Academic journal article Chicago Fed Letter

The Value Chain Case for Health Care Reform-A Conference Summary

Academic journal article Chicago Fed Letter

The Value Chain Case for Health Care Reform-A Conference Summary

Article excerpt

On April 24-25, 2007, the Federal Reserve Bank of Chicago and the Detroit Regional Chamber sponsored a two-day forum examining a "value chain" perspective of health care delivery in the U.S. The program discussed how a value chain evaluation might lead to improvement in health care quality, reduction in costs, and increased user accessibility.

Health care costs in the U.S. are high and rising rapidly. The U.S. spent approximately $2 trillion on health care in 2005, nearly 15% of real gross domestic product (GDP)-up from 5.9% in 1965 and currently among the highest in the world. More importantly, costs are rising rapidly with no hint of any slowing. Since 1990, medical care costs as measured by the Consumer Price Index (GPI) have risen at a compound annual rate of 4.6%, nearly 2 percentage points faster than the overall CPI. Without effective reforms in the health care system, such trends are likely to continue as the U.S. population ages and the scope of medical technology continues to broaden.

In Michigan, providing more cost-effective and customer-attuned health care is especially important as the automotive industry-the state's primary industrybears the hefty legacy health care costs of its retirees. This also implies that efficiency improvements in health care may have profound effects on Michigan's competitiveness. Currently, the state is burdened with both a slowly growing economy and an aging population. At the conference, academics, health care providers, insurers, employers, labor union representatives, and representatives of various governmental authorities gathered to discuss one particular approach to addressing the health care challenges in Michigan and across the nation-the "value chain."

Michael Porter has popularized the term value chain to mean the entire production process from the input of raw materials to the output of the final product consumed by the end-user.1 It is called a value chain because each link in the process adds some value before the product or service is delivered to the ultimate customer. Along the way, the particular actors involved-which may include government agencies, nonprofit organizations, and other agents-and the arrangements and incentives under which the process takes place help to determine the cost and quality features of the final product or service. For value chains involving public sector inputs, such as health care, there are myriad policy options, cooperative agreements, regulatory regimes, and institutional arrangements available at various stages of the value chain. Such arrangements characterize the quality, cost, and variety of the final product or service. In contrast, for many goods and services supplied by private firms, the value chain process, while complex, has its elements chiefly fashioned within or between private firms, operating with relatively fewer constraints than public sector entities.

In the private sector, the value chain of today's automotive industry is often held up as an ideal. Today, the automotive value chain is a segmented string of automotive assembly firms and autonomous parts suppliers, with each being highly specialized and focused on particular core competencies. Competition among firms at each stage imposes cost-effective production and product innovation.

Despite this specialization and competition, greater overall cost-effectiveness of the final automobile is also brought about by particular cooperative relations among firms along the value chain. Given the level of cooperation in this system, quality and competitive price information are communicated quickly upstream in the value chain. Consumers downstream also have ready information on the final product's quality and price. This availability of information along the value chain imposes market discipline on many competing automakers, which must in turn exert discipline on their suppliers, while also acting cooperatively on specific pre assembly activities, such as automotive design and production planning. …

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