And the pot will be from Costco, not Williams-Sonoma.

The most telling point about health reform in President Obama’s budget is that, “Some researchers believe that healthcare costs could be reduced by a stunning 30 percent — or about $700 billion a year — without harming quality if we moved as a nation toward the proven and successful practices adopted by the lower-cost areas and hospitals.”

That sentence gives us some grist for forecasting some of the elements of health reform — in particular, the last phrase which talks about moving from higher-cost, unproven health practices to lower-cost proven approaches.

In yesterday’s Health Populi, I talked about the importance of understanding practice variations, especially those behaviors that lead to increasing costs without improving health outcomes. Under the New England Journal of Medicine paper’s scenario, all practitioners would be incentivized to behave as if they practiced in Salem, Oregon and not Miami, Florida.

What will it take to “move” medical practices? We can take a page out of Costco’s playbook to answer this one. Three Costco tactics which keep the business resilient will be relevant to this scenario: standardization, deployment of information technology, and tough negotiations with suppliers.

Standardization. Costco long-term success and profitability has been driven on setting consistently high standards. Whether you enter a warehouse in southern California or in the Mid-Atlantic states, the Costco consumer experience is singular. Variability is not a good thing in the Costco playbook. In December 2008, the Dartmouth Atlas team offered an Agenda for Change which laid out some practical tactics for reducing practice variation to lead to more standardized care patterns and rational spending. Written by John Wennberg (the godfather of medical practice variation research) and Shannon Brownlee (author of the seminal book Overtreated) and colleagues, the Agenda includes financial incentives for Medicare providers that would share savings resulting from better organizing patient care and improving outcomes and efficiencies especially for people managing chronic conditions.
Efficiency here means the best outcomes and quality for patients at the lowest cost and resource utilization.

Information technology deployment. Costco’s success has been built on a strong IT backbone for both back office and front-of-store functions. Information which quantifies what therapies, procedures and workflows work versus which do not is the underpinning for this approach. Thus, the deployment of information systems among provider organizations becomes a strategic imperative. Indeed, the Obama Administration has anticipated this through the inclusion of HIT adoption incentives beginning with the Medicare and Medicaid programs in 2011.

Tough negotiations with suppliers. Costco never accepts a price increase from a supplier without examining every alternative possible to hold the line on price. At Costco, nothing is ever marked up 14% above costs. In the health care setting, this approach will rely on comparative effectiveness studies which analyze existing therapeutic interventions and compare new competitors in the market, whether they be drugs, biologics, surgical techniques, devices, or other medical inputs. If the new-new input is shown to be more beneficial for outcomes and overall savings to the system, then it will be adopted into the system. If not, the existing treatment will prevail.

Health Populi’s Hot Points: While Costco’s fortunes may be down in the current economy, they are an important case study for how to provide value-for-money in a consumer-facing milieu. The vision of the Obama health budget is that the U.S. sickness system will morph from a sickness system to a citizen-centric wellness system. The tenets of standardization, appropriately-scaled and deployed information technology, and tough negotiations on price for supplies and services will be helpful building blocks to move the dysfunctional environment toward a healthier delivery system that covers all citizens.

Vendors to the health care industry, be forewarned. Interestingly, the medical device industry has come out to support comparative effectiveness research, so long as it doesn’t, “put an arbitrary dollar amount on an extra year of lifeorce patients toward a single treatment based on cost,” in the words of AdvaMed, the industry lobby group.

By the way, the health segment is a big focus at Costco. Furthermore, Costco provides health insurance to employees, something Wall Street hasn’t liked very much over the years.

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