Why understanding medical risk is key to US health reform


The United States has a great opportunity to restrain the cost of its healthcare system, improve medical outcomes, and ease the financial and psychological burden on US consumers.

The fundamental nature of medical risk in the United States has changed over the past 20 to 30 years—shifting away from random, infrequent, and catastrophic events driven by accidents, genetic predisposition, or contagious disease and toward behavior- and lifestyle-induced chronic conditions. Treating them, and the serious medical events they commonly induce, now costs more than treating the more random, catastrophic events that health insurance was originally designed to cover. What’s more, the number of people afflicted by chronic conditions continues to grow at an alarming rate.

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 and demand sides are both hugely distorted. Consumers are overinsured against some risks and underinsured against others; woefully short of the savings required to pay predictable,controllable expenses; and all too likely to be dealing with doctors who have big incentives to treat individual episodes of care rather than prevent illness and manage chronic conditions effectively.

These are important—yet frequently overlooked—points in the current debate about the future of health care in the United States. With the US government poised to spend billions of dollars to support universal access, reformers must understand this shift in the nature of risk and move to align financing 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 financially 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 models that best control each type of risk.

To better inform the debate on the health care system, we offer a new way to look at the distribution of costs within it. We break down the country’s health care spending into separate risk categories, map them to specific medical conditions by their unique characteristics, and identify who pays for what.

This originally appeared in McKinsey Quarterly

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