E=CUP: the equation behind healthcare costs

E=CUP. That’s the equation that unlocks almost 1/5th of the United States’s economy.

It’s the touchstone for cost for a small group up through global spending.

E=Expense. The total cost of care in this case. National Health Expenditure or a group’s overall plan spend.

C=Caseload. The number of persons covered or factored into the costs. Insured persons.

U=Utilization. The number of services used per person covered.

P=Price. The average price per service used.

If our collective policy goals are generally to decrease E (Expense) and increase C (Caseload), basic algebra says that an increasing C and decreasing E means that some combination of U (Utilization) and P (Price) must decrease enough to offset the increasing C.

So how do we do it?

We can reduce the number of services per patient. This approach works in a couple of ways, either through incredible case management where the demand for services is avoided through earlier interventions, or through rationing. The former is clearly favorable to the latter, but we do get into diminishing returns in terms of how many services can be removed before we escalate treatments.

Alternatively, we can reduce the average price per unit. We pay less per unit of care, either by paying a lower unit price or paying for less expensive alternatives to care.

The equation above is inescapable. If you want lower E and increased C, U and P must have significant downward pressure.

As my friend Mark S. Gaunya, GBA, LIA says, “health insurance is expensive because health care is expensive.”

It will always remain expensive if we don’t have real talks about the cost of care. There just isn’t enough utilization management to accomplish the expense reduction.

Tomorrow we’ll talk about some of the misaligned incentives that make this simple equation so hard to solve.