Beginning as early as March 16, 1980, some residents of Washington State began to feel small earthquakes. The seismic activity recorded by scientists confirmed that dormant Mount Saint Helen was waking-up after a 123-year "rest." After two months and hundreds of small earthquakes, a "bulge" of nearly 450 feet had grown on the mountain. Then, at 8:32 a.m. PDT on May 18, 1980, a 5.1 magnitude earthquake one mile below the mountain triggered a chain of catastrophic events that resulted in the destruction of 1,314 feet of the top of the 9,677 ft. mountain.

The story of Mount Saint Helen is interesting but what does it have to do with today or even healthcare today?

If you listen carefully and monitor the data, you will detect tiny rumblings from deep within the healthcare industry. Pressure has been building steadily — not from magma — but from a variety of "cost drivers" that are contributing to substantial cost increases in the industry.

Fortunately, the U.S. has been blessed with the lack of meaningful inflation for several years. But during the period of 1992-2000, healthcare spending increased somewhat rapidly and so did the economy. However, now that the economy has slowed, high inflation in healthcare costs is becoming a major concern. Simply put, much like the first tremors at Mount Saint Helen, we may be seeing signs of problems to come.

As reported in a Jan. 8, 2003, article in The New York Times, "Spending On Health Care Increased Sharply in 2001," health spending rose 8.7% in 2001, to $1.4 trillion, and accounted for 14.1% of our total economy.1

According to Ms. Katherine R. Levit, an economist who supervised the preparation of the annual report on health spending for the government, "There was (sic) some increases in prices, but it was not as large as the increase in quality." The article attributed the inflation to "more days spent in hospitals, more outpatient services, more prescriptions and a greater use of technology, which has the potential to extend life and improve its quality." While the percentage of increase is noteworthy, of even greater concern is the percentage of gross domestic product (GDP) devoted to healthcare. From 1992 to 2000, according to the article, "... health care accounted for a stable share of the gross domestic product, 13.1 percent to 13.4 percent. But in 2001, the share grew eight-tenths of a percentage point, the largest increase on record."

Ms. Levit called the change a "warning signal." She added, "We can move about two-tenths of a percent of our economic output to health care each year without too much pain. But when we see these sudden spikes, the adaptation we have to go through in order to pay for it is usually more than we can bear."

The big question is whether the continuation of sizable increases in healthcare costs will substantially contribute to higher overall inflation in the U.S. or if overall inflation will be one of the catastrophic events leading to the need for major reform in the healthcare industry.

Sure, as an industry, healthcare has done a lot to control and reduce expenses. It has maximized group purchasing, standardized, reorganized, been through CQI/TQM, utilized clinical pathway analysis and modification, IDN formation, consolidation, stockless/point-of-use delivery systems, risk-sharing schemes and a variety of other measures. But before we begin to search for the next wave of potential solutions it is essential to identify many of the "cost drivers." Once we have a clearer picture of the issues and factors behind the problem (whether they are controllable or not), it will be easier to create effective, meaningful solutions.

In my view, the five major factors contributing to sizable increases in hospital costs are (not necessarily in order of magnitude): regulatory pressures, technology, quality, patient acuity and staffing issues.

Substantial cost increases due to regulatory pressures occur frequently. Regulations like the Health Insurance Portability and Accountability Act (HIPAA) send waves of additional cost throughout nearly every segment of the industry. Many changes, regardless of how well-intentioned they may be, are often proposed and implemented without regard to their far-reaching cost impact. One such proposal designed to reduce medication errors associated with drugs is the March 13, 2003, Food and Drug Administration proposal to mandate bar codes on drugs. While many people will debate whether such regulations can have a substantial impact on the thousands of deaths attributable to medication errors annually, I am concerned if such changes would incorporate increases to adequately compensate for additional costs.

Probably the most necessary, least controllable and most difficult cost driver to qualify or quantify is technology. While there are many examples of technological changes impacting healthcare, not the least of which are biotech drugs, the best one may be the need for and/or desirability of the drug-eluting stent.

As recently as 1994, coronary artery blockage was treated by coronary artery bypass grafting (CABG) and then, the less-invasive percutaneous transluminal coronary angioplasty (PTCA). What followed was the development of stents, often used with PTCA balloon catheters. Today, after a few advances in stent technology, we have now seen FDA approval of the first drug-eluting stent, a major development to prevent restenosis or reblockage.

How significant is this technology? If you developed a blocked coronary artery, which treatment option would you seek? Enough said about why technology adds to the cost of healthcare! Besides, as insurers scream about the cost of this technology, they seem to have forgotten the cost and impact on patients for CABG procedures.

One of the most nebulous cost drivers is quality! What is quality healthcare and how much more does it cost? Would you accept lower quality in order to save money? It is my opinion that many quality issues are attributed to standards developed by the various clinical organizations that constitute the healthcare industry, such as the Centers for Disease Control and Prevention and the Radiological Society of North America. While not formal regulations, such standards rapidly become common practice. Deviation from standards of care, regardless of the cost impact they may have, opens the door for liability should any problems arise.

While it may be possible to track costs associated with the labor side of the nursing shortage issue, the many changes in practice and the products selected to compensate for the impact of the problem become increasingly more difficult to measure.

While I have not seen any recent supporting data, it seems logical that over the past 10 years, hospitals have been treating fewer but much sicker patients in-house. Outpatient procedures and a host of new medications have contributed greatly to this situation. The fact remains, however, that as our population grows older and life-expectancy continues to climb (due in great part to technology), higher levels of acuity will escalate costs in healthcare disproportionate to normal CPI data.

Looking closely at the aforementioned cost drivers, the issue regarding what — if anything— can be done to rein in spiraling costs becomes a serious one, especially for supply chain managers. Why? Historically, as the CEO, COO, CFO and the Board of Directors measure changes in cost to determine where problems exist, they see sizable increases in non-labor expenses. Guess who they believe should control these excessive increases? Usually, they do not take into account the fact that supply costs comprise only about 15% of every net dollar of revenue. That is right, only 15%! Even more interesting is that the average supply chain manager oversees less than 50¢ on every $1 in supply costs. (You may have seen numbers as high as 35%-40% of every dollar being attributable to non-salary expenses. That, too, is correct. The difference involves non-supply expenses, such as insurance, purchased services, etc.).

When you look at the 7.5¢ of every dollar that you can influence, three things should come to mind:

1. If you are going to be held accountable for the problem or asked to help solve it, your scope of authority/involvement is going to have to expand to include a bigger piece of the pie.

2. Everything you or your organization has done in the past (and I mean everything) will have to be reexamined to ensure it provides optimal outcomes in both cost and quality.

3. Every additional cost driver must be examined in order to optimize cost effectiveness; including but not limited to price increases, consumption (waste/abuse), purchased services compared to in-house solutions, theft and waste/disposal.

Regardless of your current title, in reality, to succeed you must become the "New C," the chief of whatever process emerges within your organization to get the results necessary to survive and thrive in the future. Stay tuned for more about this "New C." HPN

1 $451.2 billion of the total in 2001 was for hospitals and the inflation rate for that segment was reported at 8.3 percent.