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 Why understanding medical risk is key to US health reform
The United States has a great opportunity to restrain the cost of itshealth care system, to improve medical outcomes, and to ease the financialand psychological burden on US consumers.
Ozgur Adigozel, Thomas M. Pellathy, and Shubham Singhal
JUNE 2009
health
 
care
 
practice
 
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The fundamental nature
of medical risk in the United States has changed over the past 20 to30 years—shifting away from random, infrequent, and catastrophic events driven by accidents,genetic predisposition, or contagious disease and toward behavior- and lifestyle-induced chronicconditions. Treating them, and the serious medical events they commonly induce, now costsmore than treating the more random, catastrophic events that health insurance was originally 
designed to cover (Exhibit 1). What’s more, the number of people aficted by chronic conditions
continues to grow at an alarming rate.
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 As the nature of risk has evolved, neither the funding mechanisms nor the forms of reimbursement for health care have adapted adequately, so the system’s supply anddemand sides are both hugely distorted. Consumers are overinsured against some risksand underinsured against others; woefully short of the savings required to pay predictable,
Exhibit 1
The nature ofhealth care risk 
 
Government administrative expenses, private insurers’ prots, research expenses, the cost of equipment and software, and thecost of public-health activities excluded; gures do not sum to %, because of rounding. Source: Ofce of the Actuary and National Health Expenditure Data Fact Sheet, US Centers for Medicare and MedicaidServices; US Medical Expenditure Panel Surveys (MEPS); McKinsey analysis
Breakdown of US health care costs,
1
 
2007
Risk category
Routine100% =$1,877 billion227
Outpatient visit for flu in healthy adult
Visit for an ear infection in toddler
Routine check up, immunizations
Mammography for 35-year-old womanwith family history of breast cancer
Routine care for diabetes type two andcomplication prophylaxis
Angioplasty or bypass in patient withknown heart disease
Below-the-knee amputation in patientwith peripheral vascular disease
Back surgery in patient where evidence-based standards show that lower-costtreatments are as effective
Myocardial infarction in previouslyhealthy patient
Interventions for accidents
Treatment of elderly patient withknown terminal illnessPreventiveChronic careCatastrophic:attributableto chronicconditionsDiscretionary:not medicallyjustifiedCatastrophic:not chronicEnd of life5435923534588141High—from incomeor savingsHigh, but mightwant to make freeto encourageMedium—dependson conditionLowMedium/low—but expenseis unnecessary
Cosmetic surgery
LasikPurely elective241Medium, withfinancingLowDepends ontreatment chosen
Totalspending,
$ billion
ExamplesConsumer’sability to absorbexpense/risk1231913
2
13318
Level of consumer discretion: degree to which consumercan exercise some restraint on costsHighMediumLow
1
For more information, see the National Center for Chronic Disease Prevention and Health Promotion Web site, at cdc.gov/nccdphp.
 
controllable expenses; and all too likely to be dealing with doctors who have big incentives totreat individual episodes of care rather than prevent illness and manage chronic conditionseffectively.These are important—yet frequently overlooked—points in the current debate about the futureof health care in the United States. With the US government poised to spend billions of dollarsto support universal access, reformers must understand this shift in the nature of risk and move
to align nancing mechanisms and reimbursement with it. Pouring more money into the system
 without modernizing it will probably worsen the health care challenges facing the country.Legislation and action by the government or private insurers should offer consumers a chance to
 buy enough protection to feel nancially secure but also require them to share in the cost of care
and give them incentives to manage risks under their personal control in a value-conscious way.Just as important, the United States needs to have the reimbursement and care delivery modelsthat best control each type of risk (see sidebar “What the future may hold”).To better inform the debate on the health care system, we offer a new way to look at thedistribution of costs within it. We break down the country’s health care spending into separate
risk categories, map them to specic medical conditions by their unique characteristics, and
identify who pays for what (see sidebar “About the research”).
Misalignment with risks
Because insurance is the dominant nancing mechanism and fee-for-service is the primary 
 way of reimbursing providers, the US health care system is misaligned in two respects. First,consumers are overinsured for some risks and underinsured for others, so the system doesn’toffer incentives for healthy behavior, promote value-conscious consumption, or provide
adequate nancial security. Second, in a fee-for-service world, providers have a nancial
incentive to undertake as many procedures as possible—a model especially ill-equipped tomanage increasingly prevalent chronic conditions.
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A better understanding of health care risks could help insurersand providers find new business opportunities. Basic healthinsurance plans, for example, might include coverage forpreventive care and catastrophic events, along with a seriesof add-on contracts offering different financing mechanismsthat tailor policies to individual needs. Health insurers are in astrong position to offer these products, but attackers—suchas life insurers or institutions that specialize in managingpopulations with chronic conditions—might lay claim to certainrisk categories and patient populations. Opportunities for banksand credit card companies to provide retail-payment, savings,and credit products that help consumers pay their out-of-pocketmedical expenses should also continue to expand. “Infomediaries”and advisory firms could provide education and planning servicesto help consumers choose appropriate products.There might also be new kinds of delivery systems (such aspatient-centered medical homes) focused on helping consumersmanage chronic conditions effectively, as well as retail clinicsoffering a variety of value propositions catering to routine healthneeds. Additional innovations might include bundled paymentsfor a full episode of care, payment for outcomes, and a vibrantconsumer market in which providers vie to offer consumers otherservices, including routine and elective ones.A wide range of health care services, delivery systems, andfinancing options could be in America’s future. But first, thehealth care community and national policy makers must developa better understanding of the current system’s flaws and startexploring new and more rational ways of aligning the interests ofproviders, payers, and patients.
What the futuremay hold
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