LDI Health Policy Seminar “Will Health Costs Bury American Manufacturing?” A View from Detroit

1. LDI Health Policy Seminar“Will Health Costs Bury American Manufacturing?” A View from Detroit Mark A. Kelley, M.D. CEO Henry Ford Medical Group

2. Henry Ford and Detroit - 1915

3. Henry Ford and Detroit - 1915 • Explosive growth in auto production 1913-15 • 300,000 cars annually = 1/3 of the world’s production • Recruited employees from immigrants and the South • Large new plant on outskirts of town Highland Park – first major assembly line

4. Henry Ford’s “Industrial Approach” to Health Care • Employed full-time physicians, some recruited from the East • Full hospital care for fixed price ($5/day = daily wage); no insurance • Latest technology – hospital designed by Ford engineers

5. The Auto Industry Labor Movement Brief History 1930-1940 • UAW founded in 1930s by Walter Reuther • After civil unrest, labor organized in Big Three (Ford last in 1941) • Major issues; working conditions, hourly wages

6. The Auto Industry Labor Movement Brief History 1941-1950 • Post war boom, suburban expansion, national highway system • American auto reigned supreme; suburban living

7. The 1950’s – Labor’s Heyday • 1950: GM grants pensions and automatic wage adjustments • 1955: Ford agrees to unemployment benefits • 1956: UAW creates health insurance company – Health Alliance Plan (HAP) • Mid 1950s: Major strikes in steel, coal industry

8. Henry Ford Hospital – 1950s • Regional academic medical center, support of Ford family • Ranked #6 hospital in the nation • Major national training center • “Go-To” place in Michigan

9. Troubles in the Motor City1965-1975 • Urban riots cripple Detroit • Invincible image of auto industry damaged • Racial polarization • Massive population shift to suburbs • “Athens of the Midwest” shattered

10. Troubles in the Motor City 1965-1975 • 1973: Oil crisis demands fuel efficient cars • 1970s: American auto quality falters • Honda, Toyota gain market foothold, via cost and quality

11. Henry Ford Hospital Becomes a System • “White flight” to suburbs fractures the city infrastructure • Hospital remembered as staging area for National Guard • Launches first “satellite” to attract suburban patients

12. The 1980s: Save the Industry! • Federal bailout of Chrysler Corporation • Focus on quality (“Job #1” at Ford) • Young and frightened workforce (“baby boomers”) • More partnering with labor and management

13. Big Three Approach to Health Care – 1980-90s • Predictable costs without labor strife • HMO prepayment attractive for: • Population-based prevention • Community-based premium • Little cost to employees • Arms length relationship with health care, except in the workplace This strategy, fueled by managed competition paradigm, worked well—for a while

14. HFHS Response 1980-99 • Suburban competition • HMO (HAP) purchased for access to UAW • System grows suburban primary care and acquires regional hospitals • Integrated delivery system as survival strategy

15. OOPS!! Health Costs Are Out of Control (Again)

16. GDP per Capita to % GDP Spent on Health Care: OECD CountriesSource: Anderson, Health Affairs 22:2003

17. Failure of Employer-Based Health Insurance • Demand for choice defeated HMO strategy • Cannot limit provider selection; health care delivery fragmented • Liability risk of restricting access • Populations do not cost $$; high risk patients account for 80% of costs • Inability to curb technology growth Source: Enthoven, Health Affairs, Spring 2003

18. The Big Three’s Health Crisis in 2003 • Flat HMO premiums in 1990s spurred temporary profits • Rebound of double digit premium inflation • Unique problems: • Aging workforce (average age 45) • Lifetime health coverage beyond Medicare • Higher actuarial risk workforce None of these problems are shared by international competitors!

19. 18.2% 17.7% 18.0% 14.0% 13.5% 13.2% 13.0% 12.0% 11.7% 11.0% 10.4% 10.0% 9.0% 8.1% 8.0% 8.0% 6.5% 5.7% 3.2% 2.1% 3.0% -0.4% -0.5% -2.0% 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 Premium Inflation is Significant HMO Premium vs. HMO Cost Increases 1988 - 2006 Annual premium increases MD I/P Rx 1999 2000 2001E 2002E 2003E 2004E 2005E 2006E Source: Salomon Smith Barney Research estimates based on data from CMS, Milliman USA, AAHP, KPMG.

20. Big Three Pays $900 More for Health Care per Vehicle Reasons: • Rich post-retirement benefits for aging workforce • Workers retire well before age 65 • First $ coverage for most hourly workers • No national policy on technology or drugs

21. Big Three’s Challenges Reflect Those of the Nation Big Three could not predict or control: • improved life expectancy • technology and pharmacy proliferation • American health care consumerism Big Three should have predicted effects of: • the baby boomer workforce • life time health care benefits • rich pharmacy benefits These are the very same issues facing Medicare!

