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Can We Develop An Optimal Healthcare Plan/System? 

Healthcare - Number One Global Issue

No matter what is your age, gender, race, religion, or financial status, healthcare is important to you. In most developed and developing countries, healthcare is the number one issue on the minds of citizens and government officials. Even though food, housing, energy and other items also top the list of critical problems in under-developed countries, healthcare still stands out as an important fundamental issue. Different countries may have adopted different systems to deal with their national healthcare, but the forging global economy makes healthcare a global issue that can not be dealt with as just a national problem.. With rapid advancement in medicine and global communication and transportation, it is our blessing that medical solutions can reach out globally. Who would have imagined 100 years ago that healthcare services could be offered as a business from one country to her neighbors and even remote places. Likewise, who could have imagined that so many pharmaceutical companies today are global conglomerates with business presence in hundreds of countries. 

However, the fast rate of progress in the development of medicine did not and does not bring a halt on the ever-increasing cost of healthcare. Hence healthcare has become the number one issue facing mankind. In US, the cost of healthcare has always been increasing faster than inflation;  it is expected to rise more than 10% a year even when the inflation is only 2-3% presently. This phenomenon is propagating through out the world irrespective of what a national healthcare system has been adopted. How to provide an affordable healthcare is therefore the number one global issue.

Healthcare Issue - A Business View 

Healthcare cost was almost completely covered by employers and governments when the cost was affordable as part of business operation or government budget. Unfortunately, healthcare's cost has risen far higher and faster than inflation and has become not affordable by most employers and even the governments. This is the reason it became necessary to 'shift' the healthcare responsibility to individuals and families,  so called 'balancing' the responsibility of the cost of healthcare among your responsibility, your family's, your employer's, your government's, your doctor's and your insurer's responsibility. This responsibility translates to financial burdens. 

As we know, in US, presently healthcare is provided through a free enterprise insurance system including the government offering the Medicare insurance for people over age 65. Everyone has to have a medical insurance plan in order to cover his or her medical costs. The US government's Medicare plan available to elderly is a federal government subsidized plan (some States also offer subsidized medical insurance plans to their US residents), all other plans are paid by employers and/or individuals through annual premiums. The healthcare is delivered through a set of free enterprise networks of healthcare deliverers, hospitals, clinics, physicians and other medical professionals. The combined US healthcare system is not doing well. It is heading towards bankruptcy. Healthcare cost was about 5% of GDP in 1960 and it rose to 14% of GDP in 1998. How much longer can we afford our healthcare system? 

The fact that the US healthcare system is not a sustainable system is troublesome. Many experts have analyzed the problems and dwelled on their solutions but healthcare remains a complex issue begging for a good solution. lack of positive solutions, thoughts on compromising the objectives of healthcare begin to surface. Take for instance the Spiral CT scan which spirals low-dose X-rays around the body for detecting tumor, it is found to be better than conventional X-rays. It costs $500 versus $50 for conventional X-ray. According to a John Hopkins study, if 100,000 current or former heavy smokers were scanned once a year starting at age 60, there would be 553 fewer lung cancer deaths over 20 years, a 13% reduction. This is great except, to achieve this, it would also require 1186 biopsies performed on false positive readings. This is very costly. According to the study, the Spiral screening program would cost $116,300 per year of life saved for current smokers and $2.3M per year life saved for former smokers. Should society develop a compromising view: We can't afford it; the smokers deserve what they get. What about Ductal lavage, a test analyzing breast cells to assess a women's risk of developing breast cancer. The test costs $700 and it only gives a fuzzy answer. how about expensive medicine? Gleevec, a new drug for leukemia, costs $12,000 per year, does not cure the disease but prolongs life. What about an $100,000 artificial heart for end-stage heart patient? These questions are begging for answers. 

We recognize it is very difficult to look at medicine and healthcare just from a business point of view, yet we have no choice not to look at healthcare in a business view. In this paper, the author would like to express his personal opinion on the issue and suggest an approach aiming at achieving a stable sustainable healthcare system without compromising the objectives of healthcare. The discussions will be leaning more towards philosophical views and principles than hardnosed solutions. The author wishes to invite further discussions using the on-line MWSearch Forum to stimulate deeper thinking on this issue and hopefully to develop a practical solution.

Can Healthcare Be Driven By A Return On Investment Business Model?

