In President Obama’s Heath Care speech to Congress on Wednesday evening, September 9th, 2009, he made two statements that referenced some MATH, specifically in regards to the rising costs of health care and the US deficit. Math is the international language that should be by its nature ‘bi-partisan’, but it is often easily manipulated and overwhelming when the numbers are large. If the math works, the politics should fall out of the equation at least when it comes to establishing some common ground. Half of the battle is getting everyone at the table to agree with the math, before setting in to the task of creating solutions. This report focuses on a cross check and the source of the math along with a cost containment opportunity that came out of the exercise.
The President said…
In his speech, President Obama said, “Then there's the problem of rising costs. We spend one-and-a-half times more per person on health care than any other country, but we aren't any healthier for it. This is one of the reasons that insurance premiums have gone up three times faster than wages.”
“Add it all up, and the plan I'm proposing will cost around $900 billion over ten years - less than we have spent on the Iraq and Afghanistan wars, and less than the tax cuts for the wealthiest few Americans that Congress passed at the beginning of the previous administration. Most of these costs will be paid for with money already being spent - but spent badly - in the existing health care system. The plan will not add to our deficit. The middle-class will realize greater security, not higher taxes. And if we are able to slow the growth of health care costs by just one-tenth of one percent each year, it will actually reduce the deficit by $4 trillion over the long term.”
These two excerpts from the speech raise two questions:
Question #1: The average annual cost per person for health care in the US is_____?
The Answer: $7,400 to $8,000 per person for health care per year
Sources: According to the March 2009 Study by The Henry J. Kaiser Family Foundation the average annual cost per American for Health care is $7,400 per person. According to Medical and Science News, the average annual cost per American for Health care is $8,000. “Programs such as Medicaid, the federal program that aids low-income people, are expanding to take up some of the slack as more people lose job-based coverage. And baby boomers will soon start reaching 65 and signing up for Medicare. Those trends together mean that taxpayers will be responsible for more than half of the nation's health care bill by 2016 -- just seven years from now.”
Question #2: The annual growth of health care costs in the US is ______?
The Answer: 6% or $132 Billion and growing each year.
Health care costs have been rising for several years. Expenditures in the United States on health care surpassed $2.2 trillion in 2007, more than three times the $714 billion spent in 1990, and over eight times the $253 billion spent in 1980. Stemming this growth has become a major policy priority, as the government, employers, and consumers increasingly struggle to keep up with health care costs. Source: Centers for Medicare and Medicaid Services, Office of the Actuary, National Health Statistics Group, National Health Care Expenditures Data, March 2009.
In 2007, U.S. health care spending was about $7,421 per resident and accounted for 16.2% of the nation’s Gross Domestic Product (GDP); this is among the highest of all industrialized countries. Total health care expenditures grew at an annual rate of 6.1 percent in 2007, a slower rate than recent years, yet still outpacing inflation and the growth in national income.”
Math Summary:
Let’s find the most cost effective way to cut at least $132 Million per year out of health care costs right now, and save $4 trillion in the deficit.
From the President’s speech, if we are able to slow the growth of health care costs by just one-tenth of one percent each year, it will actually reduce the deficit by $4 trillion over the long term. One percent of the $132 Billion annual growth in Health care costs is 1.32 Billion and one tenth of that one percent is 132 Million.
To reduce the deficit by multiple billions, the President’s math naturally factors in the interest penalty that we pay to borrow money and fund the deficit. Simply, the penalty for the extra costs year over year compounds dramatically, because of the financing charges from overseas investors such as the Chinese.
ONE POWERFULL SOLUTION:
Leverage the capabilities and technologies in the private sector to reduce the cost of Health Care costs. Find the tactics that have the absolute highest return on investment to save money. In researching this report and reading an article in Environmental Leader, it became clear that one company may have stumbled into an opportunity for savings potential that has an impact on the US deficit as well as health care costs. The savings may far exceeds their expectations. The article published on August 21st, profiles the company LED Saving Solutions that is offering $100 Million in high-tech LED (Light Emitting Diode) bulbs to 100 hospitals. The new technology will apparently reduce the lighting electricity cost by 80%. Hospitals disproportionally use a lot more of their electricity on lighting than other types of properties, because a majority of the lights are almost always on. With 50% of the electricity cost going towards lighting the savings potential is massive. Over the program period the savings would exceed $350 Million and there is ZERO upfront cost to the hospitals. See this story in Environmental Leader.
