Healthcare Cost-Control Seen as Key to Manufacturing Survival

By Control Engineering Staff March 23, 2006

Tuesday morning’s keynote address, “Managing Structural Costs and Maintaining Competitive Edge: Improving Your Situation in the Global Marketplace,” was delivered by Doug Engel, Vice Chairman and U.S. Manufacturing Industry Leader, Deloitte & Touche USA; and Tommy Thompson, former Secretary of Health & Human Services and four-term governor of Wisconsin, now Chairman of the Deloitte Center for Health Solutions.

Engel spoke primarily about structural costs and new ways to think about them. “We believe that structural costs are a gathering storm for manufacturers,” he said, “perhaps the perfect storm.” Engler cited a recent NAM study showing that such costs– including the high corporate tax environment, employee benefits, regulatory & compliance, litigation and energy add as much as 23% to the normal costs of manufacturing, a burden roughly equal to the total cost of manufacturing in China.

Another study found that over 30 years, manufacturing profitability has tended to rise and fall with the economic cycle, but that recently this has broken down. While economic activity has increased significantly over the past four years, he said, manufacturing profitability has reached average levels at best, and much of that can be attributed to structural costs. This has contributed to increased import penetration, reduced exports, and manufacturing job losses.

What is needed, said Engel, is not an incremental change, but a transformational one. Such a structural change must be driven from the top, and managed over all the dimensions of the organization. Despite the fact that it requires several years to put in place, Engel said the rewards can be ten-fold.

Next to speak was Tommy Thompson, who talked about basic problems with healthcare in America and how manufacturers can do something about it. By 2013, he said, healthcare costs will increase from today’s $1.9 trillion to $4 trillion. He noted that the U.S. spends 16% of GDP on healthcare, and will spend 20% in 2013 or 2014. Japan spends 7%, he said. He also noted that General Motors spends $1,525 per car to subsidize more than 1 million people in its healthcare system, more than it spends for steel. By contrast, Toyota spends $225 per car.

Thompson also observed that our present system spends more than 93% of its money on people after they get sick, rather than working to prevent sickness in the first place. He said that some 80% of today’s $1.9 billion healthcare bill is spent on chronic illnesses, tobacco-related illnesses alone accounting for $155 billion. “If you’re going to hold down healthcare costs,” he said, “you have to start with prevention.” He suggested instituting a prevention program, then demanding that healthcare insurance premiums be frozen and that your company share in the insurance company’s increased profits from reduced healthcare payouts. He noted that some companies have instituted programs against smoking, diabetes and obesity, and have saved huge amounts of money doing so. The next step, he said, is for our society to manage chronic illness by ensuring people follow preventative health measures.

Thompson concluded that the final step is to integrate modern IT procedures into healthcare, which is years behind the times. Simply by requiring all insurance carriers to use the same form, he said, would save $35 billion, and going completely paperless would save $135 billion. He noted that medical errors killed 98,000 people last year, and that improved information technology would both save both lives and money.

Only business can force these changes, he observed, not the government. “The only way it’s going to change is for employers like you to come together to develop a plan.”

By Pete Cleaveland
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