The crust of the matter in healthcare is containing cost. there are numerous essays on how to control the rising cost of healthcare but the issues are very complex and not easily solvable. The advancement of medicine is making people living longer, more diseases being treatable (with costly drugs and procedures) and raising people's expectation of  having better health, but these very objectives of healthcare all contribute to the rising cost of healthcare. Methods have been introduced to combat cost from efficiency, productivity and cost effectiveness points of view, (such as managed healthcare (HMOs), co-pay in insurance premium, in treatment cost and in prescription drugs, more computerization, etc.), but the cost of healthcare is still rising faster than inflation. For sure, there are still more room to improve cost effectiveness in healthcare, but for arriving at a stable and sustainable system we might have to look at the system from some fundamental and philosophical points.

The author feels that the titled question: Can Healthcare Be Driven By A Return On Investment Business Model? should be focused on for our discussion with the goal to arrive at a sustainable business system for healthcare. To answer this question, we should first examine the nature and characteristics of 'Healthcare Customers'. After understanding the healthcare customer, perhaps, then one can derive some principles which can guide us to develop a business model to satisfy the customer's requirements, demands and desires in a sustainable business operation. Even we failed to come up with a complete answer to the question, the discussions may lead to some benefits in containing the costs of healthcare.

Fundamental Characteristics of  Healthcare Customers

It has been pointed out above, the healthcare customers were hidden or ill-defined when the healthcare services delivered to them were not directly paid by them. The insurance companies offering healthcare plans have a difficulty to make products and services accountable with respect to their receivers. That is to give a cost-effectiveness figure for each product or service rendered. (This is a fundamental reason that healthcare has not been run successfully like an ordinary business with a return on investment model, a few "profitable health systems" are operating at the expense of diminishing the noble objectives of healthcare) With the balancing of responsibility and shifting of cost burden happening, healthcare customers are transitioning from indirect payers to co-payers and to direct payers. This transitioning characteristics must be understood before one attempts to develop a workable business model. With time, more customers will fall in the direct payer category, which, in the author's opinion, will enhance the possibility of arriving at a sustainable healthcare business system. 

All healthcare customers can be classified by age into grossly three groups, children, adults and elderly. By the rules of Medicare, we shall define elderly to begin at age 65. Children are defined as under 21, being a dependent of an adult. Elderly people receive government subsidy in healthcare and some may still remain as dependents on some adults. By this classification, we know that the adult group is the principal group directly or indirectly paying for the healthcare cost. This classification seemingly simple but it tells us that any sustainable healthcare business system must be able to sustain this situation. The system must have a viable scheme to allocate costs, risks and contributions among the adult group so that they feel fair, they can afford and they are willing to support the business system. Philosophically, we should give the adult group a payback when they enter into the elderly group. Philosophically, we should demand the grown-up children group to give the payback to the adult group when they march into the elderly group. (How to balance the equation when population shifts will be discussed later)      

Another way of dissecting the healthcare customers is to group them into two basic categories from healthcare delivery point of view. All healthcare customers can be grouped as "Current Patients" and "Future Patients", barring minor illness from the former group. (For a quantitative analysis, one may use a healthcare expense dollar figure to define the two classes)  This simple classification has some important implications for defining a sustainable healthcare business system. Future patients are healthy people requiring only prevention and some degree of screening services; whereas current patients all demand healthcare treatments. Naturally, future patients will sometimes become current patients and eventually will, perhaps, become current patients till death occur. One common goal that is consistent (no debate on this) with the objectives of healthcare and a sustainable healthcare business system should be pointed out here. The goal is to keep the ratio of number of current patients over the number of future patients to a minimum. By doing that the system will have more contributors to healthcare than spenders of healthcare, making a sustainable system possible. Philosophically, we should put more emphasis on sickness prevention to keep the number of healthy people to stay high. Sickness prevention goes beyond medical work. For instance, putting pressure on tobacco industry from healthcare industry may be a priority thing to do, particularly, lobbying laws against advertising and promoting smoking to children and young adults. Without this kind of prevention, the healthcare industry will have growing current patients and diminishing future patients by the evil of tobacco industry. Likewise, passing law to prevent driving while intoxicated will have a very positive effect on the health of healthcare industry. Governments paying costs of treating these current patients ought to promote legislations for 'supporting healthcare prevention'. Frankly, the author feels that the healthcare industry ought to get a significant piece of the settlement from the lawsuits against tobacco industry.   