22. The Auto Industry’s Position on Health Care - 2003 • The business case for quality worked well for the Big Three manufacturers – health care should follow! Facts: • There is waste in health care, uneven quality, little standardization • Health care not organized for quality and cost • Health care is delivered locally as a cottage industry • Human behavior is not easily engineered

23. USA Health Expenditures Annual Percentage GrowthSource: Levit, Health Affairs 21:2002

24. Hospital Days/Capita 2000

25. MD Visits/Capita 2000

26. CT Scanners per Million Pop., 2000

27. Angioplasties/100,0001999

28. Pharmaceutical Costs per Capita-2000Source: Anderson, Health Affairs 22:2003

29. 2. Health care costs too much and providers drive the inflation Facts: • UAW contracts are too rich • Hospital and pharmacy costs have dominated inflation • U.S. doctors earn relatively the same western counterparts • Utilization of health services same as other western nations

30. UAW Public Position on Health Care • Etiology of problem: • Administrative costs of private insurance • For profit components of the industry • “Medical arms race” • Solution: National health insurance and policy • Positions: • Support pharmacy benefit • Oppose health vouchers/defined contributions • Support strong CON process Source: UAW website 2003

31. You be the Quarterback #1 What would be your immediate health care strategy if you were: • The UAW • the Big Three

32. Features of 2003 UAW Contract UAW Gains: • 2-3% wage increase (beyond COLA) last two years of contract • Expanded medical coverage; retirees protected • Pension increases for future retirees • Unionize suppliers

33. Features of 2003 UAW Contract Company Gains: • Bonuses instead of wage increases (preserves the base) • No increases for current retirees • Permission to sell/close plants • Tighter prescription control

34. UAW Medical Benefits – Contract History • 1993: Fully paid benefits, no new co-pays • 1996: Drug co-pay up from $3 to $5. new members must enroll in HMO for two years • 1999: Expanded preventive care; mandatory HMO enrollment for four years • 2003: Expanded preventive care; three tier drug co-pay; $10 office co-pay; HMO requirement dropped Source: Detroit Free Press 9/19/2003

35. Henry Ford Health System’s Perspective • Financial • Crisis 1998-2001 because of capitation and flat premiums • Stability with double digit premium rise • Dilemma of owning an HMO • Autos want to beat health inflation (somehow) • Changing Delivery Tactics • HMO paradigm forced Kaiser mentality • Move to PPO allows balance of AMC and delivery system • AMC cannot survive on capitation – no margin

36. Henry Ford Health System’s Perspective • Politics • Underfunded, poorly managed Medicaid • Failing safety net in Detroit • Auto industry controls technology via CON • Recent legislation for HFHS suburban hospital

37. Henry Ford Health System’s Perspective • Patients • Clueless about benefits (except pharmacy) • Insurance coverage constantly shifting • Two incomes common • Quality • No progress in paying for quality (despite Leapfrog) • Early discussions about chronic disease management • Autos view health care as an HR issue

38. You be the Quarterback #2 As the auto company exec in charge of health care, what is your long-term strategy to solve the health care problem?

39. What are the Options for the Big Three? • Reduce Health Care Costs • Curb health care technology proliferation • Local: CON, HMOs as stall tactics • National: No traction except in Medicare • Push more cost decisions to employees • PPO’s vs closed network • Higher co-pays (ERs) • Tiered pharmacy benefits • Other moves – difficult with national platform • Reduce administrative costs/waste • Chronic disease management • May see major employers align

40. Health Care’s “Closed Box” . Employee Health $$ Health Providers Company Govt

41. What are the Options for the Big Three? • Lobby for National Health System/More Medicare Benefits • Strong emphasis on prescriptions • Aggressive approach limited by: • Lack of political will in Washington • Threat of increased taxes • Other Tactics: • Leverage local providers– only works in one industry town • Hit UAW contract harder • Restrict future benefits

42. What are the Options for the Big Three? • Doomsday Scenario: Move manufacturing off-shore • Developing countries have lower costs (for everything) • American demand for low price favors off-shore • Detroit faces same crisis as Boston and NYC did in 1900s • Irony: For Toyota, “offshore” is American South

43. HFHS Long Range Tactics • Work to Curbs Costs when Possible • Chronic disease management (maybe) • Educate patients about purchasing choices • Re-engineer practice (like manufacturing) • To improve access • Reduce rework (quality and communication) • Use alternative methods (open access, e-mail, group visits) • Maximize leverage of a closed system

44. HFHS Long Range Tactics 2. Diversify the Local Economy • Strong regional expertise in engineering, tooling, process improvement • All these skills are applicable to health care • Could Detroit have as much influence on health care as it did on manufacturing?

45. Will Health Care Costs Bury American Manufacturing? YES – If current status quo prevails! • Auto industry will fail but federal government will intervene • U.S. automakers are the icons of American manufacturing • Intervention: Fund current entitlements, recast the contracts

46. Will Health Care Costs Bury American Manufacturing? NO – Under several scenarios: 1. National health insurance paid by new taxes (levels the playing field with other countries) 2. National Medicare policy is clear and provides: • More benefits (gets autos off the hook long-term) • Less benefits – will result in national brake on drug/technology proliferation

47. Will Health Care Costs Bury American Manufacturing? NO – 3.“Near Death” for industry (like airlines) leads to union concessions (as in 2003 contract)

48. Will Health Costs Bury American Manufacturing? -- Forecast • “Near Death” scenario has already begun (2003 contracts) • Health care will be major agenda in 2008-12 elections, promoted by auto industry • Auto industry will try to catch the wave of disenfranchised retirees

49. Will Health Costs Bury American Manufacturing? -- Forecast Don’t Underestimate the Power of the Baby Boomers! • They make your cars • They stopped a war • They toppled Nixon WHEN PROVOKED, THEY VOTE!!

50. Health Care in 1915 • Organized training only in the East – especially Johns Hopkins • Standardized care in group practice (Mayo Clinic, Cleveland Clinic) • Advances in surgery and radiology, infectious disease • Life expectancy age 45; TB major cause of death