The Black Swans of Healthcare

Published on May 24, 2016

US healthcare spending is increasing at an unsustainable rate (18% of GDP and climbing). When one digs into the dynamics of healthcare consumption, a major dilemma emerges: the majority of the population spends little to nothing on care, and a very small fraction spends a gigantic amount.

This cost curve, based on 2010 data from the Robert Wood Johnson Foundation, illustrates the distribution of healthcare spending (total payments across all sources) for the US population as a whole.

The graph shows that:

  • The least costly 50% of the population is responsible for just 2.7% of total healthcare spending.
  • The costliest 5% spends nearly 50% of the total.
  • The costliest 1% spends 21% of the total.
  • A person in the top 1% spends nearly 400 times the average amount as a person in the bottom 50%.

If our society is going to make progress in curbing runaway healthcare spending, we need to figure out how to keep these costly “black swans” – the top 5% and 1% – from bankrupting us. The implication of this graph is clear – the majority of the population must pay more every year to cover the growing expenses at the edge of the curve.

Population health management and care coordination programs are attempts to prevent gray swans from turning black. Instead of waiting for chronic, end-stage diseases to materialize, and then reactively treating them with high-cost treatments, population health programs seek to identify pre-chronic populations – people whose medical conditions and lifestyle/behavior patterns are putting them on a path towards future bad health outcomes. By intervening proactively, and in a coordinated fashion, it is possible to prevent some of these people from turning into future black swans.

Fully risk-bearing entities, including traditional payers, Provider Sponsored Plans (PSPs), and some Accountable Care Organizations (ACOs) clearly have skin in the population health game. Healthier plan members equate to lower claims costs and improved profitability. It is in everyone’s best interest when people are healthier!

In addition to supporting population health initiatives, payers must also be careful not to unknowingly recruit new member populations that are full of black swans. Remember, a 1% black swan is nearly 400 times costlier than a bottom-half member of the risk pool. Particularly for smaller plans, a small fluctuation in the number of black swans can make a huge difference in the plan’s Medical Loss Ratio (MLR) and overall profitability.

Not all growth is equally profitable. How can plan administrators make more informed decisions about what kind of growth to target? Population Risk Selection (PRS) is the discipline of strategically selecting optimal population risk groups and then recruiting them to become members. PRS is a powerful tactic for health plan administrators. It allows them to identify and manage risk, and to make informed decisions that drive profitable growth.

To learn more about how practicing Population Risk Selection can improve health plan financial sustainability, read our whitepaper: “Population Risk Selection: A Powerful Tactic For Improving Health Plan Sustainability”.

Download the Whitepaper

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