When we view this current/future classification along with the age grouping, one can appreciate that the number ratio of current patients versus future patients may be high for infants ( if considering birth and infant care as treatments) and sharply drops to a low ratio and rises from the later age of adults to elderly. If we plot a diagram of  the number ratio of current versus future patients against age as the horizontal axis, it is clear that we have roughly a check mark figure, that is a high ratio for infants then a sharp drop off throughout the children's age range and remain low until mid forties with a gradual rise to the elderly range say ending in the eighties. Such an exact diagram (called Fig. 1 to be developed) is not available but it is possible to synthesize such a diagram based on various statistics already known. For instance,  Fig. 2 shows the age distribution of hospitalized patients and Fig. 3 shows the gender ratio of hospitalized patients by age, both figures from HCUP fact book) Combining healthcare statistics and the US Census of population forecast, one may be able to derive some guiding parameters for the development of a sustainable business system for healthcare.

Basic Principles For A Sustainable Healthcare Business System

The objectives of healthcare is to cure people's disease and maintain people's health. The healthcare industry can not be treated as an ordinary business like other service industry or retail industry. Having healthcare companies listed on the Wall Street stock exchanges and expect they behave as the other stocks in auto, electronics, appliances, energy, real estates, banking, financial services, etc do is fundamentally wrong. We must change the perceptions and expectations on healthcare industry (even including pharmaceutical companies). Not that healthcare related companies can not raise capitals from stock market; on the contrary, they can and they should. However, they need to characterize their businesses with the right philosophy and business model. The executives of a health company can not and should not watch their quarterly profits like other companies do. healthcare is a long-term business and investors should realize their investment in healthcare should be a long term investment. Since governments are a major stakeholder in healthcare, it make more sense to give healthcare companies special tax treatments to encourage them to run a long-term stable business.

In order for us to attempt to derive a sustainable healthcare business system, it pays to look at a number of fundamental principles for guiding the healthcare business. A few guiding principles are listed below to kick off some discussion:

  1. Healthcare is for curing people's sickness and maintaining people's health in a life time (A few month health just does not make much sense) 
  2. Healthcare business can only derive profit from efficiency and productivity gain and customer satisfaction over a long period of time
  3. Healthcare customers desire stable and long-term relationship with healthcare providers and deliverers 
  4. Healthcare customers have their dependents also as healthcare customers, all best treated as grouped and related customers
  5. Healthcare insurance must behave as a value-add business element in the healthcare business system (manage risk, spread cost, etc)   
  6. Healthcare delivery enterprise executives must be accountable for the enterprise's cost effectiveness over a long period of time (Different return on investment criteria) 
  7. Healthcare manufacturers (medical instruments, supplies and drugs) must compete against diseases not against each other (avoid wasteful advertising etc)

Based on the first principle, the healthcare business ought to view their customers as life-long customers. Customers are not captive. They should have control over their mobility, but they do prefer stable and long relationship with healthcare providers and delivers. The business system should encourage long term relationship rather than annual changes. It is unthinkable for healthcare customers to switch providers and/or delivers like people now do with their long distance phone services.

Based on the second principle, the healthcare business must establish its own measurement criteria different from other industries. The annual reports of healthcare business must report quantitative information about cost effectiveness in treating patients or curing diseases (for example per disease code). Long-term cumulative information should be presented over very long period of time possibly always from day one. (Pharmaceutical companies are required to publish cost effectiveness of their drugs over long period of time. They should be discouraged to spend money in marketing and advertising but encouraged to spend money to do post treatment statistical analysis)

Based on the third principle, the healthcare system should provide long-term health plans. Providers and deliveries must incorporate long range view in developing and offering long range health plans to each other and to the healthcare customers. Governments should provide tax credit incentives and deferrable earnings to encourage long term business contracts and health plans. Governments should assume more roles in publicizing healthcare business performance results. Companies should be given more R&D (including statistical analysis work) tax credits and tax more on companies who spend more dollars on marketing and advertising. Market share and profit should be earned from effectiveness not from success of advertisements. Governments should through US PTO offer presentations and hearings on granted patents and through FDA offer publicity on successful clinical trials and evaluations on medical instruments and drugs. For a sustainable long term business system to work, information gathering and analysis are important. With the advances of information technology available today, it is far less expensive in spending IT dollars to obtain useful information than spending on competitive marketing and advertising. Governments and healthcare industry have no excuse for not contributing to the healthcare information gathering and dissemination, especially statistical information where privacy issue can be managed. 

Based on principle 4, we should view healthcare customers as small units inclusive of all mutual dependency over their life times in a continuum. The insurance companies should take the responsibility to analyze the risk factors of healthcare customers in various categories and distribute the risks evenly over the small units. (rather than assign risk only to an individual, develop risk factor for a unit, for example, a family with adults, children and elderly) Governments can provide tax incentives to insurance companies who can develop and offer long-term health plans for families over generations. Philosophically, family bonds and cross generation supports should be emphasized through the healthcare system. A long-term sustainable healthcare business system should be based on the 'give and take' and 'paying and payback' concepts discussed above.     

