their plan and each can hold on to a much larger, still wasteful and harmful chunk of the gargantuan pie that has fed them so very well over the last 40 years of medical cost increases.

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