The current political debate about Health care made me think about how this debate is relevant to Cost Reduction and Cost Avoidance. To provide a baseline of how I am defining my terminology I will use these definitions:

• Cost reduction unquestionably creates value for an organization, by lowering costs compared to prior-period actual costs.

• Cost avoidance means that actual costs continue to increase year over year, though perhaps “less fast” compared to some expectations.

I want to take a close look at the proposed solutions and comments made about this topic to identify how what method politicians are using in qualifying their savings.

Example 1: June 2009 AP article that states “Health industry leaders told [President] Obama they would slow rate increases by 1.5 percentage points a year by improving coordination, focusing on efficiency and embracing better technology and regulatory reform.”
This is a classic example of cost avoidance that truly provides no “real” savings. The costs will continue to go up, but it will simply be at slower rate than previous years.

Example 2: Implementing Electronic Medical Records
This could provide “real” cost reduction and savings on the amount spent in materials, time and coordination in the health care arena. It’s a standardized practice within Veteran Affairs Agency.

Example 3: Credits available for low income persons to obtain health insurance.
This is cost reduction. If an uninsured person is sick or seriously ill and needs medical care they go the emergency room. This cost the person enormous amounts of money and sometimes they don’t pay. The cost is then pushed onto other patients in the form of increased fees. If the uninsured are now insured it will reduce cost across the board.

Example 4: Allowing people to purchase health insurance across state lines
The natural ability of free markets and increased competition would drive the prices down thus creating cost reduction from previous years.

Example 5: Tort Reform
This is a huge area of cost reduction in Health care. The reason number one reason why it is so expensive to go to see a doctor is because they have to pay for very expensive malpractice insurance to help them in case someone sues them. With modifications in the law to limit their exposure and liability would require them to recoup less in their fees to their patients.

Now I am not a financial expert but it’s clear that out government is years behind in looking at ways for cost reduction. If we listen carefully to any proposal we can become more educated on whether the  savings are realized  or a smoke screen that slows rising costs. I think there are some good ideas in government, but any reform should always have a goal of cost reduction. As one CPO stated “You can literally go out of business while reporting great cost avoidance results.”