Based on principle 5, insurance companies are encouraged to file patents on their value-add business elements and publish their business models to gain public trusts on their long term health plan offerings. Governments may grant special patent rights extension to support these long-term health plans. Insurance industry must fulfill their responsibility in successfully distributing and sharing risks and costs. 'No value-add no profit' should be built into the healthcare business system.

Based on principle 6, the executives of healthcare enterprise must be held responsible for maintaining the operational stability of the healthcare enterprise. Geographical coverage and service coverage must be offered with long-term stability commitment. Acceptance of healthcare customer transfer (in and Out) must be managed effectively. Competition should be directed to nature (illness) rather than other healthcare enterprises. Mergers and acquisitions must be scrutinized to pass the fundamental criteria, that is, benefiting the healthcare customers intended to serve and the shareholders of the enterprise. Hopefully, a sustainable long term healthcare business system will encourage a large portion of the shareholders are also the healthcare customers and vice versa.

Based on principle 7, the government should support a scenario that encourages all healthcare related businesses to focus on contributing to healthcare with value-add. Any business entering healthcare must offer a value not just to displace another business unless that business is failing. By providing a fair playing field to all businesses, big or small, the healthcare customers will benefit. New devices and/or new drugs should be given better chance to serve and contribute to the healthcare system. The current competition often produces higher cost products at the expense of healthcare customers.        

So far, we have been discussing general and philosophical points regarding how a sustainable healthcare system may be based on. In developing a practical business model under the 'healthcare insurance plan' concept, one must examine many other factors. One such important factor is the population growth and the shifting of age distribution towards older age.  In the following, we attempt to propose a specific scenario to further illustrate how the above principles may be applied in practice taking into account of the population change. We hope this example will trigger the industry experts to dig deeper into the model.

Optimal Healthcare Business Model - A Scenario for Stimulating Further Thoughts

As we have pointed out in an earlier paper, the current trend in healthcare is shifting more cost responsibility to individual healthcare customers. The consumer-driven plan by and large is cost sharing and co-managed plan. The trend is shifting the premium payment more directly to the individual than to the contributing employer. However, regardless the percentage of co-pay and contribution, its framework is still under an insurance plan. Hence we will use a healthcare insurance plan to articulate a new scenario of an optimal healthcare business plan.. 

Suppose an insurance company, Lifespan, has 50,000 paying healthcare customers. The company is interested in developing an optimal long term health plan based on the principles discussed above. It first analyzed its customer group, with all dependents included the insured group, it has 100,000 healthcare customers with an age distribution similar to Figure 4.  Figure 4 shows actual US population in year 2000 and its projections for year 2025 and year 2050, presented in bar graph format separating genders. For the purpose of deriving a simple scenario here, we will use the US census data in Fig. 4 as a representative distribution for the 100,000 healthcare customers at hand. Fig. 4 may be redrawn as in Fig. 5 to show the US population in absolute number plotted against age in 5 years grouping. Redrawn in Fig. 6, a normalized plot shows a distribution shift towards older age for both Y2025 and Y2050. For Y2050, there is a significant spike for age of 85 and above which is lumped in one data point. To develop a sustainable healthcare business model (say an insurance plan), one must make appropriate premium adjustments on the paying group to accommodate this percentile population shift towards 55 years and older in time. From the projections, we know the population is also increasing in number. The projected increase is normalized with respect to the Y2000 distribution as shown in Fig. 7. In our simple scenario here, we shall assume the distribution shift to old age is more a critical issue than total population growth. (More population means more adults and more paying members which can cover more dependents if there is no shift in age distribution).    

Fig. 5. US Population (Y2000 Total 282M, Y2025 Total 349M, Y2050 Total 420M)

Fig. 6 US Population Normalized (Y2000, Y2025, Y2050)

Fig. 7 US Population Normalized (Y2000, Y2025, Y2050) and Normalized over Y2000 Total (Y2025, Y2050)

Assuming a simple model that the population between age 21 and 65 is paying for the total healthcare cost of the entire population (that is taking children and elderly as their dependents), a cost sharing model must take into account the population shift about 8% of the total population in year 2025 from middle age to retirement age. The relative shift is not as severe in year 2050 except that there is a fairly large spike, nearly 3% of total population  for age 85 and up. One notes that the children's population is also gaining in relative percentage points. The total population is projected to increase as shown in the normalized Y2025 and Y2050 data. 

