The Compass

Over the last eight weeks, we revisited the key takeaways and provided a detailed overview of the 2024 Health Economy Trends Report.¹ Each trend underscores the broader takeaway that the U.S. healthcare system is disproportionately expensive and does not deliver value. This year’s report highlights eight data-driven macro trends that are either intensifying or emerging, revealing the importance of optimizing value, as opposed to maximizing value (Figure 1). Looking to the future, health economy stakeholders who focus on value optimization will establish a competitive advantage.

The U.S. health economy, which is funded in large part by Federal programs, state Medicaid agencies and employer-sponsored health plans represents 45% of the global health economy.^2,3 Although healthcare spending increased by more than 50% in the past decade, from $2.8T in 2012 to $4.5T in 2022, health outcomes have remained stagnant or declined. This raises a fundamental question: What is the return on society's massive investment in the U.S. health economy?

In economic terms, value measures the benefit derived from a good or service relative to its cost. For decades, consumer markets have emphasized value, enabling Americans to make informed purchasing decisions based on price, quality and convenience. Consumer-focused enterprises are faced with relentless pressure to offer more value, whether more features for the same price or the same features for a lower price or more features for a lower price. Health economy stakeholders rarely meet this standard.

In healthcare, cost, quality, safety and convenience are core components of value and exist on a continuum, with their relative importance depending on the care context. Quality is less relevant in an ankle X-ray but paramount in a craniotomy.

Although America’s per capita Medicaid spending is higher than any other country’s total per capita health spending, overall health outcomes in the U.S. lag behind comparable Organization for Economic Cooperation and Development (OECD) countries.⁴ Life expectancy has not improved meaningfully since 2000, has declined since 2019 and remains nearly four years below the average of OECD peers. Rates of obesity, diabetes and behavioral health conditions are at all-time highs, further straining the system and reflecting poor health. These outcomes reveal an unfortunate reality: The U.S. health economy prioritizes revenue generation over value creation.

The U.S. healthcare system operates outside the economic principles of a competitive market. Misaligned incentives lead stakeholders – from providers to life sciences companies – to focus on maximizing revenue, particularly from employer-sponsored Americans, without improving care quality or outcomes. Health plan price transparency offers a pathway to disrupt this “status quo” by introducing unprecedented competition centered on delivering value for money.

Value for money is different than value-based care, which is focused on the allocation of risk within a risk pool, not the reduction of the aggregate cost of the risk pool. In contrast, value for money emphasizes optimizing the relationship between price, quality and outcomes for the ultimate payer – whether it be employers, Federal and state governments or individual Americans. However, value for money remains elusive in the U.S.

To remain viable, health economy stakeholders must shift their focus from maximizing their revenue to optimizing value for their customers. In economic terms, value optimization is distinctly different from value maximization (Figure 2). Optimization involves making the best or most effective use of resources within given constraints, whereas maximization aims for the highest possible outcome without regard to limits.

Health economy stakeholders can deliver value for money to the customer – the employer – in one of three ways:

1. Better than average quality at a price at or near the median market rate
2. Average quality at a price that is below the median market rate
3. Better than average quality at a price that is below the median market rate

There is no value for money proposition in offering worse than average quality at any negotiated rate, especially one that is higher than the median market negotiated rate.