By the President’s math, this single private sector initiative could have a hand in a trillion dollar impact on the US deficit over time, because the existing Government Community Hospitals could take advantage of the offer. If the premise stands that the LED lighting saves 80% on electricity costs and that the bulbs last an incredible 50,000 to 80,000 or more hours, then the next question is how many privately owned and government hospitals are in America and what is the potential savings impact if a program like the LED Savings Solutions were to scale across more than the 100 hospitals in the pilot program.
Question #3: The number of hospitals in the US is_____?
Answer: Over 5,000
According to the American Hospital Association (AHA) 2007 report there are 5,708 registered hospitals in the US. Of the total public and private sector number, there are 1,111 State and Local Government Community Hospitals and 213 Federal Government Hospitals. The simple addition brings the total number of public sector hospital to 1,324.
Each hospital can save about $40,000 a month or $500,000 a year without any up-front cost. The program is funded through a savings share initiative where the hospitals only pay a portion of the savings when they actually see the reduced kilowatt consumption each month. If they take the LED Savings Solutions zero upfront cost program then the half million is net to bottom line, but if they elect to purchase the bulbs outright then the savings is over $1 Million a year. At the half million in savings level…if 1,000 of the government hospitals participated in the lighting retrofit, the annual savings would be $500,000,000. Half a billion dollars is no small figure when it comes to year over year annual savings.
As a cross check, the same American Hospital Association (AHA) report includes $583,252,288,000 (over 500 Billion) as the operating expenses for community hospitals. That is over half a trillion annually. Hospitals make up a significant percentage of health care costs: “hospitals are just one component of health care costs, accounting for about one-third of total health care spending nationally.” Math cross check: This approximately matches up with the over two trillion costs referenced by other sources for total health care costs since the AHA data is for ‘community’ hospitals.
Question #4: The percentage of lighting cost relative to total hospital expenses is ____?
Answer: .0034% (one third of one percent) This may seem like a small number but remember that in his Health Care address on 9/9/09 President Obama said that, “ if we are able to slow the growth of health care costs by just one-tenth of one percent each year, it will actually reduce the deficit by $4 trillion over the long term.”
The percentage of lighting costs is one of the more difficult research calculations given that lighting is rarely sub-metered within utility bills and that the geographical diversity across the US impacts the Heating Cooling and Air Conditioning (HVAC) costs in different ways. As an example, one financial Income Statement reveals that out of $735,261,422 in Operating Expenses, $10,704,069 was dedicated to purchasing utilities. This data has been derived from financial and utilization information reported to the Washington State Department of Health by the hospitals and has been certified by the officers of each hospital.
Hospitals on average use 50% of their energy on HVAC and of the remaining, 50% of the electricity is dedicated to lighting. So, 20% to 25% of total utilities can go toward lighting. In the case study above, about $2.5 Million of the utilities would go toward lighting, and 80% cost reduction with LED lighting would generate savings of about $2 Million annually. So, the LED Saving Solutions estimate of $500,000 as a hospital average may be conservative and actually more realistic than it appears. With $2.5 Million for lighting costs relative to $735 Million in total operating cost, the lighting percentage is .0034% (one third of one percent) of total annual operating costs for hospitals.
If one circles back to the $583 Billion number reported by the AHA report for annual hospital operating costs, then the one third of one percent for lighting generates a lighting cost of about $2 Billion. An 80% savings on $2 Billion annually is $1.6 Billion.
$1.6 Billion is over 1% of the $132 Billion annual increases in health care costs and well over the $132 Million (one tenth of one percent) reduction sited in Obama’s speech. So even if his team’s math is off by a few zeros, LED lighting could reduce the deficit by more than $4 Trillion.
Seemingly small incremental cost reductions like energy efficient lighting may have the potential for MASSIVE longer term financial benefits. With all the buzz around the ‘Green Economy’, the question of eco-impact arises. Every annual dollar in energy saved translates into about 8 lbs of CO2 reduced from output to the atmosphere. This is primarily due to the reduction emissions from coal fired power plants that produce electricity across America. So, $1.6 Billion in electricity savings each year ads up to over 12 Billion lbs of CO2 reduction.
Perhaps LED lighting is one of the ‘silver bullets’ in the fight against rising health care costs as well as climate change. The numbers seem to say YES. Now the question is…What else may lie in the math when it comes to cost containment for US health care?