After analyzed its healthcare customer data, Lifespan introduces two concepts, one is called payback expressed in healthcare credits ($ value) and the other is called service contribution also expressed in terms of healthcare credits. Given that the adult group is paying for the healthcare cost of themselves and their children and elderly dependents, the payback is given to the adult group (grown into the elderly group) by the children group when they grow up and engage their own healthcare plans. The grown-up children group are required to pay a part of premium as payback to the elderly who have paid healthcare cost for the children group. This payback is defined as healthcare credits. The entitled recipients of these healthcare credits can use them to cover their own healthcare cost or can transfer the credits to their elderly dependents if they so choose. The grown-up children are expected to stay with the Lifespan plan and they will pay for their children's healthcare cost (through premium) when they begin to have their own children. The Lifespan health plan is designed as a long-term and continuous plan encouraging people to stay in their plan for life time and commit to pay for their healthcare costs and for their dependents across generation . With a careful analysis and a mathematical model, the company expects a stable and growing number of healthcare customers to stay in the Lifespan plan and the plan can be sustained indefinitely with occasional adjustments. In reality, the Lifespan plan has to work with other plans; transfer in and out of the plan can be worked out with other companies in the event a customer has to move in or out of the plan.

The payback scheme makes sense to induce families to think healthcare as a life-long matter and they ought to commit to a workable. The paying adult has invested in their children and can expect some payback when they grow up. However, the payback system may not sustain a stable system if there is a substantial shift in population towards old age. Lifespan needs another contributing factor to balance out this instability. The service contribution is designed as a contributing factor for stabilizing the business model. The service contribution offers the elderly group (and the adult group) an opportunity to make significant contributions to the healthcare system. This service contribution can earn healthcare credits which can be used to cover the contributor's own healthcare cost or can be transferred to other designated elderly or children who can payback in future. Since the population of the elderly group is ever increasing and the subsidy from the government can not keep up with it, the service contribution is one method to make the Lifespan health plan stable and sustainable. The types of service contributions qualified for healthcare credits can be:

  1. Voluntary full-time or part-time work at healthcare delivery and/or provider organizations such as nurse aide, office clerk and other service work. 
  2. Voluntary full-time or part-time work at nursing homes assisting other elderly.       

   3.    Body organ donations. (Healthcare credits may be designated to others if donor is deceased)

   4.    Participation in medical and/or clinical experiments or treatment trials.

   5.    Voluntary full-time or part-time work at hospitals or healthcare organizations' nursery for taking care of children of healthcare workers.

   6.   Voluntary research work with university and/or public or private medical research labs. (private medical research labs can pay healthcare credits with cash for received work, public institutions may transfer healthcare credits)  

The spirit of Lifespan health plan is that the plan is life-long, expected to be stable with planned growth. The Lifespan plan will engage healthcare deliverers with long term contracts. The healthcare system is expected to be operated at high efficiency and measured by long-term performance. The healthcare customers are treated as life-long customers by the plan provider and the healthcare deliverers. As long-term customers, they will be the watchdogs for the effectiveness of the healthcare system. The paying customers do expect to get payback in later years and they will use the healthcare services effectively and not likely to abuse the system (since they and their dependents are lifelong customers). The burden of growing population of elderly are given opportunity for making contributions to the health system after (or even before) their retirement age. A healthcare credit (with $ value) system is used to compensate for payback and service contributions. The plan size is arbitrarily set in this scenario. A rigorous analysis will define an optimal size for an optimal business model. The healthcare credits are used to extend the services to other healthcare plans and to facilitate plan transfers as we do have a very mobile population.

The above scenario and discussions are meant to stimulate more thoughts from experts and those who are concerned with the healthcare issue. The author shall open a discussion forum in MWSearch (Forum under General Category), you are urged to participate in this forum. 

Written by Ifay Chang, Ph.D. on January 31st, 2003

Information on the Author

Dr. Chang is the co-founder of Medical World Search which offers an intelligent medical search engine, called MWSearch. MWSearch is an independent search service without affiliation with any healthcare organization or drug companies. Medical World Search ( ) has been offered for public use since 1996.

In early 90's, while working as a research scientist and a senior manager at IBM T. J. Watson Research Center, Dr. Chang led a large group of researchers and developed an advanced clinic information system with the purpose of supporting efficient and reliable healthcare practice. The system has been adopted by Kaiser Permanente, Colorado and other healthcare organizations. Dr. Chang has maintained his interests in medical informatics, healthcare issues and clinical information systems over the years. He has published a number of  papers related to healthcare.

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